EU Parent Subsidiary Directive amended to avoid hybrid mismatches

On July 8 2014 the European Union’s Council of Economic and Finance Ministers (“ECOFIN”) formally adopted an amendment to the European Parent Subsidiary Directive (2011/96/EU) (the “Directive”) On the basis of this Directive EU member states are obliged to exempt from dividend withholding tax certain cross-border profit distributions within a group in order to prevent from double taxation on the profit received and that such groups are not put at a disadvantage compared to only domestically operating groups of companies. The Directive does not apply in case of capital gains.

Via the use of so called hybrid financing arrangements (“loans”) it is possible to realize a double benefit: deduction of the paid interest in the country of the debtor and exemption of the reclassified interest as dividend from taxation in the country of the creditor. This hybrid mismatch is the result of the fact that the hybrid loan has characteristics of both debt and equity which can give rise to a different classification for tax purposes of the same amount in different EU member states.

As a consequence of this amendment the EU member state where the creditor is established shall tax the profits which were distributed by a subsidiary (established in another EU member state) to the extent such payment was deductible for corporate income tax purposes at the level of the subsidiary. In case the interest payment by the subsidiary on the hybrid loan was not deductible for corporate tax purposes at the level of the subsidiary the EU member state of the parent company must refrain from taxing the payment and apply the exemption according to the Directive.

The EU member states are obliged to implement the amended Directive in their domestic tax law at the latest by December 31, 2015.

With respect to The Netherlands an adaption on the regime of the Dutch participation exemption can be expected.

Further the position of Switzerland in this respect is interesting. Despite the fact that Switzerland does not belong to the EU, the EU has an agreement with Switzerland for measures equivalent to those laid down in the Directive on savings income in the form of interest payments (PBEU 2004, L385/30) making it effectively possible that the EU Parent-subsidiary directive can be applied to Swiss companies when there is complied with the conditions. However when aforementioned agreement with Switzerland is not updated hybrid mismatches might still be possible when Swiss companies are involved in intra-group financing structures.

Please do not hesitate to contact us in case you have questions about the above.

Innovative Tax BV
Erik Jansen
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+31 24 7600.136
Nijmegen, August 8, 2014