One of the key pillars of the EU internal market, the Council Directive 2011/96/EU of 30 November 2011 (the "Parent-Subsidiary Directive") was originally conceived to prevent the double taxation of same-group companies based in different Member States. At the time the original Parent-Subsidiary Directive was adopted (in 1990), European cross-border groups were generally at a disadvantage in comparison to domestic groups because of the double taxation to which profit distributions were subject.
To achieve the aimed neutrality, the Parent-Subsidiary Directive' objective was to (i) exempt dividends and other profit distributions paid by subsidiary companies to their parent companies from withholding taxes and to (ii) eliminate double taxation of such income at the level of the parent company.
However, due to different tax qualifications given by Member States to hybrid loans (financial instruments that have characteristics of both debt and equity), payments under a cross-border loan have in certain situations been treated as a tax deductible expense in the Member State of the payor and as a tax exempt distribution of profits in the Member State of the payee. This may result in an unintended double non-taxation that can however only be achieved by cross-border groups, not by mere national groups, and therefore potentially distorts the common market in addition to depriving Member States from tax revenue.
Since the benefits of the Parent-Subsidiary are not intended to lead to situations of double non-taxation, the Parent-Subsidiary Directive was amended on 8 July 2014 by the Council Directive 2014/86/EU to avoid situations of double non-taxation deriving from mismatches in the tax treatment of profit distributions between Member States (the "Amending Directive").
In particular, pursuant to the Amending Directive, the Member States of a parent company should not allow it to benefit from the tax exemption applied to received distributed profits, to the extent that such profits are deductible by the subsidiary of the parent company; in that case, such received distributed profits should be taxed by the parent company.
The amendments brought about by the Amending Directive are required by be implemented into national law by 31 December 2015.
Whilst the Amending Directive follows the recent international trend to combat base erosion, profit shifting and non-taxation schemes resulting from mismatches of different domestic regulations, it will directly impact the tax situation of European groups the subsidiaries of which are financed by hybrid instruments that qualify as debt in the relevant subsidiary's Member State but as equity in the parent's Member State. Any groups using hybrid structures would therefore be well-advised to consider and potentially revisit their existing corporate and financing structures.
