10 Colum. J. Eur. L. 153 (2003)
The European Commission published a new proposal on July 29, 2003 (the Proposal) regarding the amendment of the EC Parent-Subsidiary Directive (the Directive) replacing an earlier 1993 proposal. The objective of the Directive is to exempt dividends and other profit distributions paid by subsidiary companies to their parent company from withholding taxes and to eliminate double taxation of such income at the level of the parent company.
A basic concern of companies operating within the Internal Market is the flow of properly taxed income between associated companies, that is, companies in which another company has significant shareholding. There is a general risk of (economic) double taxation inherent in profit distributions between associated companies of different Member States. The distributed profits have, by this time, typically been subject to corporation tax at the level of the subsidiary. At the shareholder level, the profits are again subject to corporation tax. Consequently, unless some form of relief applies, the profits are taxed twice, at both the company and shareholder level.
Although the Directive aims to eliminate such double taxation, its narrow scope restricts its benefits to limited circumstances. This creates obstacles to cross-border activity within the Internal Market and adversely affects the competitiveness of European companies.
The Proposal is an element of a 2001 company strategy plan in which the Commission identified a number of tax obstacles to cross-border activity in the Internal Market and proposed a two-track strategy to remove them. The strategy addresses a number of targeted measures. In addition to the Proposal, the plan contemplates extension of the Directive on the tax treatment of mergers and measures dealing with cross-border loss relief, transfer pricing and double tax conventions. In the long term, the Commission plans to adopt a more comprehensive solution, which would address the underlying cause of the obstacles. This approach would provide EU businesses with a single common consolidated tax base for their activities in the Internal Market.