EU: consultation on taxing cross-border royalties

Following the report on the functioning of the Interest & Royalties Directive over a year ago, the EU has now launched a consultation on the Directive, looking to clarify existing legislation on taxation of cross-border royalties (and interest) between associated companies and extending benefits of that legislation to a wider range of companies.

The proposal is that the legislation be updated and widened by:

  • including other legal forms of companies within the scope of the Directive;
  • reducing the thresholds for a company to be considered associated (hopefully only for these purposes; this could have negative implications for other areas of tax if the changes are not confined to this directive);
  • taking account of indirect shareholdings to compute the total holding to determine association;
  • alternatively, extending the exemption to payments between unrelated parties (interesting but seems unlikely to be approved!)

The EU are also planning to solve a potential technical problem derived from the requirement that the payment be a tax deductible cost for a permanent establishment making it by stating that the directive covers payments linked to the activity performed by such an establishment.

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