Reducing compliance complexity: withholding tax relief at source

Parent Subsidiary and Interest and Royalties Directive changes

The proposal amends the application of withholding tax relief under both the Parent-Subsidiary Directive (2011/96/EU) and the Interest and Royalties Directive (2003/49/EC). The scope of both directives is significantly broadened and has the following impact:

• a minimum shareholding requirements (including both percentage and holding period thresholds) are removed: and
• pre-authorisation for withholding tax relief is no longer required.

 Withholding tax exemptions

Withholding tax exemptions will apply to all taxpayers irrespective of the level of participation between associated companies. In addition, pension institutions benefit from a full exemption from dividend withholding tax, regardless of their legal form.

From pre-authorization to self-assessment

The second key element of the proposal is that a pre- authorisation to establish eligibility for withholding tax relief will no longer exist. Instead taxpayers will self-assess at source the eligibility of the relief and will be subject to ex post controls by tax authorities

Relief at source with refunds as a fallback

Where withholding tax relief eligibility cannot be verified at the time of payment, fallback mechanisms will apply. For publicly traded securities held through financial intermediaries or nominee accounts, where the paying company may be unable to identify the beneficial owner at the time of payment, access to fast-track procedures is ensured through alignment with the FASTER Directive (Directive (EU) 2025/50). To that end, the proposal amends the FASTER Directive so that its relief-at-source and quick-refund procedures are available where a withholding tax exemption results from the Interest and Royalties Directive or the Parent-Subsidiary Directive, ensuring that the fast-track procedures extend to these newly exempt payments. In other cases, where withholding tax is levied despite the exemption being applicable, Member States are required to grant a refund within a reasonable timeframe under domestic procedures.

Anti-abuse and double taxation measures

The proposal maintains and refines targeted anti-abuse safeguards. Under the Parent Subsidiary Directive, Member States may disallow the deduction of costs related to a participation only where the shareholding reaches at least 10%, with any flat-rate disallowance for management costs capped at 5% of distributed profits.

Defensive measures are introduced to address risks of double non-taxation. Interest or royalty paid to recipients in jurisdictions that do not levy corporate income tax or apply a zero rate, Member States must either impose withholding tax at source or deny deductibility of the payment. This safeguard does not apply where the recipient is subject to a qualified domestic top-up tax or forms part of an MNE group within the scope of the Pillar Two Directive (EU) 2022/2523 (or the OECD Model Rules for third-country situations).

The application of Interest and Royalties Directive is extended to payments attributable to permanent establishments, irrespective of whether such payments are tax deductible in the Member State in which the permanent establishment is located. A permanent establishment is treated as the payer only insofar as the relevant payments constitute expenses incurred in connection with its activities.

Finally, governance provisions are updated to ensure flexibility going forward. The Annexes listing qualifying legal forms under both directives are revised, and the European Commission is empowered to update these lists through delegated acts to accommodate future developments in company law framework.