Parent-Subsidiary Directive reform under the Tax Omnibus: expanding access to cross-border dividend relief

However, minimum participation thresholds, holding period requirements and divergent national administrative procedures continue to limit access to the Directive's benefits in cross-border investment structures.

As mentioned in our previous article on the reform of the Interest and Royalties Directive, the European Commission’s Tax Omnibus proposal seeks to simplify the EU direct tax framework and remove remaining barriers to cross-border investment. Within this broader initiative, the proposed amendments to the PSD aim to expand access to withholding tax relief, facilitate dividend repatriation, and reduce administrative burdens associated with cross-border profit distributions.

While the proposal remains subject to negotiation and unanimous approval by the Member States, the current draft envisages that most withholding tax-related changes would apply only from 2037. Given the potential impact on national tax revenues, the final text may still evolve significantly during the legislative process.

The current framework

The PSD provides a framework aimed at eliminating economic double taxation between qualifying companies located in different Member States. Under the current framework, dividend distributions are generally exempt from withholding tax in the Member State of the subsidiary, while the parent company benefits either from a participation exemption or a foreign tax credit in its state of residence.

To qualify, the parent company must generally hold at least 10% of the capital of the distributing subsidiary. In addition, Member States may require that participation be maintained for an uninterrupted period of up to two years before the Directive’s benefits become available.

Removal of the ownership requirements

Similar to the case of the IRD, one of the most significant proposed amendments is the removal of the ownership minimum requirements currently embedded in the PSD.

Under the proposal, access to the PSD would no longer depend on a minimum 10% participation threshold or a minimum holding period. As a result, dividend distributions between EU companies could potentially benefit from the Directive irrespective of the level or duration of ownership.

In practice, this reform substantially changes the original architecture of the PSD. Historically, access to the Directive has been built around the existence of a qualifying parent-subsidiary relationship, evidenced by a minimum level of participation and, potentially, a minimum holding period. By removing these conditions, the proposal significantly broadens the scope of the Directive and extends its benefits to a much wider range of cross-border investment structures.

From a business perspective, this could significantly simplify the treatment of:

• minority shareholdings;
• joint venture structures;
• regional holding entities;
• investment platforms with changing ownership profiles;
• intragroup reorganisations.

The proposed change may also reduce situations where taxpayers currently rely on Double Tax Treaties because they do not satisfy the minimum PSD participation requirements.

Limitation of management cost restrictions

Under the current PSD, Member States may deny the deduction of expenses relating to the holding of participation or losses arising from the distribution of profits. In practice, this provision is intended to prevent taxpayers from benefiting simultaneously from participation exemption and a tax deduction for costs directly connected with the exempt income.

The Tax Omnibus proposal retains this option but significantly narrows its scope. Under the proposed rules, Member States would only be allowed to apply such restrictions where the parent company holds at least 10% of the subsidiary. The rationale is that management and holding costs are generally incurred only in the context of a meaningful shareholding, and that the removal of the general ownership threshold should not result in disproportionate limitations for smaller investments.

From a practical perspective, this amendment may simplify the tax treatment of minority participations benefiting from the expanded PSD regime. At the same time, it highlights that, although access to the Directive would be significantly broadened, certain tax consequences may continue to depend on the size of the underlying participation requirements.

Extension of the Directive to pension funds

Another noteworthy feature of the proposal is the extension of the Directive to pension funds.

Under the current framework, access to PSD benefits generally depends on the recipient’s qualifying as an eligible company and being subject to one of the taxes listed by the Directive. The proposal would extend the Directive to pension funds irrespective of their legal form and would introduce a specific derogation from the subject-to-tax requirement currently embedded in the PSD.

For pension funds and groups with pension fund investors, this change could significantly broaden access to withholding tax relief on dividend income received from other Member States.

The proposal is intended to facilitate cross-border investment by pension funds and remove situations where access to withholding tax exemptions depends on the legal form of the investor. This is a welcome change considering that in practice there has been extensive tax litigation at the European Court of Justice in relation to withholding tax regimes in various Member States, as well as the fact that local administrative procedures for reimbursement of withholding taxes in relation to dividends earned by pension funds on their holdings are generally burdensome from an administrative cost and time perspective.

Limitation of prior authorisation procedures

Similarly to the proposed IRD reform, the PSD proposal would considerably reduce procedural requirements. Under the new framework, Member States would generally no longer be allowed to require prior authorisation or administrative procedures as a condition for accessing withholding tax relief. Instead, eligibility would be determined through taxpayer self-assessment and subject to ex-post review by the tax authorities.

For businesses, this could help accelerate dividend distributions and reduce administrative burdens associated with obtaining withholding tax exemptions. However, taxpayers would still need to maintain sufficient documentation demonstrating that all substantive conditions of the Directive have been met.

Faster access to withholding tax refunds

The proposal also addresses situations where withholding tax has been applied despite the substantive exemption conditions being fulfilled.

For certain dividend payments arising from publicly traded securities, taxpayers may benefit from the fast-track refund procedures introduced by the FASTER Directive. In other situations, domestic refund procedures would continue to apply.

These measures are intended to improve cash-flow efficiency and reduce the administrative burden associated with recovering excess withholding tax.

Updated list of eligible entities

Similar to the proposed amendments proposed for the IRD, the Tax Omnibus also updates the list of legal forms that may benefit from the PSD, ensuring that entities that should naturally fall within its scope are expressly covered.

The proposed reform represents a significant shift in the architecture of the Parent-Subsidiary Directive. By removing the minimum ownership threshold and holding period, extending access to pension funds and limiting prior authorisation requirements, the proposal seeks to make withholding tax relief more widely available and better aligned with the commercial realities of cross-border investment within the EU.

If adopted in its current form, the reform could materially simplify dividend repatriation for multinational groups, minority investors, joint ventures and investment platforms, while reducing reliance on bilateral tax treaties and domestic refund procedures. It could also remove practical obstacles arising in the context of intra-group reorganisations, particularly where changes in ownership currently affect the satisfaction or continuity of the applicable holding requirements.