Europe: Changes to Parent Subsidiary Directive

On 25 November 2013, the European Commission proposed to amend the European Parent Subsidiary Directive (PSD). Corporate tax avoidance has been at the top of the political agenda of EU and non-EU countries alike for over a year. Likewise, the G20 as well as the G8 have emphasized the urgency of countering corporate tax avoidance. The EU itself agreed on a coordinated approach to counter corporate tax avoidance in May 2013.

This proposal, therefore, comes as no surprise. It targets loopholes in the PSD that may be used to avoid corporate taxes and contains two measures: the amendment of the general anti-abuse provision and a provision to counter the abuse of mismatches.

Proposed amendments

The first measure consists of the amendment of the general anti-abuse provision in the PSD. Changing the anti-abuse provision in the PSD forces all member states to amend their national laws to make them comply with the amended PSD. This results in an EU-wide common standard to counter tax avoidance through the PSD.

If the proposal of the European Commission is ultimately approved, the benefits of the PSD will only be granted if there is legitimate economic substance. This means PSD benefits will no longer apply in case of artificial arrangements created with the essential purpose of obtaining an improper tax advantage. Arrangements are considered artificial if they do not match the economic reality. The proposal contains an example of such an artificial arrangement: inserting a letter box company with no substance in a structure to avoid withholding taxes excludes that structure from PSD benefits.

The second measure consists of the creation of a new provision that denies PSD benefits in case of mismatches. The proposal contains an example: after introduction of this provision, if a loan is treated as debt in the country of the debtor and as equity in the country of the creditor, payments on the loan will no longer be exempt in the country of the creditor. Said country will be obligated to tax the part of the payments that was deducted in the country of the debtor.

Way forward

The proposal contains two measures to counter corporate tax avoidance through the PSD. In order for these measures to be effective, it is crucial that all EU member states adopt the amended PSD provisions. Therefore the proposal contains a deadline: all EU member states are expected to adopt the amended PSD provisions before 31 December 2014. This, however, will only be the case if the proposal is approved by both the EU Parliament and all EU member states.


Introducing these measures EU-wide creates a level playing field within the European Union.  Furthermore, the current political sentiment regarding corporate tax avoidance could result that the proposal will be approved and implemented faster than previous amendments to EU-legislation. Subsequently, it is recommended that international corporations making use of country mismatches (inter alia hybrid loans) consult their RSM adviser to design and implement alternative arrangements.

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