Europe: Parent Subsidiary Directive

On 25 November 2013, the European Commission (EC) proposed to change the European Parent Subsidiary Directive (PSD). The EC wishes to close certain loopholes in the PSD that multinationals may have started to use to avoid corporate taxes. In order to do so, the EC proposes two measures: the amendment of the general anti-abuse provision and a provision to counter the abuse of mismatches.

If this proposal is ultimately approved, the benefits of the PSD will only be granted in case of a legitimate economic substance. The PSD benefits will therefore no longer apply in cases of artificial arrangements created to obtain improper tax advantages. Arrangements are considered to be artificial if they do not match the economic reality, e.g. inserting a letter box company with no substance in the structure in order to avoid withholding taxes. After the proposed amendment of the PSD, such constructions will no longer work. Furthermore, the amended PSD will also deny PSD benefits in case of international mismatches.

In order for these proposed changes to be effective, it is crucial that all EU member states adopt the amended PSD provisions. Therefore, the proposal contains a deadline that all EU members must have adopted the amended PSD provisions before 31 December 2014 – provided the proposal is approved by both the EU Parliament and all EU member states.


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