Site

Map

LUXEMBOURG

The EU parent-subsidiary Directive of 23 July 1990 concerns the tax exemptions on dividends applicable to parent and subsidiary companies in Member States of the EU. It helps to eliminate tax obstacles in the area of profit distribution between groups of companies in the EU by abolishing withholding tax on payments of dividends between associated companies of different Member States and preventing double taxation of parent companies on the profits of their companies.

On 22 December 2003, a new EU directive was adopted in order to broaden the scope and improve the operation of the parent-subsidiary Directive. This new EU Directive updates the list of companies that are covered by the original parent-subsidiary Directive to include certain co-operatives, mutual companies, certain non-capital based companies, savings banks, associations with commercial activity, the European Company and the Co-operative Society.

This EU Directive also relaxes the conditions for exempting dividends from withholding tax. Previously, the parent company must have held at least 25% of the shares in the subsidiary company for the tax exemption to apply. The minimum shareholding was gradually reduced to 10%.

In addition, the new EU Directive renders more complete the mechanism for the elimination of double taxation of dividends received by a parent company located in the member state from its subsidiary located in another. Currently, since a subsidiary company is taxed on the profits out of which it pays dividends, the EU Member State of the parent company must either exempt profits distributed by the subsidiary from any taxation or impute the tax already paid in the EU Member State of the subsidiary against its own tax.

The new EU directive deals with imputing tax paid by subsidiaries of these direct subsidiary companies. In consequence, the objective of eliminating double taxation is better achieved.

The Luxembourg legislator was ahead of its European counterparts in transposing the original EU parent-subsidiary Directive into national law very early (the law of 6 December 1990). The Luxembourg regulation of 24 December 1990 further extended the privilege of parent companies and their subsidiaries to tax exemption from capital gains resulting from the disposal of equity investments.

Other major legislative developments have since been enacted, in particular the Luxembourg law of 28 December 1995 (extension of the parent and subsidiary company privilege to permanent establishments) and the Luxembourg law of 21 December 2001 (simplification of the application conditions for this privilege).

TAX EXEMPTION – EUROPEAN DIVIDENDS