Application of the Parent Subsidiary Directive

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Application of the Parent Subsidiary
Directive in the Czech Republic Ale Cechel
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EU Accession and Legislation Developments

• The Czech Republic will accede to the European
  Union as of May 1, 2004
• The Czech Republic is required to implement EU
  legislation before the accession date
• EU changes will become effective as of the
  accession date (i.e., May 1, 2004)

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Parent Subsidiary Directive General Terms

• EU Parent Subsidiary Directive
• (COUNCIL DIRECTIVE 90/435/EEC of July 23,1990)
• Exemption of profit distributions between parent
  companies and their
• subsidiaries from taxation (does not exempt
  capital gains).
• Requirements for qualification for the benefits
  of the Directive
• Minimum holding of 25 for a period of at least 2
  years
• Applies only to companies that are tax residents
  in Member States
• Applies only to companies that are subject to
  corporate taxation in the country of the
  residence
• Applies only to the types of companies listed in
  the Annex to the directive (not including, e.g.
  partnerships)

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Parent Subsidiary Directive Non-Deductibility
of Holding Expenses
The Directive allows Member States to consider
any charges relating to the holding and any
losses resulting from the distribution of the
profits of the subsidiary to be non-deductible
for the holding company. Where the management
costs relating to the holding in such case are
fixed as a flat rate, the fixed amount may not
exceed 5 of the profits distributed by the
subsidiary.
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Parent Subsidiary Directive Current Amendment

• An amendment to the EU Parent Subsidiary
  Directive has recently been
• approved by the European Parliament
• The amendment should be implemented into local
  legislations by
• January 1, 2005
• The following changes were proposed
• Minimum holding of 25 is gradually reduced to
  10 (20 from 2005, 15 from 2007 and 10 from
  2009)
• Applies also to dividend distributions flowing
  between two companies through foreign permanent
  establishment of one of them
• Applies to more companies, i.e., the Annex to the
  directive is extended (includes, e.g.
  partnerships and other tax-transparent entities)

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Implementation of the Directive in the Czech
Republic

• The Parent Subsidiary Directive was implemented
  into the Czech Income Taxes Act
• The amendment of the Income Taxes Act became
  valid as of January 1, 2004
• Provisions implementing the Directive will become
  effective as of the accession day (i.e., May 1,
  2004)

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Definition of Parent Company

• Company residing in the Czech Republic or in an
  EU Member State
• The form of business organization is stock
  company (a.s.) or limited liability company
  (s.r.o.) in the Czech Republic or another form
  listed in the Annex to the Directive in other EU
  Member States
• The company is subject to tax similar to Czech
  income tax in the country of its residence
• Holds at least 25 (will be reduced) share in a
  registered capital of another company for a
  consecutive period of at least 2 years

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Definition of Subsidiary

• Company residing in the Czech Republic or in an
  EU Member State
• The form of business organization is stock
  company (a.s.) or limited liability company
  (s.r.o.) in the Czech Republic or another form
  listed in the Annex to the Directive in other EU
  Member States
• The company is subject to tax similar to Czech
  income tax in the country of its residence
• Parent company holds at least 25 (will be
  reduced) share in its registered capital for a
  consecutive period of at least 2 years

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Application of the Directive

• Applies to Parent companies and Subsidiaries
• Provisions of the Directive may be applied even
  before fulfillment of the required holding period
  (24 months), provided that the holding period is
  subsequently met
• Applies to both domestic and cross-border profit
  distributions between companies residing in EU
  except for distribution of liquidation surplus
• Applies to income from decrease of registered
  capital of the Parent company up to the amount of
  previous increase from profit or any other fund
  from profit
• Applies to profits distributed based on a
  controlling agreement
• Applies also to profits generated before January
  1, 2004 if the decision of the general meeting
  regarding distribution of dividends is taken
  after May 1, 2004

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Non-Deductibility of Holding Expensesin the
Czech Republic

• Expenses of parent company relating to holding of
  a share in its subsidiary are tax non-deductible
  (but capital gains taxable!)
• Interest paid by the parent company on a loan
  received within six months preceding the
  acquisition of the share is deemed to be an
  expense relating to the holding of the share in
  the subsidiary, unless the taxpayer proves
  otherwise
• Related interpretation issues
• When a company becomes a parent company for
  purposes of tax deductibility of expenses related
  to holding? After fulfillment of 2 year test or
  even before?
• Are all expenses tax non-deductible or just those
  accrued after the accession date, i.e., after the
  amendment become effective?
• Loan will be draw down before the accession day.
  Will the tax non-deductibility test apply?

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Taxation of Dividends in Slovakia

• Profit distribution as well as the distribution
  of liquidation surpluses are not subject to tax
  in Slovakia under the following conditions
• The profit distributed was previously taxed
• Applies only to certain types of companies (joint
  stock and limited liability companies)
• Applicable to distributions made from domestic,
  as well as foreign companies, except for
  distributions made to unlimited partners
• Expenses relating to non-taxable income (e.g.
  distribution of profits) are tax non-deductible

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Contact

• Ale Cechel
• White Case Prague, Czech Republic
• Telephone [phone], e-mail
  acechel_at_whitecase.com