The parent-subsidiary directive aims to avoid double taxation of cross-border profit distributions. Therefore, these dividends are generally exempted from taxation at the parent company or the already paid corporate tax is refunded on request. The aim is to harmonise tax policy across the EU. The Merger Directive (FRL) and the Interest and License Directive also pursue this objective. In the following, the parent-subsidiary directive according to § 43b EStG will be considered in more detail.

In order to establish uniform rules for direct taxes within the EU, the European Parent-Subsidiary Directive was introduced. This includes dividends, i.e. profit distributions, from European corporations to their parent companies in other European countries. This applies in particular to German corporations that have a parent company in other European countries. Accordingly, the tax burden on a profit distribution from the subsidiary to the parent company is reduced to 0% for the latter. Because of the unlimited tax liability of the subsidiary in the country of residence, it already taxes the distribution completely. The directive thus avoids double taxation of profits generated. However, the criteria for the full deduction of capital gains tax must be observed.

Requirements of the parent-daughter directive according to § 43b EStG

2.1 Characteristics of the parent company

The parent company must be established in the European Union for the effective application of the Parent-Subsidiary Directive. In addition, a domestic company must be a corporation and a foreign company must have a form similar to that of a German corporation. There are two different situations in the application of the Directive.

On the one hand, a European parent company which is not based in Germany in conjunction with a domestic subsidiary. On the other hand, this link may also exist from a domestic parent to a European, non-domestic subsidiary. However, different legal consequences must be observed. This will be discussed later on in more detail.

2.2. Parent company participation rate according to the Parent-Subsidiary Directive

In order for the parent-subsidiary directive to apply, the parent company must be involved in the subsidiary with at least 10% in accordance with § 43b (2) sentence 1 number 2 EStG. In addition, the participation must be continuously owned by the mother for at least 12 months. It should be noted that the capital gains tax arises when the capital gains are injected into the creditor (section 44 (1) second sentence of the EStG). In this case, the capital gain is generated by the decision to use the profit of the subsidiary.

2.3 Characteristics of the subsidiary

In addition, the subsidiary must also have the legal form of a capital company and have its registered office in an EU country in order for the directive to take effect.

Normally, the payment of a dividend results in a capital gain according to § 20 EStG, which is charged with the capital gains tax according to § 43 EStG. However, this is only the case for two domestic companies or for natural persons who generate investment income. In the case of cross-border capital distributions, attention must now be paid to the direction in which the capital income flows in order to be informed in advance about the amount of the tax burden.

In a so-called inbound case, a foreign company owns shares in a company in Germany. In this case, the German corporation pays a dividend to the foreign parent company. Since, in accordance with Article 7 (1) of the DTA, the subsidiary’s fundamental right to tax is in Germany, the company’s profits are taxable in full. Consequently, a distribution of profits pursuant to § 8(3) second sentence KStG does not reduce profit. Thus, the profit distribution is taxed here for the first time.

3.2. Dividend from subsidiary to other European countries

However, the foreign company with domestic income is subject to limited taxation. Accordingly, capital gains tax would be due for the dividend pursuant to § 43 (1) EStG and Article 10 (2) Double Taxation Agreement (DTA). However, the use of the parent-daughter directive according to § 43b para. 1.2 EStG possible, with no capital gains tax due. Since the parent company has its registered office in other European countries and is also a corporation, it is exempted from double taxation of the dividend. As already mentioned above, it should be noted that the participation rate and its holding period meet the requirements of § 43b paragraph 2 EStG and the application was made. We are happy to assist you with the requests to be made or other questions about this process.

3.3. exemption from capital gains tax

The parent company must submit an application according to § 43b (1) sentence 1 EStG, so that no capital gains tax is incurred on the dividend. Different approaches are possible. On the one hand, the foreign parent company that receives a dividend can be refunded any tax amounts already paid pursuant to § 50a EStG. Consequently, the tax has already been paid here and the tax is to be recovered subsequently. On the other hand, this can also be protected by an exemption order according to § 50d EStG before payment of future dividends. The latter is the optimal variant, which provides a lot of planning security as well as interest and liquidity advantages. We are a competent partner who is sufficiently familiar with the procedure.

In the so-called outbound case, it should be noted that the subsidiary is in principle not taxable in Germany. Only the domestic parent company is taxable on its income. Accordingly, the dividend received is taxed in Germany, since the mother is taxed with her foreign income limited. The international box privilege for distributions applies, which is usually recorded in the DTA. Consequently, if there is a significant shareholding, i.e. more than 25 %, the tax will be reduced. More specifically, the tax rate is now often 15%, in some DTAs (e.g. USA, France and Austria) also 5% are agreed.

4.2. Taxation of the parent company in accordance with the Parent-Subsidiary Directive

However, according to § 8b (1), the dividend is exempted in Germany if the participation is greater than 10%. Nevertheless, according to § 8b paragraph 5 KStG, 5 % of the dividend remains as non-deductible operating expenses, which are added to the taxable income of the parent company. It is possible to offset the capital gains tax already incurred abroad on the dividend in accordance with § 26 (1) KStG. More specifically, it is the task of the state of the receiving company to avoid double taxation. If, therefore, an exemption of the dividend from the parent company in accordance with § 8b paragraph 1 KStG and § 9 no. 7 GewStG takes place, the crediting accordingly ceases.

Conclusion on the parent-daughter directive

In conclusion, it can be judged that the Parent-Subsidiary Directive significantly facilitates Europe-wide profit distributions. Thus, interconnections between companies are not limited by the individual tax provisions. In addition, companies do not have to change their structure if they want to acquire or set up subsidiaries in other countries. Nevertheless, this directive also makes it possible to shift profits to low-tax countries and thus opens up international tax competition. However, the additional taxation, which is currently being revised, limits these shifts.