Introduction to European Tax Law on Direct Taxation

I. S. 184Principles

595

On 1 January 2004 the Interest and Royalty Directive entered into force after long years of preparatory work and many disputes. The Interest and Royalty Directive is based on the notion that in the single market interest and royalty payments between associated companies of different Member States should not be subject to less favourable tax conditions than those applicable to the same payments carried out between associated companies of the same Member State. Less favourable tax conditions could entail double taxation of such EU cross-border payments since bilateral and multilateral tax treaties do not always ensure the elimination of double taxation. E.g. not all tax treaties provide for a reduction at source in the source state and credit in the residence state of the recipient; furthermore, bilateral tax treaties in particular do not contain solutions for triangular situations and are not concluded between all EU Member States. Although in many cases double taxation is avoided through the application of tax treaties, the application of the particular tax treaty and especially source taxation often causes additional administrative burdens, cash-flow problems, interes...