Introduction to European Tax Law on Direct Taxation

S. 196I. Principles

539

On 1 January 2004, Council Directive 2003/49/EC of 3 June 2003 on a Common System of Taxation Applicable to Interest and Royalty Payments Made Between Companies of Different Member States (the Interest and Royalties Directive) entered into force after many years of preparatory work and dispute. The Interest and Royalties 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 made 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. For example, not all double taxation conventions (DTCs) provide for a reduction at source in the source state and a credit in the residence state of the recipient; furthermore, DTCs, in particular, do not contain solutions to triangular situations and have not been concluded between all EU Member States. Although, in many instances, double taxation is avoided...