Introduction to European Tax Law on Direct Taxation

I. Principles

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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 IR-Directive) entered into force. Although, in many instances, double taxation is avoided through the application of DTCs, in particular, source taxation often causes additional administrative burdens, cash-flow problems, interest and other opportunity costs. Thus, according to Recital (1) of the IR-Directive, equal treatment of EU cross-border and domestic interest and royalty payments is to be achieved by the IR-Directive. Additionally, less favorable tax conditions, as well as double taxation and double non-taxation, should also be avoided. From a practical perspective due to the burdensome application requirements of the IR-Directive, however, companies often prefer to rely on a “zero” source tax rate (e.g. as provided for in Art. 12 OECD Model) if S. 190applicable under the respective DTC. In 2011, the Commission adopted a proposal containing amendments to the Interest and Royalties Directive being still under discussions.

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The main principle of the IR-Directive is found in Art. 1(1...