Parent Subsidiary Directive (90/435/EEC)
As an onshore EU finance centre Gibraltar is also in a position to take full advantage of the Parent and Subsidiary Company Directive (90/435/EEC) (“the P&S Directive”).
The P&S Directive deals with the tax regime applicable to parent and subsidiary companies incorporated in EU Member States, and eliminates any double taxation of dividends paid by a subsidiary in one Member State to a parent company in another Member State.
The Directive is given effect through the new Income Tax Act with the relevant provisions set out in Part I of Schedule 5 of that Act.
A Parent / Subsidiary relationship is established where a parent holds 10% or more of the capital of the subsidiary company in question. Although some Member States require that the parent company maintain the minimum holding for an uninterrupted period of time before qualifying for the exemption (Article 3(2) of the P&S Directive grants Member States the option to impose such restrictions), under Gibraltar law there is no such requirement.
The Effects of the Directive
(1) The Member State where the subsidiary company is incorporated must exempt the dividend paid from withholding tax; and
(2) The Member State where the parent company is incorporated must either:
a. Exempt the incoming dividend from taxation; or
b. Grant a credit in respect of the corporation tax paid by the subsidiary company in its Member State.
Gibraltar has adopted the former approach. As a result, when the parent company is situated in Gibraltar, no taxes are levied on the dividend income in the hands of the recipient parent company.
If the subsidiary company is situated in Gibraltar, no withholding taxes will be applied to dividends paid to the parent company.
It is worth noting that irrespective of the application of the Directive dividends received by Gibraltar companies are not liable to taxation irrespective of the source of the dividend payment, as dividends are not taxable in the hands of a recipient company under Gibraltar law.
Similarly, withholdings taxes (save in very specific circumstances) are not applied under Gibraltar law. Therefore, withholdings taxes would not be levied in Gibraltar irrespective of the application of the Directive.
That said, the Directive does provide tax planning opportunities for clients holding income generating companies situated in the EU who want to pay out dividends exempt from withholding taxes and exempt from any further taxation in the hands of the recipient company.
To be continued in Part III: Directive 2003/49/EC: the Interest and Royalty Directive (“the I&R Directive”) tomorrow.