Profit distributions between companies in an international context

International profit distributions between companies

For companies operating internationally or investing through a foreign subsidiary, it is crucial, both at the structuring stage and when distributing future profits, to assess how those profit distributions will be taxed.

Both the taxation in the country where the distributing subsidiary is established (the source state) and in the country of the receiving parent company (the residence state) must be taken into account.

The subsidiary is first taxed on its profits. When these profits are later distributed as dividends, a withholding tax may be due in the source state. Finally, the dividends received are treated as taxable income for the shareholder company.

The European Parent-Subsidiary Directive

To avoid double taxation, the EU introduced the Parent-Subsidiary Directive. Under this directive, dividend distributions between related companies are exempt from withholding tax in the source state, and measures must be taken to avoid double taxation in the parent company’s residence state.

The exemption only applies if the following conditions are met:

• Both companies (parent and subsidiary) are established in an EU Member State;

• They have an eligible legal form;

• The parent company holds at least 10% of the subsidiary’s capital for an uninterrupted period of at least two years.

Since 2015, a specific anti-abuse clause has been added, allowing authorities to deny the benefits of the directive if a structure (or a series of structures) has been set up with the main purpose of obtaining those benefits.

Each Member State must transpose the directive into national law. As the directive sets only minimum standards, it can be implemented more flexibly at national level.

Implementation in Belgian law

As regards the exemption from withholding tax on dividends paid by a Belgian subsidiary, the directive has been implemented relatively flexibly in Belgian legislation.

• The minimum holding period is only one year.

• The exemption can also apply to dividends paid to a parent company established in a country with which Belgium has concluded a double tax treaty, provided there is an agreement for the exchange of information.

Important: certain formalities must be met in order to claim this exemption. A withholding tax return must be filed, accompanied by a certificate confirming that the conditions are fulfilled.

The exemption for dividends received by Belgian parent companies has been implemented in Belgium through the DRD (Definitively Taxed Income) deduction. However, the conditions for this deduction have been tightened since the De Wever I government. More information can be found in our article on the DRD deduction.

Implementation in other Member States, such as the Netherlands

Because the exemption conditions and formalities vary from one country to another, it is essential to verify, for each dividend distribution, whether the withholding tax exemption applies.

In the Netherlands, the directive has also been implemented in a relatively lenient way (5% participation, no minimum holding period), but the anti-abuse clause introduced in 2015 is applied very strictly.

Do you have questions about the tax treatment of profit distributions or dividends in an international context? Don’t hesitate to contact one of our experts via the form below.