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Mother-Daughter Policy

Directive on the common tax system of the parent companies and subsidiaries of different member states, also: Corporate policy; EC Directive (OJ EC No. L 225 of August 20, 1990, amended by OJ EU L 13 of January 2004) on the harmonization of the taxation of profit distributions made by a subsidiary to its parent company. The Parent-Subsidiary Directive, together with the Merger Directive, is the first regulation on direct taxes adopted as part of the harmonization of tax policy. The aim of the directive is to avoid double or multiple taxation of the profits on which these dividends are based.

Regulations: a) The dividend distributed by the subsidiary is either not taxed at all in the country of the parent company (box privilege), or the corporate income tax already paid by the subsidiary when generating the dividend is offset against the tax, so that in the end the profit in the group is only once economically is taxed.

b) No withholding tax may be levied on the distributed profits (Articles 5 and 6 Parent-Subsidiary Directive).

Requirements: There must be a stake of at least 10 percent between the parent company and the subsidiary (from 2009, higher thresholds previously applied, initially even 25 percent); the two companies must be corporations and be based in different EU countries.

Exceptions: In the case of distributions on the occasion of liquidation, the state of the parent company may deviate from the rules of the parent-subsidiary directive.

Implementation in national German law: a) AtProfit distributions from a German subsidiary company To a foreign parent company within the meaning of the Parent-Subsidiary Directive, the capital gains tax to be withheld (§§ 43, 43a EStG) of the foreign parent company will either be reimbursed upon application or - if a corresponding application is made before a distribution - after the issuance of a certificate of exemption by the Federal Central Tax Office not even charged. In both cases, however, checks are carried out to ensure that the foreign EU parent company has not just been improperly involved in the investment chain in order to save the capital gains tax and to use the parent-subsidiary directive. National regulations that specify when abuse is suspected are laid down in Section 50d III; in these cases, according to the German tax authorities, there is then no entitlement to the application of the guideline in favor of the foreign company.

b) At Receipt of dividends from foreign subsidiaries The requirements of the Parent-Subsidiary Directive in the KStG are implemented by their domestic parent company through § 8b KStG by exempting dividends from taxation at the German parent company. However, 5 percent of the dividends received are regarded as non-deductible business expenses when determining taxable income, a measure that the Parent-Subsidiary Directive expressly allows. In the context of trade tax, the requirements are implemented by means of a reduction provision in Section 9 GewStG.