European Community's new directives.

• Author: Hartman, Craig S.

Much has been said and written about 1992 and the European Community's (EC) integration. Now that 1992 has arrived, we can look at Europe's political developments and realize that 1992 is just a starting point for the many changes that will take place. These changes will generally span years, and tax developments will progress in the same fashion.

To facilitate the necessary commercial changes, the EC has issued two directives in the tax field, effective Jan. 1, 1992. One directive deals with parent companies and subsidiaries; the other with mergers, divisions and contributions of assets.

Under the first directive, if at least 25% of the stock of a corporation that is resident in a member state is held by a corporation that is resident in another member state, any dividends paid to the parent will be exempt from withholding tax. The directive allows a member state to require a holding period of up to two years. Some member states have enacted legislation requiring a one-year holding period.

There are exceptions. In general, there will be a 5% withholding tax on dividends from a German company until mid-1996. Greece, generally, has been excepted from this directive because of differences in its tax system. Portugal will gradually phase out its withholding tax by the year 2000.

Under the mergers directive, the EC members intend that corporate reorganizations be tax free and any capital gains arising from specified transactions be deferred in a manner similar to the reorganization provisions in the U.S. Internal Revenue Code. Specific definitions have been given to various terms that will be uniformly applied. This directive currently applies to all EC members except Portugal, which becomes subject to it on Jan. 1, 1993.

Although these directives have become effective, the domestic law in a particular country may not, as yet, have been conformed. Consequently, the local taxing authority may not initially comply with these directives. In this event, the taxpayer may appear before the European Court of Justice, which will resolve the conflict and enforce the directives. All EC member states whose domestic laws have not been conformed are presently working to make the necessary changes.

Proposed to take effect Jan. 1, 1993 are directives relating to interest and royalties, and the use of related-party losses. These directives still have to be formally issued by the EC commission. With respect to interest and royalties, withholding tax would be...