Potential changes to EU Withholding Tax rules
Potential changes to EU Withholding Tax rules
A headline item in the European Commission's Omnibus on Direct Taxation is the introduction of an exemption from withholding tax on all cross-border payments of dividends, interest, and royalties between companies in the EU which it says should give EU taxpayers savings and benefits of around €5.3 billion annually.
Please outline the current inefficiencies in this area and whether the current proposals are likely to achieve their goal of ‘boosting financing, encouraging investment and enhancing competitiveness’ in the Single Market.
Contributor: Angela Fleming, Partner & Head of Financial Services Tax, BDO
On 24 June 2026, the European Commission adopted a tax simplification package, comprising of the Tax Omnibus and the recast of the Directive on Administrative Cooperation (“DAC”). This package introduces significant amendments to the EU direct tax framework and aims to simplify existing rules, reduce compliance burdens, and enhance the competitiveness of the EU while maintaining robust anti-abuse provisions.
One of the key components of the Tax Omnibus are important changes to the Parent-Subsidiary Directive and Interest and Royalty Directive, including removal of current minimum participation thresholds (currently 10% for dividends, and 25% for interest and royalties). The effect of this is to grant full exemption from withholding tax on dividends, interest and royalties between companies in the EU. This would be a significant step in reducing the withholding tax burden on cross-border intra-EU payments.
Under the current system, where minimum holding thresholds are not met, exemption may still be available but this will generally depend on the tax treaty in place between the paying and recipient jurisdictions. In many case, full exemption cannot be achieved, but a lower rate of withholding tax may instead be available.
Even in situations where the minimum holding thresholds are met, administrative procedures may need to be observed and these add compliance burden for taxpayers, or may involve a withhold-and-refund approach.
The process of applying for a refund of withholding taxes varies significantly across jurisdictions, and can range from weeks to years. In addition, for small amounts of withholding tax, the cost of applying for a refund can often exceed the quantum of refund due, as generally external assistance (e.g. from a local tax advisor) is required with the application.
The omnibus also proposes doing away with existing upfront administrative procedures, moving instead to eligibility self-assessment by the taxpayer, as well as the extension of the directives to pension funds, irrespective of their legal form, through a derogation from the subject-to-tax condition.
Overall, these are very welcome changes, and should have the effect of reducing compliance burden for taxpayers and the overall cost of intra-EU withholding taxes. Such changes also have the potential for boosting investment within the EU, making EU investments more attractive than investments outside the Single Market, although investment decisions will still ultimately be decided based on expected returns.
Content published in Finance Dublin Irish Tax Monitor.