International business structures with representation in different countries may lend resources to each other. Will do this in order to finance themselves in an appropriate manner. Always respecting existing regulations on related-party transactions.
A group company in one country may therefore lend money to a group company in another country, at market rates. But in which country will this interest income be taxed? If we refer to EU countries, Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States states in Article 1:
"1. Interest or royalty payments from a Member State shall be exempt from any form of taxation on such payments (whether collected by deduction at source or by assessment) in that source State, provided that the beneficial owner of the interest or royalties is a company of another Member State or a permanent establishment situated in another Member State of a company of a Member State.”
The concept of beneficial owner
According to requirements and restrictions described in the Directive (available here in Spanish), interest generated by loans from another company not resident in the same country will initially be exempt in the home state. However, the concept of "beneficial owner" referred to in the Directive and also commented on in the OECD model double taxation agreement and in the various bilateral conventions between countries should be emphasised, as it is a concept originating in the Anglo-Saxon legal system.
To this end, we find the analysis of the ruling of 26 February 2019 of the Court of Justice of the European Union very useful. It should be borne in mind that this ruling focuses the definition of this concept solely on interest payments between associated companies from different member states.
It is not a mere intermediary or intermediary company
The beneficiary of this interest must be effective for the exemption to take place. That is to say, it is not a mere intermediary or intermediary company, but it must have the power to freely dispose of this income. It is possible for a company to receive the interest, but not be considered the beneficial owner of it .
Therefore the exemption cannot apply. As the taxpayer will be responsible for proving his status as the beneficial owner to the authorities in the event that he is required to do so because of a possible misapplication of the interest exemption, this aspect should be well documented both with regard to the loan itself and in the agreements between the associated companies.
Contact us to solve any doubt. Our International Department at Carrillo Asesores we will be glad to help you.
