Indirect taxes on raising capital (recast Directive)
Directive 2008/7/EC regulates the levying by Member States of indirect taxes on the raising of capital. It provides for a general prohibition on such taxes, notably capital duty, though certain countries may continue levying it for the time being.
Council Directive 2008/7/EC of 12 February 2008 concerning indirect taxes on the raising of capital.
Preventing distortions of competition and interference with the free movement of capital is crucial to the functioning of the internal market. Capital duty is an indirect tax, which interferes with the free movement of capital. Directive 2008/7/EC acknowledges that the best solution would be to abolish the duty, seeing as it is harmful to business development within the Union. However, the losses of revenue which would result from the immediate application of such a measure are unacceptable for certain Member States. Accordingly, those Member States that charged the duty as at 1 January 2006 may continue to do so under strict conditions.
The Directive applies to companies incorporated with limited liability as listed by the Directive. It also applies to any company, firm, association or legal person:
- whose shares can be dealt on the stock exchange;
- whose members may freely dispose of their shares and are only responsible for company debts to the extent of their shares;
- and any other company, firm, association or legal person which operates for profit.
The taxes concerned are indirect taxes in respect of contributions of capital to capital companies, restructuring operations involving capital companies and the issue of certain securities and debentures.
Contributions of capital are defined as:
- the formation of, or conversion into, a capital company;
- increases in capital by contributions of assets or by capitalisation of profits or reserves;
- increases in assets which are in consideration of rights like those of members or are through the provision of services which entail variations in the rights of the company;
- transfers from a third country to a Member State of the centre of effective management or registered office of the company;
- loans taken up, if the creditor is entitled to a share of company profits or if they are guaranteed by a member.
Restructuring operations are defined as:
- mergers effected by contribution of assets;
- mergers effected by exchange of shares.
Prohibition on levying indirect tax on the raising of capital
Essentially, Member States may not levy indirect tax on the raising of capital to capital companies. The transactions concerned are:
- contributions of capital;
- loans or services provided as part of contributions of capital;
- registration or other formalities required before commencing business because of the company’s legal form;
- alteration of the instruments constituting the company, particularly when involving the conversion into a different type of company, the transfer of centre of effective management or registered office from one Member State to another, a change in the company’s objects or the extension of its period of existence;
- restructuring operations.
Indirect taxes are also entirely prohibited on the issue of certain securities and debentures.
However, Member States may charge certain transfer duties, duties in the form of fees or dues and value added tax (VAT).
Member States where capital duty levying may continue
Special provisions apply to Member States that charged capital duty as at 1 January 2006. Those Member States may continue to levy the duty, which must be charged at a single rate not exceeding 1%, and it may be charged on contributions of capital solely. That is, capital duty may not be charged on other transactions, such as restructuring operations.
Capital duty may only be levied by the Member State where the centre of effective management of the capital company is situated at the time when the contribution is made. It is important that capital duty is charged only once, if at all, to comply with the internal market ideology. The basis of assessment for capital duty must be the actual value of the contribution, after the deduction of liabilities and expenses. Increases in capital, which have already been subjected to capital duty, are excluded. Capital contributed by a member with unlimited liability may also be excluded by the Member State.
Exemptions may be applied to capital companies which supply a public service or have an exclusively cultural or social aim. Derogations in the form of exemptions or reductions of capital duty rates may be granted under the derogation procedure in the interests of fairness, social reasons or to enable a Member State to deal with exceptional situations.
The Commission will report to the Council every three years to review the functioning of the Directive, with a view to phasing out capital duty altogether.
From 1 January 2009, this Directive will repeal Directive 69/335/EEC, as amended. References to Directive 69/335/EEC will then be taken as references to Directive 2008/7/EC.
Articles 3, 4, 5, 7, 8, 12, 13 and 14 must be implemented by 31 December 2008. The date of entry into force is 12 March 2008; however Articles 1, 2, 6, 9 and 10 will apply from 1 January 2009.
|Act||Entry into force – Date of expiry||Deadline for transposition in the Member States||Official Journal|
|Directive 2008/7/EC [adoption: consultation CNS/2006/0253]||12.3.2008 (articles 1, 2, 6, 9, 10, 11 from 1.1.2009)||Articles 3, 4, 5, 7, 8, 12, 13 and 14 by 31.12.2008||OJ L 46 of 21.2.2008|