In July 2003 the European Commission proposed amendment to EC Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (COM(2003) 462). On 24 September I sent you an Explanatory Memorandum (11935/03) in respect of the proposal which your Committee cleared on 7 October.

  Member States have now reached conclusion and the main changes are the staged reduction of the minimum shareholding requirement from 25 per cent to 10 per cent (20 per cent from 1 January 2005, 15 per cent from 1 January 2007 and finally 10 per cent from 1 January 2009), the inclusion of the Interest and Royalties Directive definition of permanent establishment as within the EU and removal of the provision on management expenses, which does not affect the UK.

  Since I submitted the EM, further discussions have highlighted that there is a very small chance that a transaction that fell within the terms of the new Directive could fall outside the provisions in our domestic law. Therefore, we will be introducing a minor change to our domestic law to allow for voting rights or a minimum shareholding as the test of ownership in defining the relationship between a chain of subsidiaries that are not directly linked to a UK company.

  The Italian Presidency has said it will aim for adoption of the proposal without discussion at the 25 November ECOFIN.

17 November 2003