How Withholding Taxes Affect Cross-Border Investment in Europe

Cross‑border withholding taxes on dividends, interest, and royalties create double taxation and administrative friction for investors in Europe. A June 2026 European Commission proposal would remove the holding‑percentage requirement that currently obliges EU companies to withhold tax on such payments, aiming to ease capital movement across the bloc.

How withholding taxes operate

• A withholding tax is deducted by the payer in the source country before the income reaches a foreign investor.
• The tax is credited against the investor’s domestic tax liability, but credit may be partial, delayed, or limited by treaty caps.
• When credit is insufficient, the investor faces double taxation, which can lower after‑tax returns and push investors toward lower‑yielding or less diversified assets.

Illustrative case:
A German company pays €100 in dividends to a Greek investor. German law withholds €26.37 (including a 5.5 % solidarity surtax). Under the Germany‑Greece treaty, the withholding rate is capped at 25 %, so the investor can reclaim €1.37 of the surtax. Greece taxes dividends at 5 % but grants a foreign‑tax credit only up to its domestic rate. Because the German withholding exceeds the Greek rate, the Greek resident ends up paying an effective 25 % tax on the dividend, rather than the 5 % that would apply to a domestic dividend.

EU policy context

• Existing EU Directives already prohibit withholding on dividend payments from a subsidiary to its parent in another Member State, provided certain conditions are met.
• The Commission’s Tax Omnibus package would extend this exemption to interest and royalty payments and would apply regardless of the holding percentage between EU companies.

Projected impact (Commission estimate):