EU & Italian International Tax Law Blog : International Tax Lawyer & Attorney : Marco Rossi Law Firm : Italy, New York, European Union, EU

On December 19, 2008, the Attorney General (AG) at the European Court of Justice (ECJ) filed his opinion in Aberdeen Property Fininvest Alpha (C-303/07).

The case concern Finnish taxation of dividends paid by a Finnish company to a Luxembourg SICAV investment fund owning 100 percent of the stock of the Finnish company.

Under Finnish law, the dividends paid to the Luxembourg fund are subject to Finnish withholding tax. The Luxembourg fund does not qualify for the dividend withholding tax exemption granted under the EU parent subsidiary directive, because it is not organized according to one of the corporate forms enumerated in the directive and is not subject to corporate tax in Luxembourg. 

Dividends paid to a Finnish company or investment fund are exempt from withholding tax to eliminate double taxation of corporate profits.

The Attorney General in his opinion took the position that the Finnish withholding tax violates the EC treaty.

According to the AG, the EC treaty still applies to inter-company dividends that fall outside the scope of the parent-subsidiary directive. The treaty freedom of establishment and free movement of capital prohibit member states from taxing outbound dividends less favorably than domestic dividends. The position of a Luxembourg investment fund Sicav is comparable to that of domestic company or fund, even though the Luxembourg fund Sicav is not subject to tax in Luxembourg.

The opinion is not binding on the ECJ, even though the Court tends to rule according to AG opinions in most of the cases. If the ECJ accepts the AG opinion, the case would be a major step ahead towards the elimination of dividend withholding tax in the EU.

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On December 11, 2008 the European Court of Justice ("ECJ") issued its decision in case n. C-285/07 dealing with the tax treatment of a cross-border EU transfer of shares under German law.

The Court held that the requirement imposed under German law, according to which the shareholders of the transferred corporation ("target") are not taxed on the gain from the exchange of their shares in the target for the shares of the acquiring corporation, at the condition that the acquiring corporation takes a tax basis in the shares of the target equal to the transferring shareholder's tax basis in those shares prior to the transfer (carryover basis), violates the EU directive n. 90/434/CEE of July 23, 1990 (the "Mergers Directive") and EU law. 

The facts of the case concern a German public company which transferred a majority shareholding in a German private company to a French public company solely in exchange for stock of the French company. The German transferor took a tax basis in the stock of the French acquiring company received in the transaction, equal to the tax basis it had in the shares of the German transferred company (substituted basis). The French acquiring company carried the shares of the German acquired company at their fair market value at the time of the transaction. 

The EU mergers directive prescribes that, in order to qualify for tax free treatment and defer the tax on the gain from the exchange of stock in the target for stock of the acquiring company, the shareholders of the target company must take a substituted basis in the stock of the acquiring company received in the exchange. The directive is silent as to the tax basis at which the acquiring company should carry the stock of the acquired company received in the transaction. 

German law prescribed that the acquiring company took a carry over basis in the shares of the target (so called "double carry over basis requirement"). The position of the German government on the issue was that the EU directive is silent and the matter falls within the authority of the Member States.

The Court rejected the argument and held that the double carry over basis requirement imposed by German law violates the EU mergers directive and EU law in that it result in an undue restriction of a cross-border exchange of shares between to EU companies.

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On December 3, 2008 Italy's tax administration issued ruling n. 470/E, by which it clarified that cross-border mergers between non-EU companies with permanent establishments in Italy can be carried out tax free.

Italian law provides for nonrecognition treatment of mergers between domestic companies, in which all of the assets of the target company are transferred to the acquiring company in a statutory merger, and the target company's shareholders exchange their stock in the target company for stock of the acquiring company. No boot can be exchanged in the transaction. The acquiring company takes a carryover basis in the assets of the target company, and the target company's shareholders get an transferred basis in the stock of the acquiring company received in the transaction.  

The EU directive 90/434/CEE (the mergers directive) provides for a tax deferral treatment of mergers that are carried out between companies resident in two different EU member states. In this case, ten per cent of the consideration can be cash.

In the ruling, the tax administration clarifies that the Tax Code non recognition treatment of domestic mergers can apply also to cross border mergers that fall outside the scope of application of the EU mergers directive.

The ruling is extremely important because it facilitates the possibility to carry out cross-border reorganizations involving Italian assets or Italian companies without immediate recognition of gain.

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On December 4, 2008 Italy's tax administration issued resolution n. 471/E of December 4, 2008, in which it ruled on the change of tax residency of individuals during a tax year.

According to the ruling, if a foreign individual who is resident in Italy for tax purposes returns to his or her home country and terminates his or her residency in Italy during the second half of a year, his or her Italian tax residency continues through the end of that year and he or she continues to be taxable in Italy as resident on his or her worldwide income until the end of that year.

The ruling clarifies that the potential double taxation that arises in the above circumstances cannot be resolved under the tie breaker rules of a tax treaty between Italy and the taxpayer's home country, pursuant to which the tax residency of the taxpayer for that year is allocated between Italy and the taxpayer's home country and taxpayer is treated as partly resident in Italy and partly non resident in Italy (for the second part of the year, in which he left Italy and moved back to his or her home country) unless that tax treaty contains specific provisions that provide for the part time residency.

As a consequence, the only remedy to double taxation might be to claim the foreign tax credit granted in Italy for the taxes charges in the home country on income from sources within that country.

Ruling 471/E highlights the need of a careful planning before moving away from Italy to a foreign country during a tax year, in order to avoid a potential extended exposure to Italian taxation. 

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On November 27, 2008 the European Court of Justice ("ECJ") issued its judgment in Ministry of Finance v. Société Papillon (C-418/07). The questions referred to the Court was whether the French national tax laws, which do not allow a French parent company to form a French consolidated tax group with its French subsidiaries (and reduce its tax liability by offsetting its profits with the losses of other members of the group and disregarding intra-group transactions), when the French subsidiaries are owned indirectly through an EU holding company (in the case, a Dutch BV) not subject to tax in France, violates  Article 43 of the EC Treaty.  

The Court ruled that such restriction is discriminatory and constitutes a violation of the freedom of establishment, because a French parent company that exercises its freedom of establishment by incorporating a holding company in another EU Member State through which it owns stock in its French subsidiaries is subject to a less favorable tax treatment in France than a French parent company that owns stock in its French subsidiaries directly or through other French intermediate holding companies. Indeed, the latter is able to offset its profits with the losses of the French subsidiaries while the former is not.

Contrary to the Advocate General's opinion, the Court refused to apply the coherence of tax system  justification to sustain the restriction, on the ground that the restriction goes beyond what is strictly necessary for that purposes and fails the proportionality test.

Société Papillon provides legal support to taxpayers who intend to challenge national tax laws that restrict access to consolidated tax regimes in EU cross border situations.

Italy permits consolidation of foreign subsidiaries, but sets more restrictive requirements that those that apply to consolidation of domestic subsidiaries. The ECJ ruling in Société Papillon puts in doubt the validity of those restrictions under EU Law.

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