An interview on Marco Q Rossi & Associati has been published today on the Italian financial newspaper ITALIA OGGI. We attach below the file with the full account: www.lawrossi.com/images/stories/docs/MQR_Italia_Oggi.pdf
Italy's Tax Code determines the tax residency of a company on the basis of one of three alternative tests: place of legal seat, place of management and principal place of business. As a result, an Italian or foreign company that is effectively managed from Italy is treated as an Italian company for Italian tax purposes and it is subject to tax in Italy on its worldwide income.
In order to prevent abusive practices consisting in putting an Italian company owned or controlled by Italian shareholders under the umbrella of a foreign holding company established in a tax favorable jurisdiction, Italy enacted special anti abuse provisions according to which a foreign company owning or controlling an Italian company is presumed to have its tax residency in Italy if one of two alternative tests are met: Italian shareholders control the foreign company, or the majority of the company's board members are Italian nationals. Taxpayers can rebut the presumption by providing clear and convincing evidence that the foreign company is effectively managed outside of Italy.
On December 7, 2010 the Council of Finance Ministers of the European Union (ECOFIN) adopted a new draft legislation that provides for reinforced and more extended exchange of tax information among EU Member States to contrast international tax evasion. The new bill shall be formally presented in a future ECOFIN meeting and enacted into law as EU directive by the EU Parliament. At that point the EU Member States shall have to incorporate the new directive into their own internal legal systems so that the directive shall be generally enforceable throughout the EU.
The new directive shall eliminate the banking secret and shall prevent a Member State from denying the access to information in response to a detailed request coming from another Member State. From 2015, the exchange of information shall be automatic in at least five of the eight areas that are covered by the directive namely employment income, bonuses, dividends, capital gains, royalties, life insurances pensions and real estate.
On February 25, 2010 the European Court of Justice issued its ruling in X Holding (C-337/08 X Holding Judgment.pdf). Under the facts of the case, a Dutch parent wanted to be allowed to combine with its Belgian subsidiary under the Dutch tax consolidation rules to use the latter losses, which it would have been allowed to use had the subsidiary been a branch. The Dutch fiscal unit system, which disregards intra group transactions, is consolidation. Under Dutch tax law, the Netherlands does not tax a foreign branch's profits, but allows a deduction for foreign branch's losses subject to recapture of branch's profits in the following years for an amount equal to losses allowed in prior years. The Belgian subsidiary could still use its losses in Belgium, so it was clear that the losses would not be deductible under Marks & Spencer holding and the case rested on a cash flow argument that the parent should be allowed to use the losses sooner in the Netherlands. The Attorney General's opinion concluded that the denial of consolidation of foreign subsidiaries is justified under the balanced allocation of taxing powers, coherence of tax system and need to protect member state's tax base and the restriction to the freedom of establishment is proportional and justified. The European Court of Justice upheld the AG's opinion and ruled in favor of the Dutch government. The Court rejected the taxpayer's argument that taxpayer should be allowed the same treatment granted in case of a foreign branch, on the ground that a foreign branch and a foreign subsidiary are not in a comparable situation, the former being subject in principle to the tax jurisdiction of the member state of origin, while the latter being an independent legal and tax entity subject only to the tax jurisdiction of the member state of destination.
On July 14, 2010 Marco Rossi presented a lecture on the European Union and EU tax law to candidates/students of Master of Science in Taxation at Fairfield University. We provided an overview of the European Union and its institutions, discussed the sources of EU law and the main developments in the area of EU statutory tax law (including the EU tax directives and tax arbitration convention), and illustrated the main concepts of the jurisprudence of the European Court of Justice in the area of direct taxation, including a brief analysis some landmark cases recently decided by the Court. We attach a copy of the presentation materials for your direct reference (EU Law-Fairfield University Lecture.pdf.) (An Italian Perspective On Recent ECJ Direct Tax Decisions (TNI 2_6_08).pdf)
EU Outbound Merger Not Eligible For Tax-Free Treatment if No Permanent Establishment in Italy After the Merger
In ruling n. 21/E of January 27, 2009 (Resolution 21/E-2009.pdf), Italy's tax administration ruled on whether a merger of an Italian company into a Spanish parent would qualify for tax-free treatment under the EU merger directive.
Under the facts of the ruling, a Spanish company engaged in the business of distribution and sale of clothing and accessories would acquire the stock of an Italian company, which perform the following services:
- receipt of goods from Italian manufacturers and suppliers;
- storing and warehousing;
- quality and conformity control;
- packaging, shipping and delivery of goods to the parent or customers;
- collection and provision of information and other auxiliary services.
Immediately after the acquisition, in order to avoid administrative costs the Italian company would be merged into the Spanish company and would continue to operate as a permanent establishment in Italy of the Spanish company.
According to the taxpayer, the transaction should qualify as a tax free merger under the provisions of the EU merger directive as implemented in Italy.
Also, the Spanish company through its Italian permanent establishment should be able to purchase stock of other Italian companies and include them in a domestic tax consolidated group in Italy, with offset of profits and losses among the members of the group.
The Italian tax administration disagreed and ruled that the merger would be a taxable transaction and the Spanish company could not consolidate other Italian subsidiaries under Italian domestic tax consolidation rules.
According to the tax administration, after the merger there would be no permanent establishment of the foreign parent company in Italy, because the activities performed in Italy are excluded from the definition of permanent establishment provided for in the tax code.
Consequently, since the permanent establishment requirement is not met, the tax deferral treatment granted by the EU merger directive would not apply, and any gain or loss realized in the merger would have to be recognized for Italian tax purposes.
With judgment issued on December 22, 2008 in Les Vergers du Vieux Tauves (C-48/07) the European Court of Justice (ECJ) held that Directive 90/435/EEC of July 23, 1990 (the EU parent-subsidiary directive), which exempts dividends paid by a EU subsidiary to its EU parent from withholding tax, does not apply to dividends paid to the holder of a right of usufruct on the shares for which the dividends are paid.
In the case decided by the Court, a Belgian company held a usufruct in the shares of another Belgian company, while a different Belgian company held legal title to the shares.
The usufruct conferred to the holder the right to receive the dividends paid on the shares, but it did not confer full legal title on the shares or the status of shareholder.
Article 3, paragraph 1 of the EU parent-subsidiary directive requires that, for the benefits of the directive to apply (exemption from withholding), the dividend recipient have a minimum holding of 25 per cent of the capital of the dividen payer (reduced to 15 per cent for dividends distributed from 1.1.07 and to 10 per cent for dividends distributed from 1.1.09).
The usufruct does not represent a participation to the capital of the company, and does not confer the status and rights of shareholder. As a result, the parent-subsidiary directive does apply to dividends paid to the holder of the usufruct on the shares.
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.Continue Reading...
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.Continue Reading...
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.Continue Reading...