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.
Taxation of outbound dividends under Italian law
The position under Italian law is slightly different.
Under Italian law, the reduced 1.365% withholding tax rate on EU outbound dividends (dividends paid to EU companies) applies both to dividends paid on stock to the legal holder of the stock (shareholder) and to profits paid in respect of financial instruments that do not represent a participation to the capital of the issuer and do not confer the status of shareholder, but pay a remuneration which is a percentage of the profits of the issuer. it also applies to profits paid under a joint venture contractual arrangement.
Equally, the participation exemption rules exempt from tax both gains from the sale of stock and gains from the sale of financial instruments which confer the right to a percentage of the profits of the issuer, even though they do not represent a participation to the capital of the issuer, or from the transfer of joint venture arrangements.
Therefore, if the transaction is properly structured, a EU dividend recipient can benefit from the reduced withholding rate even though it does not technically hold the full legal title to the shares and the status of shareholder.
The parent subsidiary directive, as enacted in Italy by legislative decree n. 136 of March 6, 1993 requires that the EU parent hold directly at least 25 per cent of the stock of the Italian subsidiary for a minimum period of 12 months. The holding percentage is reduced to 15 per cent and 10 per cent from 1.1.07 and 1.1.09 respectively.
The statutory withholding rate on outbound dividends (when neither the reduced rate nor the directive exemption applies) is 27 percent, reduced under tax treaties.