By way of ruling n. 55/6/2019 filed on January 21, 2019, the Regional Tax Court of Abruzzo held that no withholding tax exemption under the EU Parent-Subsidiary Directive applies, unless the EU parent company proves that it has been “materially charged” with an income tax on the dividends in its own country of residency.
The case concerns a dividend paid by an Italian subsidiary to a EU parent company based in the Netherlands. Upon payment of the dividend, the Italian subsidiary charged the dividend withholding tax at the rate of 27 percent, as provided for under Italy’s internal tax law.
The Dutch parent then filed a petition with the tax agency’s office of Pescara, Abruzzo (in charge with international tax matters, including international tax refund claims), claiming the full refund of the withholding tax pursuant to the EU Parent-Subsidiary Directive.
According to the taxpayer, the dividend withholding tax exemption provided for under the Directive applies whenever the EU parent company is organized in one of the legal forms specifically set forth under the Directive – that is, as a taxable entity falling within the scope of – and liable to – the corporate income tax, in its own residence country. The fact that no income tax is actually paid, on the dividend received by the parent, under a participation exemption tax regime for holding companies, which exempts dividends and capital gains in the parent’s home country, should be irrelevant for the purpose of applying the Directive’s exemption.
The regional tax court (having appellate jurisdiction over Italy’s tax agency’s office in charge of international tax cases) rejected the taxpayer’s argument and held that, with no actual taxation of the dividend in the Member State of the parent, there is no double taxation and no need to apply the exemption from withholding tax in the country of source of the dividend.
The ruling is inconsistent with both the literal language and the rationale of the statute. The Directive provides that no exemption applies whenever the parent company itself, as an entity, is not liable to corporate income tax, or benefits from a tax exemption of general nature and scope. The exemption of a specific item of income does fall within the scope of this exception. The rational of the Directive is that, for the purpose of facilitating the flow of cross-border investments within the EU, the EU Member State which is the source country of the dividend should waive its taxing rights on the amount of profits repatriated to a company based in another EU Member State, after those profits have already been subject to the corporate income tax in that source country, when realized by the distributing company based there, in order to avoid an economic double taxation of the same profits, in two different Member States, upon two different affiliates entities.
The ruling, however, is in line with the most recent decisions of Italy’s Supreme Court on that issue. If appealed to the Supreme Court, it may it will give the highest court of the land another opportunity to revisit the matter. In the meantime, any tax planning structure based on the use of EU holding companies is severely at risk and under great scrutiny and potentially exposed to audits and tax assessments.