In its Ruling N. 380 of September 11, 2019, Italy’s Tax Agency provided its guidance on certain tax implications of a corporate reorganization pursuant to which a Luxembourg holding company, which owns an Italian company, would reincorporate into Switzerland and convert into a Swiss tax resident company.
Prior to the reincorporation of the holding company in Switzerland, the dividends paid by the Italian subsidiary to its Luxembourg parent were exempt from Italian withholding tax under the EU Parent-Subsidiary Directive.
The issue in the ruling request was whether, after the reincorporation of the holding company into a Swiss tax resident company, the dividends paid by the Italian subsidiary to its (Swiss) parent company would still be exempt from Italian withholding tax.
Under the Switzerland-EU Agreement, which provides Switzerland access to benefits similar to those in the EU parent-subsidiary directive, withholding tax is reduced to 0% on cross-border payments of dividends between related companies residing in EU member states and Switzerland when the capital participation is 25% or more and certain other criteria are met.
More precisely, Article 9 of the Switzerland Tax Agreement extends the dividend withholding tax exemption of the EU Parent-Subsidiary Directive to dividends paid to EU-based companies to a parent company organized in Switzerland, provided that the Swiss holding company has been owning 25 percent or more of the shares of the Italian company distributing the dividends, for at least two consecutive years as of the date the dividends are declared.
In its ruling request, the taxpayer provided evidence that Luxembourg law allows a Luxembourg company to reincorporate abroad, as a Switzerland company, and that Swiss law, conversely, allows a foreign company to reincorporate into Switzerland, maintaining its original corporate charter now governed under Swiss law, with both laws treating the transaction as a reincorporation of a Luxembourg company into Switzerland, rather than a dissolution of the Luxembourg company followed by the incorporation of a newly organized Swiss company.
In light of the treatment of the transaction under the corporate laws of the two countries involved, according to the Italian Tax Agency, the original Luxembourg entity is not dissolved but continues as a Swiss entity; as a result, under the terms of the reorganization transaction, the minimum ownership and holding period requirements for the dividend withholding tax exemption are met and dividends paid by the Italian subsidiary would still be exempt from withholding tax.
The question is whether the same conclusion should stand whenever two EU-based companies engage into a tax-free reorganization pursuant to which the acquiring company receives the shares of a EU subsidiary from the acquired company, on a tax-free basis and without recognition of gain, and prior to the reorganization the requirements for dividend withholding tax exemption with respect to those shares were met.
In that scenario, taxpayers would argue that the minimum ownership and holding period requirements in the hands of the acquired company should be teated as carrying over to the acquiring company, and the withholding tax exemption should be maintained.