Italian Supreme Court rejects Luxembourg company tax appeal, finds parent-subsidiary directive inapplicable

By Gian Luca Nieddu, Head of Transfer Pricing and Tax Value Chain at Hager & Partners, Milan area

In a decision which appears based upon faulty reasoning, Italy’s Supreme Court has rejected an Italian corporation’s request for reimbursement of withholding taxes paid on dividends distributed to its Luxembourg parent.

The Court concluded that the distribution lacked the requisites for an exemption under the EU Parent-Subsidiary Directive because no double taxation occurred.

Italian withholding tax dispute

In the case at stake, decision n. 32255/2018 dated 13 December 2018, a Luxembourg company, on the basis of the directive, filed a request for reimbursement of Italian withholding tax applied to the dividend distribution made by its Italian subsidiary.

In the absence of an official reply from the tax office, the appealing entity (subsequently merged into another Italian company) successfully appealed before the provincial tax court (first degree).

Subsequently, the tax office brought the case before the regional tax court (second degree) and the latter, overturning the previous pronouncement, denied the refund arguing that the Luxembourg company – benefiting from a domestic regime of dividend exemption – did not meet all requirements of the directive due to the lack of an actual taxation of the dividend in the hands of the recipient.

The dispute was then appealed by the taxpayer to the Supreme Court which, in the end, rejected the request for reimbursement, aligning its position to the rationale and the analysis embraced by the second-degree court.

In particular, the Court ruled that the reimbursement of withholding tax would have generated a double non-taxation of the dividends considering that they would not be subject to tax in Italy (because of the requested refund) nor in Luxembourg (because of the domestic exemption regime), so to say that no cumulation of benefits can be allowed.

In general terms, the Court reiterated the concept that – according to art. 27-bis of the Presidential Decree n. 600/1973 where the directive has been transposed in the Italian tax law framework – the withholding exemption is aimed at solving double taxation cases and its application cannot merely lead to the exemption of any taxation of dividends distributed by a corporation, which has a legal seat in another Member State of the EU, which already takes advantage of the dividend exemption in the country of residence (see also Supreme Court decisions n. 27111/16 and n.19567/17 for additional inputs). The case under discussion would not qualify – according to the Court – as a double taxation situation.

Questionable conclusions

The crucial point of the decision is that the Court judged not relevant the fact that the Luxembourg company duly demonstrated to be subject to local income tax, where only dividends – among the types of income – were exempted.

The crucial point of the decision is that the Court judged not relevant the fact that the Luxembourg company duly demonstrated to be subject to local income tax, where only dividends – among the types of income – were exempted.

In fact, the Supreme Court said the dividend exemption regime was per se able to avoid any double taxation, without making any reference to the difference between “juridical double taxation” and “economic double taxation” which, in the case at stake, would not be avoided since the profit generated by the Italian subsidiary would remain subject both to the Italian corporate income tax and, likewise, to the Italian dividend withholding tax upon distribution.

Considering the above, the arguments purported by the Court raise relevant doubts and appear to be ultimately not correct.

In fact, as already clarified, the aim of the directive is to solve double taxation cases, both juridical and economic. In this regard, articles 5 and 4 of the directive provide both for the withholding tax exemption in the source State and for the exemption from taxation for the recipient company.

 Accordingly, subordinating the benefit of the withholding tax exemption to the condition that the dividend is effectively levied in the State of residence of the recipient company, as the Court requires in the case under scrutiny, is clearly against the literal wording and the objectives of the directive. 

Moreover, the Court seems to wrongly interpret the requisite of “subject to taxation” described in the EU directive.

It is worth mentioning a former decision of the European Court of Justice (C-448/15), where the applicability of the directive in favour of a Belgian recipient was excluded because the same recipient was subject to income tax with a 0% rate upon the integral distribution of the profits to its shareholders.

However, this case was characterized by a total exemption from income taxation and is completely different from the one analysed by the Court which considered an exemption limited to the sole dividends, being in line with provisions and objective of the directive.