Italy-France tax treaty’s interaction with parent-subsidiary EU directive

By Michele Targa, Gatti Pavesi Bianchi Ludovici, Milan

The Italian Supreme Court (Corte di Cassazione) with its recent order no. 24874 of 15 September ruled on an interesting case relating to the concurrent application of the Italy-France tax treaty and an EU directive to a dividend distribution by a French-resident subsidiary to its Italian-resident parent company.

The Italian parent company benefited from the French dividend tax credit (avoir fiscal) granted by article 10(3)(b) of the double tax treaty applicable at the time. The same company subsequently also excluded 95% of the dividends from the Italian corporate tax base under the parent-subsidiary directive (Directive 90/435/EEC, now Directive 2011/96/EU of 30 November 2011), implemented in Italy from the previous article 96-bis of Presidential Decree no. 917 of 22 December 1986 (the Italian Income Tax Act).

The “avoir fiscal” has not been available since 2006, but the decision could be relevant for similar pending tax controversies.

The Italian revenue agency, in fact, challenged the Italian parent company’s behavior regarding the application of the parent-subsidiary directive, considering that the joint application of the two regimes would have resulted in an undue tax benefit, which exceeded the elimination of double taxation.

The Italian revenue agency’s position was also confirmed by judges in both the first instance (provincial tax court of Venice) and the second level (regional tax court of Veneto).

The Supreme Court, instead, struck down the lower court’s decision by ruling in favor of the Italian taxpayer. The order is consistent with a previous decision (decision no. 20646 of 20 July 2020) in a case where an Italian entity distributed dividends to its UK parent entity, which benefited from the Italian dividend tax credit permitted under the double tax treaty and, at the same time, from the parent-subsidiary directive.

According to the Supreme Court, the French dividend tax credit and the parent-subsidiary directive may be applied concurrently by the Italian parent company considering that the tax credit permitted under the treaty does not necessarily eliminate the risk of economic double taxation nor the risk of violation of the principle of fiscal neutrality as interpreted by the Court of Justice of the European Union (Case C-389/18, Brussels Securities SA v. État Belge, 19 December 2019).

Moreover, the Supreme Court underlined how no provision in the parent-subsidiary directive prevents the directive from being applied even in cases where double taxation is already mitigated by double tax treaty provisions (or the other way around). Rather, article 7(2) of the directive explicitly states that the directive shall not affect the application of domestic or agreement-based provisions designed to eliminate or lessen economic double taxation, including (therefore) conventional provisions relating to the attribution of tax credits to the recipients of dividends.

— Michele Targa is an associate at Gatti Pavesi Bianchi Ludovici, Milan.