On 16 July 2009, the Advocate General to the European Court of Justice (ECJ) released its opinion on the procedure between the EU Commission and the Republic of Italy, on the former Italian regime of outbound dividends distributed to companies which did not meet the provisions set forth by the Directive 90/435/EEC (so called Parent-Subsidiary Directive, executed in Italy by Article 27-bis of the Presidential Decree no. 600/731).
Italy was referred to the ECJ for the discriminatory taxation of outbound dividends (Case C-540/07, Commission vs Italy2) distributed to companies resident in EU member states, when compared to dividends paid to Italian resident companies.
Pursuant to the Italian tax legislation in force until 31 December 2007, dividends paid to foreign companies, except those compliant with the conditions required for the application of the Parent-Subsidiary Directive regime, were subject to a 27 per cent definitive withholding tax3. The taxpayer could claim a refund of up to four-ninths of the withholding tax applied if they could give evidence that such dividends were subject to tax - in their state of residence - for an amount equal to the total amount claimed for refund.
Conversely, “domestic” dividends (ie, dividends paid to resident companies) were taxed at the ordinary IRES rate (equal to 33 per cent when the Case was referred to the ECJ) applied only on the 5 per cent of their gross amount. This resulted in a final tax burden of 1.65 per cent - now 1.375 per cent.
In light of the above, the Commission challenged that Italy was levying a heavier taxation of outbound dividends paid to EU member states according to the “general” regime, when compared to the taxation of domestic distributions of dividends. The Commission’s view is that this was in breach of the free movement of capital and of the freedom of establishment granted by the EC Treaties.
On 16 July 2009, the Advocate General at the ECJ released its conclusions, maintaining that Italy was in breach of the free movement of capital due to the different (and more burdensome) tax regime applicable to outbound dividends distributed to EU resident companies (not complying with the Parent-Subsidiary Directive regime), compared to the one granted to distributions made to Italian resident companies. The Advocate General also stated that the difference was not justified by any of the reasons referred to by Italy during the proceedings before the ECJ, such as the need to prevent tax evasion and the possibility that the economic double taxation deriving from the application of the 27 per cent withholding tax could be removed by the application of the anti-double taxation rules contained in the Double Tax Treaties concluded by Italy. The Advocate General’s opinion is not binding on the ECJ, which will come to its own conclusions, but it is often persuasive evidence for the court.
In anticipation of this challenge, Italy has amended Article 27 of the Presidential Decree no. 600/73 by providing for the general application of the 1.375 per cent withholding tax (instead of the 27 per cent withholding tax) on dividends distributed to non-resident companies or entities which are:
- subject to corporate income tax in their State of residence; and
- resident in a EU State or in a EEA State included in a “white list” based on the exchange of information criterion (to be issued by Ministerial Decree).
The 1.375 per cent withholding tax applies regardless of the Parent-Subsidiary Directive regime4, but limited to profits accrued starting from the tax period following 31 December 2007. Profit distributed on or after 1 January 2008, but accrued prior to 31 December 2007, is still subject to the 27 per cent withholding tax rate under the former version of Article 27.
In light of the above, should the ECJ rule that the historic taxation of outbound dividends was incompatible with EC law, Italian taxpayers with EU/EEA shareholders should have the possibility to file a tax refund claim for withholding taxes applied (and still applicable, in some cases) by Italy on outbound dividends which did not benefit from the Parent-Subsidiary Directive regime.