The tax credit provided by the double taxation treaties is due even after the application of the mother-daughter Directive

Prepared by Carlo Romano and Maurizio Foti

On May 20th, 2021 the Supreme Court issued the ruling n. 13848, recognizing that the exemption from withholding tax (provided by the mother-daughter Directive implemented in Italy with the introduction of article 27-bis, paragraph 3, of the Presidential Decree 600/1973) of dividends distributed by an Italian subsidiary to the French parent company, does not preclude the latter its right to request, even ex post, the refund of the tax credit provided for by art. 10 co. 4, lett. b), of the Italy-France Double Taxation Treaty (indirect tax credit). This is a matter of international taxation that has been much debated over the past years and has been the subject of various refund disputes, some of which currently pending before the Supreme Court, which could finally find a favourable solution to taxpayers.

The case

During the year 2000 an Italian company paid Lire 2,100,000,000 as dividends to its French mother without applying the withholding tax (and benefiting from the application of article 27-bis, paragraph 3, of the Presidential Decree of 29 September 1973, no. 600). Then the French parent company, being subject to tax in France, requested a refund to the Italian Tax Authorities of € 248,328.87 pursuant to article 10, paragraph 4, lett. b) of the Italy – France Double Taxation Treaty, namely: the refund of 50% of an amount equal to the tax credit, which at the time would have been due to an Italian participating company, relating to the taxation of the corporate profits of the Italian subsidiary, determined after a 5% deduction on the same tax credit and a 5% on the dividends received.

Both Provincial and Regional Tax Courts decided negatively for the French parent company: in fact, according to them, the Company had already benefited from the exemption from withholding taxes on dividends and this precluded its right to request any refund of the tax credit provided by the Italy-France Double Tax Treaty; moreover, according to the judges, the French company did not provide the proof that the dividends in question were subject to taxation in France.

Therefore, the Tax Courts confirmed the thesis of the Revenue Agency, according to which the French parent company was precluded from choosing “ex post” to benefit from tax credit refund pursuant to the Italy-France Double Taxation Convention, having initially chosen  the non-application of the Italian withholding tax. According to the Revenue Agency, the contrary interpretation of the case at stake would have entailed an unlawful combination of benefits, e.g. the simultaneous exemption of dividends from withholding tax and the refund of the tax credit.

The grounds of the judgement issued by the Supreme Court

The Supreme Court upheld the appeal of the French company, with particular reference to the violation of article 10, paragraph 4, lett. b) of the Italy – France Double Taxation Treaty.

In particular, the Supreme Court questioned whether the judgement under appeal “could be considered correct in the light of the interpretation of Community legislation” and in particular “whether the benefit already obtained with the exemption from withholding taxes would be in irreconcilable conflict with the subsequent request for refund of the tax credit in the manner indicated by the applicant company”.

The judges of the Supreme Court – recalling what recently argued by the same Supreme Court (see judgements no. 2313 of31/01/2020 and no. 26307 of 19/11/2020) which also has resumed the Euro-unitary principle of neutrality in taxation in transnational relations emphasized in the judgment of the Court of Justice in case C-389/18 (Brussels Securities v / Belgium) – specified that it is not “forbidden for the company to request the refund of the tax credit, even when the parent company has benefited from profits on which the daughter company, belonging to another Member State, has not applied the withholding tax on dividends”. Indeed, abstractly – albeit with subsequent concrete verification – they explain the compatibility of the two systems, which above all in the terms in which the present applicant intends to quantify the amount of the tax credit, i.e. net of the 5% deduction from the refund itself and from the profits contributed, are proposed as alternative instruments, which can also be used with subsequent options “.

In particular, it should be remembered that in case C-389/18 the Court of Justice specified that in order to ensure the tax neutrality of the dividends received by the parent company, it is necessary to avoid not only the direct taxation of dividends by the company mother but also the indirect one. mother, but also the indirect one.

This indirect taxation must be understood as a consequence of the application of some mechanisms that could concretely cause to the parent company a different (and worse) tax treatment compared to the one  due if the two companies (mother and daughter) were resident in the same member State.

In addition, the Supreme Court, in the judgement at stake, specified that:

  • the non-application of the withholding tax by the Italian subsidiary does not determine an immutable option, because there is no law that covers this limitation. Therefore, a parent company – which receives dividends without application of withholding tax – has the right to opt, even ex post, for the conventional benefit;
  • the refund of the tax credit governed by the Double Tax Treaty is not subject to effective taxation in the country where the parent company is resident for tax purposes, since it must be considered sufficient the fact that the dividends compose the total income, even though there is no effective taxation.

In conclusion, the Supreme Court state the following principle of law: «In the matter of dividends’ taxation paid by an subsidiary company resident in Italy to a parent company resident in France, the tax credit provided by article 10 co. 4, lett. b), of the Italy-France Double Taxation Treatyis not excluded from the recognition of the exemption from the withholding tax provided by the mother-daughter Directive no. 453 of 1990 (implemented with Legislative Decree no.136 of 1993), given that, according to the interpretation offered by the Court of Justice (case C-389/18, of December 19, 2019, Brussels Securities), this second benefit does not necessarily eliminates the risk of economic double taxation or the violation of the principle of fiscal neutrality”.

Therefore, the Supreme Court upheld the French company appeal, redirecting the case to the Regional Tax Court which should apply the aforementioned principles of law.

The principles of law provided by the judgment at stake will be crucial for many controversies that are still pending before the Supreme Court for the same issue; in this regard, the preparation of a well-motivated explanatory memorandum, which develops the arguments of the aforementioned case-law, will be essential because it will represent the last chance for the taxpayer to convince the judges about its right to refund.

Let’s Talk

Per una discussione più approfondita ti preghiamo di contattare:

Carlo Romano

PwC TLS Avvocati e Commercialisti


Maurizio Foti

PwC TLS Avvocati e Commercialisti

Senior Manager