Prepared by Carlo Romano and Flaminia Ferrucci
Decisions no. 26681/2022 and 26684/2022 lodged on September 9th, 2022 by the Italian Supreme Court, ruled in the cases related to two different Dutch banks which had suffered a 15% taxation on dividends distributed by an Italian company in the years 2005, 2006 and 2007.
More precisely, the foreign companies (subject in the Netherlands to the so-called “participation exemption“) asked for the refund of 27% substitute tax governed by articles 27, paragraph 3, and 27ter, paragraph 1, of the Presidential Decree 600/1973 (in the version ratione temporis), reduced to 15% by virtue of the Convention against double taxation between Italy and the Netherlands, because contrary to the principle of free movement of capital, pursuant to articles 18, 63 and 351 of the Treaty on the Functioning of the European Union (“TFEU”), as well as discriminatory with respect to the tax treatment reserved to Italian companies which, in the same circumstances, would have been taxed at a rate of only 1,65% of the gross amount of dividends received (again in accordance with current legislation ratione temporis).
The judges of second instance rejected the appeals filed by the companies on the assumption that the Convention against double taxation should be considered the suitable instrument for avoiding double taxation and that the tax reduction from 27% to 15%, by virtue of the application of the said Convention, represented the only remedy of foreign subjects that nothing else could claim.
The tax cases did not deal with the status of beneficial owner of the foreign banks, because that was fully recognized, but the judge of second instance believed that no proof had been provided on the actual tax paid in the country of residence on the dividends received.
The aforementioned decisions of the Supreme Court upheld the appeals filed by the foreign banks and confirmed, on the basis of the EC Court of Justice C-540/07 of 19 November 2009, “representing a UE legislation source directly applicable“, that a taxation higher than 1,65% applied to resident subjects, although conventionally reduced to a rate of 15%, violates articles 18, 63 and 351 of the TFEU, as it certainly represents a more serious tax.
The Supreme Court clarifies that the application of the Convention against double taxation possibly offset the effects of the difference deriving from domestic law, only in the event that the tax withheld at source can be deducted from the tax due in the State of residence for an amount equal to the difference of the tax treatment between dividends distributed to companies established in other Member States and dividends distributed to resident companies.
This means that dividends sourced in Italy must be sufficiently taxed in the other Member State provided that “if such dividends are not taxed or if they are not sufficiently taxed, the sum withheld at source in Italy or a fraction thereof cannot be deducted“.
Moreover, since the choice to tax (or not) income sourced in Italy does not depend on our country but on the other Member State, the Italian Republic cannot just apply the Tax Treaties to compensate the difference resulting from the application of domestic legislation. In fact, the Supreme Court recognized that the elimination of the unequal treatment is something more than just elimination of double taxation and that an unfavorable tax treatment, contrary to a fundamental freedom, cannot be justified by the existence of possible other tax advantages (Court of Justice C-170/05, 14 December 2006 (Denkavit) and Court of Justice C-379/05, 8 November 2007 (Amurta).
The Supreme Court also recalled that the Revenue Agency itself issued ministerial circular no. 32/E of 8/07/2011 to identify the procedures for asking the refund of the withholdings applied on dividends formed before January 1st, 2008 (but not before of January 1st, 2004) which are exactly relevant in this case.
Given the above, the sentences in question identify the following two law principles:
i)with relation to the withholding taxes applied by Italy on dividends distributed by a resident company to a Dutch company, in order to fully and effectively apply the interpretation provided by the Court of Justice case C-540/07 of 2009, also for dividends formed before January 1st, 2008, the reduced withholding tax of 1,65% is applicable. This favorable rate prevails over that provided by article 27 of the Presidential Decree. 600/1973 (in the version ratione temporis), albeit mitigated by the applicable Tax Treaty, as this remedy is not sufficient to settle the discrimination;
ii) the reduced withholding tax applies to foreign entities and companies subject to tax in the Country of residence on their corporate income, but this condition must be interpreted as “subjectability” to taxation, satisfied any time those entities and companies are “potentially” subject to IRES, regardless the application of possible tax breaks compatible with EU legislation.
In conclusion, the Supreme Court, by reiterating that there is no need “to have actually paid taxes, because the mere subjection to tax is sufficient, as clarified by the administration itself in the aforementioned circular (Supreme Court decisions no. 5152/2022 as well as n. 21302 of 05/07/2022, no. 21159 of 04/07/2022)“, has recognized to the foreign banks the right to obtain a refund of the tax paid in Italy net of the tax equivalent to 1,65% of the gross amount of dividends received.
For a deeper discussion, please contact:
PwC TLS Avvocati e Commercialisti