24 February 2007
On 9 January 2007, the European Commission announced that it had sent Italy a formal request to terminate the levy of a withholding tax on dividends paid to parent companies resident in the Netherlands (case reference number 2005/4047), as it is contrary to the exemption from withholding tax provided for by the Parent-Subsidiary Directive (Council Directive 90/435/EEC)(the Directive).
The request is in the form of a reasoned opinion, which is the second stage of the infringement procedure under Art. 226 of the EC Treaty. If Italy does not reply satisfactorily to the reasoned opinion within 2 months, the Commission may refer the matter to the European Court of Justice (ECJ). Details of the Italian system and the reason why the Commission considers that this system is incompatible with the Directive are summarized below.
In 2004, Italy replaced the credit system by an exemption system to relieve economic double taxation of dividend distributions.
With reference to the case law of the Italian Supreme Court under the previous credit system, the Italian tax administration refuses to reimburse to Netherlands shareholders the 5% withholding tax on dividends provided for in Art. 10(2)a)(i) of the Italy-Netherlands tax treaty.
The Italian Supreme Court decision (No. 19152 of 26 April 2004), to which the tax administration refers, holds, relying on Art. 7.2 of the Directive, that the 5% withholding tax levied pursuant to the relevant tax treaty is not incompatible with the Directive. In particular, the Italian Supreme Court argued that even though, Art. 5.1 of the Directive, in principle, prohibits the levy of a withholding tax on qualifying distributions, Art. 7.2 provides that "the Directive shall not affect the application of domestic or agreement-based provisions designed to eliminate or lessen economic double taxation of dividends, in particular provisions relating to the payment of tax credits to the recipients of dividends".
Referring to the Océ van der Grinten case decided by the European Court of Justice (ECJ) (Case C-58/01), the Italian Supreme Court interpreted this provision in the sense that it allows the application of the 5% withholding tax, since such withholding tax is provided for by the Netherlands-Italy double tax treaty, that is, it forms part of "agreement based provisions designed to eliminate or lessen economic double taxation of dividends". Since the levy of 5% withholding tax pursuant to the relevant tax treaty is not contrary to the Directive, no refund is due to the Netherlands shareholders.
Furthermore, in its general comments the Italian Supreme Court pointed out that any potential double taxation is, in any event, eliminated since Art. 24.3 of the double tax treaty provides for a mechanism under which the Italian withholding tax is to be credited against the Netherlands tax due on the dividends in the hands of the shareholder.
The Commission, however, considers that the Italian tax authorities' reliance on the above case results in a too extensive interpretation of the Directive having regard to the fact that the credit system is not any more in place in Italy. As under the current system, Italy does not grant tax credits to Netherlands shareholders, the Italy-Netherlands tax treaty cannot be considered as "agreement based provisions designed to eliminate or lessen economic double taxation of dividends" under Art. 7.2 of the Directive. Consequently, the levy of the 5% withholding tax is incompatible with the Directive.
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