BEPS legacies and ECJ recent decisions on the abuse of EU tax directives have increased the complexities around repatriating profits from Italy by way of dividend.

Some recent Italian Supreme Court’s decisions have added unnecessary confusion to this already complex issue.

In decision no. 32255 of December 13, 2018, the Supreme Court held that a dividend paid by an Italian subsidiary to its Luxembourg parent did not qualify for the dividend withholding tax exemption granted by the EU Parent/Subsidiary Directive unless the dividend was subject to corporate income tax in Luxembourg. An identical decision was rendered a few months earlier in relation to a Dutch parent company.

The underlying reasoning is apparently simple and logical. The Court argued that (a) the dividend withholding tax exemption eliminates double taxation on the dividend and (b) if the dividend is not subject to effective taxation in the hands of the parent company, there is no double taxation to eliminate.

Is this right? With all due respect to the Court, it is not. A student taking this view would not pass the EU tax law exam in any Italian university.

The PS directive aims at eliminating economic double taxation on corporate profits by stating essentially that, within a EU group, profits generated by a subsidiary may be taxed only once even when distributed to a EU parent. This is achieved by (a) article 4 of the directive, which prohibits further taxation in the country of residence of the parent by way of imputation credit or exemption, and (b) article 5 of the same directive, which denies to the State of residence of the subsidiary the right to apply a withholding tax.

The Court mistakenly interpreted the “liability to tax" requirement in the directive as referring to dividends received by the parent company and not as simply requiring the parent itself to be a taxable entity, albeit being exempt on dividends received.

This legal mechanism is masterfully summarized in paragraphs 36-47 of the Opinion of the Advocate General Kokott on case C-116/16, delivered on March 1st, 2018. Evidently, the judges of the Italian Supreme Court did not choose to read the AG Kokott’s opinion before taking their surprising position.

 Luckily, Italian Supreme Court’s decisions are not binding precedents, and the Court may (and often does) rule differently on the same issue. If contrasting decisions on the same issue emerge within the Court, the interpretative conflict can be referred to the full bench of the Supreme Court, which would establish a uniform interpretation.