A previous On the Subject, published January 29, 2007, highlighted the arguments providing good grounds for non-Italian companies or funds residing in EU or EEA/EFTA Member States to claim reimbursement of dividend tax withheld in Italy.
In the 12 months elapsed since then, new developments have further strengthened the arguments supporting the case for filing the reimbursement request.
Decision of the European Court of Justice in the Amurta Case
On November 8, 2007, the European Court of Justice (ECJ) issued its decision on the Amurta case (C-379/05). The case submitted to the ECJ was similar in many respects to the Denkavit case (C-170/05), decided by the ECJ on December 14, 2006.
In Denkavit, the ECJ found that the French withholding tax levied by a French subsidiary on dividends paid to its Dutch parent company, which would not have been applicable if the parent company had been residing in France, was discriminatory and violated article 43 of the EC Treaty (freedom of establishment). However, the ECJ ruling in Denkavit suggested that a discriminatory taxation would not have occurred if the tax withheld resulted in a tax credit in the shareholder’s country of residence. This ruling seemed to imply that a reimbursement request could only be filed by non-Italian shareholders residing in countries where the exemption system is applicable to avoid double taxation on dividends, while the same opportunity seemed to be precluded for shareholders residing in countries where the tax credit system is applicable.
In this respect the decision in the Amurta case innovates the jurisprudence of the ECJ. In Amurta the ECJ ruled that the Dutch withholding tax on dividends paid by a Dutch company to a Portuguese shareholder holding 14 per cent of the shares of the Dutch company, in a situation where the withholding tax would not have been applicable on dividends paid to a Dutch-resident shareholder, was a restriction on the free movement of capital, prohibited by article 56 of the EC Treaty and not justified under any of the circumstances indicated in article 58. This part of the decision is substantially similar to the Denkavit decision, apart from the reference to the free movement of capital principle instead of the freedom of establishment. (The reference to the free movement of capital principle may have important implications, as article 56 of the EC Treaty prohibits restrictions on free movements of capital not only between Member States, but also between Member States and third countries.)
More importantly, however, in the second part of the decision the ECJ ruled that in preventing economic double taxation of dividends, a Member State may not rely on the existence of a full tax credit granted unilaterally by another Member State to a recipient company established in the latter Member State. Only the national law must be taken into consideration in ascertaining whether a Member State is compliant with its obligations under the EC Treaty (for these purposes the double taxation conventions form part of the national legal background so that they can be taken into account in determining whether the effects of the restriction on the free movement of capital can be neutralized).
The implications of the ECJ decision in Amurta are extremely important for non-Italian companies residing in Member States where the tax credit is the method to avoid economic double taxation on dividends. In fact, if such companies have suffered a withholding tax on dividends paid by an Italian company, the arguments set out in the Amurta decision provide strong grounds for a reimbursement claim of the tax withheld, irrespective of the fact that the tax may have been fully credited in the shareholder’s State of residence pursuant to domestic provisions of the latter State.
New Legislation Introduced by the 2008 Budget Law
On December 24, 2007, the Italian Parliament approved the 2008 Budget Law. Among many other provisions, the Legislature has changed the tax treatment applicable to outbound dividends paid to entities resident of other EU or EEA Member States, in order to comply with the request of the European Commission to end the discriminatory treatment so far applied in those cases where the “Parent-Subsidiary” Directive is not applicable (i.e., when the shareholding is below the 15 per cent threshold). In particular, the 27 per cent withholding tax rate provided for by domestic legislation (which can be reduced pursuant to the applicable double taxation conventions) has been replaced by a 1.375 per cent tax rate which corresponds to the same economic double taxation of dividends in the hands of a recipient company residing in Italy. (For Italian companies, dividends distributed by other Italian companies are only taxable for 5 per cent of their amount at the 27.5 per cent corporate income tax rate: 27.5 * 5 per cent = 1.375 per cent).
The new provision will only be applicable starting from the distribution of dividends out of profits realized in fiscal year 2008 (i.e., as from 2009). The rationale behind the delayed effectiveness of the new provision is that the 27.5 per cent ordinary corporate income tax rate for Italian companies is applicable as from fiscal year 2008 (until 2007 the tax rate was 33 per cent).
In light of the new legislation, the withholding tax applicable on dividends paid from Italian companies to entities resident in other EU or EEA Member States until 2008 is implicitly acknowledged as discriminatory by the Italian Legislature itself.
European Commission Infringement Procedure Against Italy for Outbound Dividends Paid to Pension Funds
On July 23, 2007, the European Commission sent a request of information in the form of letter of formal notice (first step of the infringement procedure pursuant to article 226 of the EC Treaty) to the Italian Government in order to assess whether the taxes withheld on outbound dividends paid to foreign pension funds are higher than the tax levied on domestic dividends.
Domestic dividends paid to Italian pension funds are not subject to any withholding tax. Such dividends are included in the total income of the pension fund which is subject to a 11 per cent tax. Outbound dividends paid to foreign pension funds, instead, are subject to a 27 per cent withholding tax, possibly reduced pursuant to the double taxation conventions, where applicable.
In light of the ECJ case law and the consistent approach taken by the European Commission on discriminatory taxation of dividends, it is easily predictable that the Italian rules on taxation of outbound dividends to foreign pension funds will be found incompatible with Community law.
The Opportunity of Filing Reimbursement Requests
Companies resident of EU or EEA Member States which have suffered a discriminatory taxation on dividends paid by Italian companies have very strong arguments to claim from the Italian tax authorities the reimbursement of the tax unduly withheld.
The same applies to EU pension funds, in light of the infringement procedure opened by the European Commission.
While no similar initiatives have been started by the European Commission with respect to the taxation of outbound dividends paid by Italian companies to EU investment funds, there are good grounds for such funds to file reimbursement requests too. In this respect, the Amurta doctrine—whereby Member States must ensure that the measures applicable to prevent economic double taxation of dividends do not restrict the free movement of capital—is of particular interest in construing a case for reimbursement against the Italian tax authorities.
Finally, it should be noted that the statute of limitation for filing reimbursement requests is 48 months from the date of the withholding tax payment.