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Italian Supreme Court issues a decision dealing with 1)  abuse of the Parent-Subsidiary Directive and 2) subject-to-tax requirement

Italian Supreme Court (Cour of Cassation) issued decision no. 25490/2019, dealing with the application of Directive 90/435/EEC (taxation of dividends distributed by an Italian subsidiary to its EU parent and in this case the recipient is a Luxembourg holding company).

We have to point out that decision of the Supreme Court is of utmost importance as such decision contains, amongst others, important statements concerning 1) relevance of the place of effective management, for the purpose of assessing the existence of an abuse of the Directive and 2) the interpretation of the subject-to-tax requirement.

Court held the following:

  • an abuse of the PSD could exist where the place of effective management of the parent company is located outside the EU State of residence (Luxembourg, in the case at hand) and the Court stated that the concept of place of effective management not only serves as tie-breaker rule in dual resident cases, but also functions as an anti-avoidance provision. With reference to this matter it is worth noticing that Italian Supreme Court added that, in assessing where the place of effective management is located, Italian tax authorities are not bound by the certificates issued by the tax authorities of other EU Member States.
  • b) as far as the-subject-tax requirement provided for in the Directive the Italian Court stated this principle implies and requires an effective taxation of the dividends in the hands of the parent company (which is statement on which we fully disagree).

Considering the specific case such condition was not met because the dividends received by the Luxembourg parent were not taxed in Luxembourg due to the application of the domestic participation exemption regime and such a conclusion confirms an increasing trend in the case law of the Supreme Court (see also decision no. 32255 of 13 December 2018, also dealing with dividends paid to a Luxembourg parent company).

In our view this opinion of the Court is to be considered as incorrect because:

  • it ignores that the exemption is one of the two optional methods envisaged in the PSD to relieve economic double taxation. Luxembourg opted for such a method and therefore the exemption is, in the case at hand, in line with the specific requirement laid down by the Directive.
  • overlooks the case law of the Court of Justice of the European Union (and we refer to the decision of 8 March 2017, in case C-448/15, Wereldhave).

Quorum Law firm (Milan / Rome)

Paolo Comuzzi