Italian tax rules on dividend distributions to non-residents (Part one) Summary: Under the Italian tax law non-residents (either companies and partnerships) are liable to tax in Italy only on the relevant income effectively derived therein (principle of territoriality). In this regard, dividends are liable to a finale withholding tax with different tax rates according to the provisions set forth by the domestic, European and conventional rules.
EU Parent-Subsidiary Directive
Pursuant to the domestic law (Art. 27-bis of the Decree) implementing the EU Parent-Subsidiary Directive (Directive 90/435/EEC of 23 July 1990), dividends distributed by an Italian subsidiary to its parent company may be exempted in Italy as long as the following requirements are met:
– The parent/subsidiary companies are be resident, for tax purposes, within the EU;
– The parent/subsidiary companies are qualifying companies under the Directive (partnerships are not covered);
– The parent/subsidiary companies are liable to one of the taxes listed in the Directive without the possibility of an option or of being exempt;
– The parent has directly held at least 10% of the capital of the subsidiary for at least 1 year (only direct ownerships are covered).
For seek of clarity, please note that:
– The covered companies are only those listed in the Directive (ECJ Gaz de France case C-247/08);
– The Directive sets that the participation must be directly held: therefore it is not sufficient that the parent company has only the economic rights.
The exemption regime could be extended to EU controlled (direct/indirect) companies by non-EU companies only if the participation is not held for tax driven purposes (i.e. the sole purpose of the participation is to benefit of the exemption regime). In order to define the notion of control for Italian tax purposes, reference can be made to several Italian Tax Authorities’ positions stating that the definition of control can be gleaned from Art. 2359 of the Italian Civil Code, according to which it exists where:
– The majority (50%+1) of the shareholders’ or members’ voting rights in a company are held by another company (internal control or de jure control);
– A dominant influence is exercised in terms of voting rights by another company (de facto control);
– A dominant influence is exercised by virtue of particular commercial relations (external control).
In order to ascertain whether the first two kinds of control exist, the voting rights of controlled/trust companies must be taken into account (i.e. control exercise through interposition).
Double Tax Treaties
According to the Italian tax law, if there is an agreement/convention in place between Italy and the State of residence of the foreign entity then domestic rules shall apply on to the extent that they result as being more favorable in the hand of the recipient.
On that basis, the 27% withholding tax provided for dividends paid to non-residents can be overruled by the reduced withholding tax (5% – 15%) applicable to dividend distributions under the applicable (if any) relevant Double Tax Treaty (hereinafter “DTT(s)”).
Having regard to partnerships, please note that as a general rule DTTS apply only to entities that are treated as taxable units in their State of residence. In this respect, partnership will be covered by DTTs only to the extent that they are not treated as fiscally transparent vehicles (i.e. they have full personal liability to tax) in their State of residence. Where a State considers that a partnership does not qualify for DTTs purposes because is not liable to tax and the partners are liable to tax in their State of residence on their share of partnership’s income, the Commentary to DTTs provides for that “it is expected that that State will apply the provisions of the Convention as if the partners had earned the income directly [beneficial owners]”.
The above mentioned clarification was recently implemented in Italy by Italian Tax Authorities with Ruling no. 167 of 21 April 2008.
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