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Italian Supreme Court Holds Parent-Subsidiary Directive Withholding Tax Exemption May be Denied if Parent Not Effectively Taxed on Dividends

According to recent reports, the Italian Supreme Court issued a decision in December 2018 concerning the withholding tax exemption on dividends under the EU Parent-Subsidiary Directive. The case involved a parent company resident in Luxembourg that received dividends from an Italian subsidiary. The Luxembourg company claimed a refund of Italian tax withheld but was denied. This was appealed, with the provincial tax court finding in favor of the company. However, the regional tax court determined that the Luxembourg company was not eligible for the refund under the Parent-Subsidiary Directive because the dividends received had been exempted under Luxembourg's participation exemption, which was appealed to the Supreme Court.

In its decision, the Supreme Court upheld the decision of the regional tax court, finding that the Luxembourg company was not entitled to a refund of tax withheld. In particular, the Supreme Court held that although the Luxembourg company was generally subject to corporate income tax in Luxembourg, which is a condition of the Parent-Subsidiary Directive, the company was not effectively subject to tax on the dividends received and therefore the withholding tax exemption in Italy should not apply. In the Supreme Court's view, the purpose of the Parent-Subsidiary Directive is to eliminate double taxation and, because the dividends received were exempt in Luxembourg, this purpose was achieved, and no refund was due. In addition, the Court considered an argument from the Luxembourg company that the withholding tax violated the EU freedom of establishment and the free movement of capital because an Italian parent would have been granted a 95% exemption on Italian source dividends received. However, the Supreme Court rejected the argument.

The Supreme Court decision is seen as questionable and it is possible that it will be challenged further at the level of the EU.

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