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Ruling on application of EC Parent-Subsidiary Directive to trust companies — Orbitax Tax News & Alerts

In Ruling No. 37/E of 13 March 2006, the Italian tax authorities clarified that dividends paid by an Italian company to its qualifying EU parent company are exempt from Italian withholding tax even if the shares in the Italian subsidiary company are held through an Italian trust company (Società fiduciaria). To qualify for the exemption, the trust company must comply with all the formal requirements under Italian law, e.g. attestations. Details of the ruling are summarized below.

(a) Legal background. Under Art. 27(3) of Presidential Decree 600 of 1973 (Italian Tax Assessment Code), dividends distributed by an Italian resident company to non-resident shareholders are generally subject to a withholding tax at the rate of 27%. Art. 27-bis of the same Decree, following the implementation of the EC Parent-Subsidiary Directive by Legislative Decree 136 of 5 March 1993, provides that dividends paid to qualifying EU parent companies are not subject to withholding tax. To qualify for the exemption from withholding tax, the parent company must:

-   be a resident for tax purposes of an EU Member State;
-   have one of the legal forms listed in the Annex to the EC Parent-Subsidiary Directive;
-   be subject to one of the taxes listed in the Annex to the EC Parent-Subsidiary Directive, without the possibility of benefiting from an exemption, unless temporarily or territorially limited; and
-   hold at least 25% of the capital of the subsidiary for a period of at least 1 uninterrupted year, regardless of whether or not this period has already expired at the time of the distribution (it should be noted that the Amending Directive to the EC Parent-Subsidiary Directive has not yet been implemented in Italy).

The regime established by the EC Parent-Subsidiary Directive is not available in respect of dividends received by companies controlled by persons who are not residents of an EU Member State, unless the recipient can prove that it was not established for the only purpose of benefiting from the special regime for EU outbound dividends. This proof must be given either to the payer, which may apply the immediate exemption under its own responsibility, or to the tax authorities when the recipient applies for a refund of the withholding tax. The satisfaction of the relevant requirements requested must be proved by a certificate issued by the tax authorities of the EU Member State of the parent company.

(b) The ruling. The Italian tax authorities have clarified that shares owned by a EU parent company in an Italian subsidiary through an Italian trust company benefit from the exemption under the EC Parent-Subsidiary Directive. Under Italian Law, trust companies (officially recognized as a legal entities by Art. 1 of Law 1966 of 23 of November 1939) are entities based on a legal fiduciary relationship between the trustee and the beneficial owner, under which the former is required to act in the best financial interests of the latter. In respect of the same relationship, the trustee can be authorized to be the mere holder of the property of the beneficial owner for the sole purpose of managing the property in the interest of the beneficial owner. For this reason, if an Italian trust company is the mere holder of shares or participations in an Italian company held by a non-resident company, the trust company does not qualify as the "effective owner" of these shares.

According to the Italian tax authorities, the fact that the shares were formally held by a trust company does not prohibit the application of either the income tax rules or the tax-exemption rules in respect of the effective owner of the shares. Accordingly, an EU non-resident parent company is directly entitled to benefit from the exemption of the withholding tax, provided that (i) it is the effective owner of the shares merely held by an Italian trust company and (ii) it fulfils all the conditions required under the EC Parent-Subsidiary Directive.