EU ruling rejects Italy: Mediolanum's double taxation on foreign dividends illegitimate

The 5% tax applied by Italy to dividends which financial intermediaries receive, as parent companies, from their subsidiaries established in other Member States is contrary to European Union law. That is also the case where the taxation is effected by means of a tax which is not a corporation tax but includes those dividends or a fraction thereof in its tax base.

Banca Mendiolanum after more than 10 years has won against the Italian tax authorities. During the tax years 2014 and 2015, the credit institution with tax residence in Italy had received dividends from its subsidiaries that had their tax residences in other EU Member States. Banca Mediolanum had included them in the tax base for corporate income tax (Ires), within the limits of 5% of their amount. As a financial intermediary, Mediolanum had included these dividends in the taxable base of the regional tax on productive activities (Irap), to the extent of 50% of their amount. This step was taken in order to comply with the rules of the 'IRAP law', i.e. the legislative decree establishing the regional tax in the part where it applies to intermediaries. Subsequently, Banca Mediolanum had requested the refund of this portion of the IRAP, claiming that this provision was contrary to EU law. The tax authorities had rejected the request for recovery, arguing that the IRAP provision was not contrary to Directive 2011/96 2. The Italian court, before which the case is still pending, had asked the Court of Justice for an interpretation of the directive.

The Court of Justice rejected the Italian tax authorities' argument and recognised the right to a refund for Banca Mediolanum. The judges recalled that, with regard to the tax treatment of profits distributed by a subsidiary to its parent company, Directive 2011/96 explicitly leaves Member States the choice between the exemption system and the imputation system. Italy has chosen the exemption system. However, in addition to taxing dividends distributed to parent companies resident in Italy by their subsidiaries to an extent, permitted by that directive, corresponding to 5% of their amount, the national legislation requires, in essence, that 50% of those dividends be included in the tax base of another tax, namely IRAP, regardless of the origin of the dividends. For the Court, Directive 2011/96 5, when it provides that a Member State, if it opts for exemption, must refrain from taxing profits which a parent company resident in the Member State receives from its subsidiaries resident in other Member States, does not concern a particular tax. Consequently, from a literal point of view, the exemption system covers any tax which includes in its taxable amount dividends which a parent company receives from its subsidiaries established in other Member States. Furthermore, the Court notes that that directive seeks to avoid the double taxation of those profits in economic terms and that, therefore, the exemption system covers any tax which, in the parent company's Member State of residence, includes in its taxable amount even a part of those profits, irrespective of its nature. Thus, the effect of the provision of the 'IRAP Law' relating specifically to those intermediaries is that 50 % of the dividends that those intermediaries receive from their subsidiaries is included in the tax base of the IRAP for which they are liable, irrespective of the origin of the dividends.

Thus, where the system of exemption has been chosen, Directive 2011/96 precludes national legislation by which a Member State may tax, at a rate higher than 5% of their amount, dividends which financial intermediaries resident in that Member State receive from their subsidiaries resident in other Member States, even where that taxation is effected by means of a tax which is not a corporation tax, such as IRES, but includes those dividends, or a fraction thereof, in its taxable amount, as in the case of IRAP. A reference for a preliminary ruling allows the courts and tribunals of the Member States, in the context of a dispute before them, to refer questions to the Court on the interpretation of European Union law or the validity of a European Union act. The Court does not resolve the national dispute. It is for the national court or tribunal to resolve the case in accordance with the decision of the Court. That decision is equally binding on other national courts to which a similar question is referred.