Requirements for withholding tax exemption for interest and royalties paid to EU associated companies clarified - mario starita

Requirements for withholding tax exemption for interest and royalties paid to EU associated companies clarified

In a tax ruling dated 27 May 2009, No. 131/E, the Italian Tax Administration (ITA) clarified that the exemption from withholding tax provided for interest and royalties paid to associated companies resident in a EU Member state does not apply if the recipient holds the company that makes the payment through a related company (i.e. indirect holding). The ITA further clarified that in order to benefit from the exemption, the participation in the associated company must be maintained for an uninterrupted period of at least one year. If such requirement is not fulfilled at the time of payment, the paying company will withhold tax at source. The recipient may claim a refund of the withholding tax upon fulfilment of the one year uninterrupted holding requirement.

Requirements for withholding tax exemption for interest and royalties paid to EU associated companies clarified

In a tax ruling dated 27 May 2009, No. 131/E, the Italian Tax Administration (ITA) clarified that the exemption from withholding tax provided for interest and royalties paid to associated companies resident in a EU Member state does not apply if the recipient holds the company that makes the payment through a related company (i.e. indirect holding). The ITA further clarified that in order to benefit from the exemption, the participation in the associated company must be maintained for an uninterrupted period of at least one year. If such requirement is not fulfilled at the time of payment, the paying company will withhold tax at source. The recipient may claim a refund of the withholding tax upon fulfilment of the one year uninterrupted holding requirement.

CFI: Italian lower substitute tax rate of 5% for specialized investment vehicles incompatible with EU State aid rules – details

As previously reported (see TNS:2009-03-05:E2-4), on 4 March 2009, the Court of First Instance (CFI) gave its decision in the case of Associazione italiana del risparmio gestito v. Commission (T445/05). The applicants contested the Commission Decision 2006/638/EC of 6 September 2005 on the aid scheme implemented by Italy for certain undertakings for collective investment in transferable securities specialized in shares of small and mid-capitalization companies (small and mid-caps) listed on regulated markets. In its decision, the Commission had held that the lower substitute tax rate for specialized investment vehicles (investing primarily in small and mid-caps) is incompatible with the State aid rules (see TNS:2005-09-08:E2-1). The main findings of the CFI are summarized below.

Categorization of beneficiaries

The applicants argued that the scheme is a general measure, since it benefits all investors in shares in investment vehicles, which are mostly individuals, rather than undertakings. In addition, they claimed that the investment vehicles cannot be categorized as undertakings, because they are merely pools of assets.

Referring to the ECJ judgments in Germany v. Commission (C-156/98) and Netherlands v. Commission (C-382/99), the CFI recalled that Art. 87 of the EC Treaty does not draw a distinction as to whether the aid-related advantages are granted directly or indirectly. In cases where the investment vehicles have corporate form, they can themselves benefit from the aid as undertakings. Conversely, when those vehicles do not have legal personality, the undertakings that manage them (managing undertakings) derive an indirect benefit from the advantage in question. In either case, the scheme benefits "certain undertakings", which is sufficient for the application of Art. 87(1) of the EC Treaty, regardless of whether the scheme may also benefit entities which are not undertakings.

Selective advantage for vehicles and managing undertakings

The applicants further argued that the tax reduction does not ensure that the managing undertakings will obtain additional fees. The advantage is accessible to all managing undertakings, as they are free to set up such specialized investment vehicles. The contrary would mean to construe too broadly the concept of selectivity and to stretch the concept of State aid to cover reduced rates of tax applicable to income from certain types of investment instruments.

The CFI acknowledged the Commission's observation that, as the management and entry fees are paid in proportion to the volumes concerned, the increase in shares purchased in the vehicles will inevitably lead to an increase in the management and entry fees paid to the vehicles or their managing undertakings. With regard to selectivity, the CFI held that the tax reduction is limited to well-defined investment vehicles (and their managing undertakings). It does not apply to all economic operators and is, therefore, selective.

Selective advantage for small and mid-caps

As to the advantage for the small and mid-caps, the investment in whose shares would qualify an investment vehicle as "specialized", the applicants pointed out that the number of those companies (approx. 6,900) is large compared to the amount of aid (approx. EUR 600,000). In addition, they argued that the situation of those companies is not comparable to that of other listed companies.

Referring to the ECJ judgment in Germany v. Commission (C-156/98), the CFI recalled that a measure allowing undertakings to increase their own resources on more favourable terms may constitute State aid. Therefore, the measure at issue confers an indirect advantage to the small and mid-caps. The fact that large-capitalization companies are heavily present both on the markets and in the portfolios of investment vehicles does not mean that they cannot be compared with the small and mid-caps.

Recovery of the aid

The applicants argued that the recovery order may concern only the direct and actual beneficiaries of the aid. The indirect advantage obtained by specialized investment vehicles with corporate form and managing undertakings from the increase in the fees charged does not correspond to the amount of the aid scheme. The repayment of the tax relief equivalent is a disproportionate charge which they would not otherwise have had to bear.

The CFI emphasized that, for the purposes of the recovery of unlawful aid, no distinction is made under EC law whether a party is a direct or indirect beneficiary. The specialized investment vehicles with corporate form and managing undertakings are the persons required to pay the substitute tax and are therefore the only possible interlocutors that can recover the aid. They always have an option of subsequent recovery in turn from their investors, in accordance with provisions of national law.

Note: On 4 March 2009, the CFI also gave its decision in the case of Italy v. Commission (T-424/04) concerning the same issue, i.e. the lower substitute tax rate of 5%. The substantial findings of the CFI are similar.

Italian tax authorities ruling that CFC regime applies when indirect participation, via transparent entity (France) and trusts, in companies resident in black list countries (Isle of Man, Mauritius)

On 23 October 2008, the Italian Tax Authorities (ITA) issued Ruling No. 400 on the applicability of the CFC regime with regard to participation indirectly owned in companies resident in a state or territory having a privileged tax regime (black list countries), by an Italian company through a transparent entity and trusts.

(a) Facts. An Italian company (the Company) owns a 50% participation in a French company in a French organization (Gruppo di Interesse Economico – G.I.E.). G.I.E. is a legal entity incorporated in France, fiscally transparent, and engaged in the production of turboprop aircraft for short-haul routes (the Aircraft).

In the 1990s, G.I.E. established several ad hoc special purpose companies (SPCs) specifically aimed at the marketing and distribution of the Aircraft to customers. SPCs bought from G.I.E. at market price one or more Aircrafts through a long-term bank financing equal to the price paid to G.I.E. and, subsequently, leased the same Aircraft to several airlines for a rental fee that allowed them to repay the debt.

G.I.E., as sole beneficiary, allocated the shares of the SPCs to non-discretionary fiduciary trusts.

Among the SPCs wholly owned by the G.I.E. through trusts, three of them are resident in a black list countries (the CFCs): two are resident in the Isle of Man, and the other in Mauritius.

(b) Issue.

(i) Whether the CFC regime, as embodied in Art. 167 of Presidential Decree 22 December 1986 No. 917 (Italian Income Tax Code – ITC) or the provisions of Art 168 of the ITC, should apply since:

the CFCs are owned indirectly (50%) through a trust and a transparent entity (i.e. G.I.E.);

Arts. 167 and 168 make reference to "profit realized by foreign entity" resident in a black list countries, whilst CFCs do not realize any income as their income is directly attributed to G.I.E.

(ii) Whether the participation exemption regime (PEX) provided for by Art. 89 of the ITC applies on dividends paid by G.I.E. to the Company, if the CFC regime is disregarded.

(c) ITA's opinion. For CFC regime purposes, Art. 167 of the ITC refers to the concept of "control" pursuant to Art. 2359 of the Italian Civil Code, i.e.:

majority of the votes at the shareholders' meeting;

sufficient votes to exert a decisive influence in the shareholders' meeting; or

dominant influence of another company due to a special contractual relationship.

Art. 168 makes reference to direct and indirect control of 20% of capital held by Italian resident entities in companies resident in a black list country.

In the case at issue, as the Company owns indirectly 50% of the CFCs, the provisions embodied in Art. 168 of the ITC applies.

In addition, ITA clarified that the CFC regime applies even when trusts is interposed in the chain of control. Trusts qualify as "person" for tax purposes (see Ministerial Circular No. 48/E of 6 August 2007). Participations held through a trust are regarded as held "through an interposed third person" which is explicitly contemplated in Arts. 167 and 168 of the ITC.

In addition, even though CFCs attribute the profits directly to G.I.E., it is not sufficient per se to maintain that such CFCs do not "realize" any income in their state of residence. Arts. 167 and 168 should apply on profit "realized" regardless how of they are effectively taxed (e.g. in the hand of the CFCs or by way of attribution to G.I.E.). As the requirement of Art. 168 are met, the CFC regime, which provides that income realized by the CFCs indirectly owned by the Company are taxed by way of transparency directly in the hands of the Company, applies.

In addition, as the ITA ruled that PEX regime is not available, dividends distributed by the foreign entity are taxable for the amount exceeding the income that has already been taxed in the hands of the Company under the CFC regime.

Reference: ECO:IT:A.13.4.; HOLD:IT:7.1.; M&A:IT:4.12.


ECJ: Longer recovery period for foreign savings balances and income from foreign assets not incompatible with freedom to provide services and the free movement of capital

On 11 June 2009, the European Court of Justice (ECJ) gave its decision in the joined cases of Passenheim van Schoot v. Staatssecretaris van Financiën (C-155/08 and C-157/08). A reference for a preliminary ruling was made by the Dutch Supreme Court on 21 March 2008. There was no opinion of the Advocate-General in the case.

(a) For the facts, legal background and issue of the case, see TNS:2008-04-04:NL-1.

(b) The ECJ first decided that Arts. 49 and 56 of the EC Treaty must be interpreted as not precluding the application of a longer recovery period by a Member State, where savings balances and income from those balances held in another Member State are concealed from the first Member State's tax authorities who had no evidence of their existence and thus were unable to initiate an investigation. The fact that that other Member State applies banking secrecy is not relevant in that regard.

In addition, the Court decided that Arts. 49 and 56 of the EC Treaty must be interpreted as allowing a Member State when applying such longer recovery period to assets held in another Member State than in the case of assets held in the first Member State, to calculate the fine imposed for concealment of the foreign assets and income from being calculated as a proportion of the amount to be recovered and over that longer period. This applies where those assets and the income therefrom were concealed from the first Member State's tax authorities who had no evidence of their existence enabling an investigation to be initiated.


Premessa ed entrata in vigore


Il 20 Maggio 2009 il Lussemburgo e gli Stati Uniti hanno firmato un Protocollo (Allegato n. 1) ed uno scambio di lettere (Allegato n. 2) che costituisce parte integrante dell'accordo stipulato tra i due Paesi che modificherà, una volta entrato in vigore, il Trattato per evitare le doppie imposizioni precedentemente firmato in data 3 aprile 1996 dai due rispettivi Paesi.


L'obiettivo dell'accordo é di sostituire l'articolo 28 del Trattato Lussemburgo-Stati Uniti (che disciplina lo scambio di informazioni) in modo da ampliare la possibilità di scambio di informazioni ai fini delle imposte domestiche dei rispettivi Stati signatari in seguito alle pressioni esercitate dal G-20 sui Paesi che adottano nella loro legislazione il segreto bancario.


L'entrata in vigore é prevista una volta che il Protocollo sarà ratificato in entrambi gli Stati ed avrà effetto per le richieste effettuate dalle autorità dei rispettivi Stati aventi ad oggetto gli esercizi fiscali a partire dal 1° gennaio 2009.


Tale Protocollo é peraltro simile ai Protocolli già firmati recentemente dagli Stati Uniti con il Liechtenstein e Gibilterra.


Ambito di applicazione


Lo scambio di informazioni previsto dal nuovo Protocollo prescinde dal fatto che le parti hanno richiesto tali informazioni per i fini fiscali o perché il fatto costituirebbe un delitto in base alla legislazione interna dello Stato richiedente e dello Stato destinatario della richiesta (c.d. doppia incriminazione in fase di rogatoria internazionale).


Tale informazione riguardante la proprietà di società di capitali o di persone, Trusts, fondazioni ed altre entità, ivi incluse le informazioni sui precedenti soggetti qualora siano inseriti in una "catena societaria", deve essere divulgata a prescindere dal fatto che essa sia detenuta da una banca, un altra istituzione finanziaria, "nominee" o una persona che agisce in base ad un contratto di mandato o un contratto fiduciario.


Inoltre, viene specificato nel Protocollo che tale richiesta di informazioni può essere messa a disposizione delle autorità fiscali dei rispettivi Stati richiedenti ed eventalmente divulgata in processi giudiziari pubblici o in sentenze giudiziarie.


Modalità di richiesta


Come specificato dallao scambio di lettere tra le due amministrazioni, l'autorità competente dello Stato richiedente dovrà fornire, in caso di richiesta:


l'identità della persona sotto inchiesta o indagine fiscale;

una dichiarazione che attesti il tipo di informazione ricercata e la forma in cui lo Stato richiedente desidera ricevere l'informazione richiesta;

il fine fiscale per cui l'informazione é cercata;

le motivazioni per cui si ritiene che l'informazione ricercata si trovi nell'altro Stato o in possesso di una persona situata in detto ultimo Stato;

in base alle informazioni conosciute dall'Autorità dello Stato richiedente, il nome e l'indirizzo di ogni persona che si ritiene in possesso delle informazioni richieste;

una dichiarazione che affermi che la richiesta é conforme alla legislazione o prassi amministrativa dello Stato richiedente e che se l'informazione fosse stata richiesta all'interno dello Stato applicante alla rispettiva autorità, la competente autorità avrebbe potuto in tal caso ottenere tale informazione;

una dichiarazione in cui lo Stato applicante afferma che ha esperito ogni mezzo disponibile nel proprio territorio, ad eccezione di quelli che generebbero difficoltà sproporzionate.


European Commission refers Luxembourg to ECJ for incorrect application of the EU Savings Directive

On 25 June 2009, the European Commission announced that it had referred Luxembourg to the European Court of Justice (ECJ) in respect of its incorrect application of the Savings Directive 2003/48/EC (the Directive).

Luxembourg refuses to apply the Directive to beneficial owners who benefit from the "non-domiciled resident" status in their country of residence. Consequently, Luxembourg paying agents do not levy withholding tax on interest payments to such beneficial owners.

According to the Commission, Luxembourg cannot provide an exemption from withholding tax in situations other than those expressly provided by Art. 13 of the Directive (the "voluntary disclosure" procedure which allows the beneficial owner expressly to authorize the paying agent to report information to the tax authorities and the certificate procedure, which ensures that withholding tax is not levied when the beneficial owner presents to his paying agent a certificate drawn up by his Member State of residence for tax purposes).

The Commission is of the opinion that the paying agent has the obligation to establish the residence of the beneficial owner on the basis of minimum standards, as provided by Art. 3(3) of the Directive. Therefore, if the beneficial owner is a resident of another Member State in accordance with these standards, the Member State of the paying agent must ensure that the latter applies the Directive and, in the case of Luxembourg, that the paying agent levies a withholding tax on interest payments to such a beneficial owner.

As Luxembourg did not change is practice following the Commissionns reasoned opinion sent on 27 November 2008, the Commission has decided to rtefer the case to the ECJ.