Dividends from an Italian subsidiary to the usufructuary EU parent company

In civil law jurisdictions, the right of usufruct is the right whereby a person may use certain property and take all the advantages and income therefrom, even though the property is legally owned by another person, subject to the condition that the holder does not change, damage or sell the property. The aforementioned response by the Italian Tax Agency, however, gives us the opportunity to make some reflections on the taxation regime of dividends distributed by a subsidiary resident in Italy to its parent company resident in the EU holding the right of usufruct on the shares of the subsidiary.

According to domestic tax legislation, no withholding tax is applied on dividends paid to non resident companies that meet the requirements for benefiting from the Parent-Subsidiary Directive, that is to say:

• with regard the parent company:
  
  (a) it is incorporated in one of the legal forms indicated in the annex to Directive 2011/96/EU (in fact it is a corporation);
  
  (b) it is resident for tax purposes in an EU country;
  
  (c) it is subject to one of the taxes indicated in the aforementioned directive without benefiting from option or exemption regimes (except for those territorially or temporally limited).
  
  
• with regard to the subsidiary:
  
  (a) the direct holding is not less than 10% of the capital;
  
  (b) the direct holding has been held continuously for at least 1 year.

It is exactly the literal reference to the “participation in the capital” mentioned above that raises the question on the possibility of applying the Parent-Subsidiary regime to dividends distributed to the non-resident parent company holding the right of usufruct on the shares of the subsidiary.

This concern comes from the fact that several years ago the EU Court of Justice dealt with this topic in the sentence C-48/07 “Les Vergers du Vieux Tauves”. In this decision the ECJ judges established that the holder of the right of usufruct is not entitled to claim the exemption provided for in the State of source of the dividends. According to them, in fact, the meaning of participation in the capital of a company of another member state cannot be extended to the holding of right of usufruct in the capital of a company of another member state since this would extend the relative obligations of the member states. However, the decision does not preclude a member state from unilaterally opting to extend the benefit of the exemption to dividends paid to the company holding the usufruct right.

The Italian tax authorities have long considered the holder of the right of usufruct as the holder of a shareholding in the capital of a company. The amount of the participation in the capital is determined by multiplying the value of the full ownership by the legal interest rate and multiplying the value thus obtained by a coeffcient provided for by law in relation to the age of the holder of the right of usufruct.

This position is confirmed in the response to the above-mentioned tax ruling, where the tax authorities, in order to establish whether the shareholding of the applicant (full owner of 1% of capital and holding the right of usufruct of 59%) could be considered a qualified shareholding pursuant to the capital gains provisions, utilise the expression “participation in the capital” in the same way as the above-mentioned law. It does not seem unreasonable, therefore, to assume that the position assumed by the tax authorities with reference to capital gains provisions can also be applied to the verification of the requirement of capital participation in order to benefit from the exemption provided by the Parent-Subsidiary Directive in the case of distribution of dividends to the holder of the right of usufruct.

A similar conclusion should also be extended with reference to the application of the provisions laid down in certain double tax treaties entered into by Italy.

Article 10 of the double tax treaty between Italy and the United Arab Emirates, for example, provides, as a general rule, that dividends paid by a company resident in Italy to a resident of the United Arab Emirates are taxable in that other state. However, such dividends may also be taxed in Italy in accordance with domestic law, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed the 5% of the gross amount of the dividends if the beneficial owner holds directly or indirectly at least 25 percent of the capital of the company paying the dividends.

Conversely, in the absence of the requirements to benefit from the parent-subsidiary regime with the consequent non-application of the exit withholding tax on dividends paid to non-residents, the domestic legislation provides for a withholding tax to be applied at the rate of 1.20% on profits paid to companies subject to corporate income tax resident in EU member states and in EEA countries that are included in the White List pursuant to the Ministerial Decree of 04 September 1996.

Since that provision does not expressly provide any requirement of participation in the capital, there is no doubt that it also applies to dividends distributed to the non-resident parent company holding the right of usufruct on the shares of the subsidiary. A different conclusion would, in fact, constitute an open violation of EU law as it would be discriminatory with respect to the tax treatment of dividends paid to resident companies holding the right of usufruct on the shares of the distributing company.

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