In Taxation

ICC Tax Digest | Issue 1 – Aprile 2019 (free)

by the Taxation Commission of ICC Italia

Contributions by:

Avv. Sara Armella (Studio Armella & Associati)
Avv. Paolo de’ Capitani (Studio Uckmar), Chair of the Commission
Dott. Alberto Pluviano (Satis Res Consulting)


In this number:

Residence of a corporation – place of effective management
Parent-subsidiary directive – exemption from the dividend withholding tax – subject to tax clause
Dividend withholding tax – EU-Switzerland agreement – subject to tax clause
Vat deduction – violation of the rules on reverse charge
Participation exemption regime – minimum holding period and corporate reorganizations
Parent-subsidiary directive – interest and royalties directive / beneficial ownership
OECD discussion draft on financial transactions
The Court of Justice on customs procedure 42 and VAT exemption



The Italian Supreme Court wrote a new chapter in the ongoing clash between the Italian Tax Agency and D&G’s trademark company regarding the latter’s place of effective management: it will have to be identified in a new trial respecting EU law’s cardinal principles (first and foremost, the freedom of establishment). Corte di Cassazione civile Sez. V,, sent. nn. 33234 e 33235 del 21 dicembre 2018. After the acquittal from the criminal charges they were facing for the same issue (Supreme Court, criminal section, decision no. 43809/2015), the Italian Supreme Court’s decision no. 33234/2018 and no. 33235/2018 took a position on the tax side of the case, based on the challenge of the residence of GADO sarl, the Luxembourg incorporated entity to which the two stylists had transferred the trademark they previously held personally and jointly. The dispute at hand started when the two stylists needed to assign the trademark, which they personally and jointly held, into the corporate group, so to comply with the requests of their corporate stakeholders. Given the contribution of the trademark into any company would trigger significant amount of income taxes, in absence of an actual realization/receipt of fresh cash, their consultants structured an alternative consisting in the sale of the trademark to GADO, a Luxembourg incorporated company which would then manage the intangible (but highly valuable) asset. GADO would then rent the trademark to the Italian operating company and receive royalties in exchange. With the amount of the royalties received, GADO would pay the instalments due to the two stylists for the purchase of the intangible. While GADO benefited of a tax ruling in Luxembourg submitting its income to a rate of 4%, the Italian operating company could take the full deduction of the royalties paid. The stylists would obviously tax the capital gains arising from the sale upon the receipt of the instalments. The Tax Agency challenged the structure asserting that GADO had no administrative structure nor effectively empowered employees in Luxembourg (the two employees of GADO being mere executors of the directives coming from Italy) and that all decisions were actually made at the Italian Headquarters of the group, so that the place of effective management and, thereby, the residence for tax purposes were to be located in Italy. The Courts of first and second degree confirmed the reassessment notice of the Tax Agency, making reference to the fact that the decisions by GADO were actually made in Italy, and the Luxembourg structure would then only execute them without using its discretion. The Supreme Court, however, reversed their ruling by recalling the precedent in the criminal case and the principles of EU law it made reference there, in particular the freedom of establishment and the Cadbury Schweppes jurisprudence (C-196/04). The Supreme Court therefore referred the case back to the second degree, asking the judges to base their evaluation of the case not only on the place where the directives to GADO’s employees and directors were coming from, but also on whether the Luxembourg subsidiary could be considered an artificial structure or a real entity effectively performing its corporate activity. While the case refers back to tax periods in which the subsequently introduced extension of the CFC rules to white list countries (inclusive of EU countries) did not apply, the decision of the Supreme Court seems to be concerned with the side effect of too strict an approach on the place of management issue on the subsidiaries of Italian multinationals. In particular, the concern the literature has raised over the past few years is that considering the directives coming from the mother company, or the group HQs in general, as the only relevant issue when determining the residence of a subsidiary might actually hinder the daily business of multinational groups where information flows daily, and not always in a way that is known to the same directors, and the decisions are taken after multiple discussions among different branches and working groups across borders and corporate boundaries. The second degree will have to make clear whether the case at hand really concerns such an hypothesis, or not.

Avv. Paolo de’ Capitani – (



The Italian Supreme Court denied the withholding tax exemption under the Parent-Subsidiary Directive because the Parent company’s State of residence would not tax the dividends. Corte di Cassazione civile Sez. V,, sent. 13 dicembre 2018, n. 32255. As renown, the EU Parent-Subsidiary Directive (90/435/EU), as implemented in Italy through article 27-bis of the Presidential Decree no. 600/1973, provides the exemption from withholding tax on the dividends distributed from an Italian subsidiary to its EU shareholding company, provided certain requirements are met. One of these requirements, as once again renown, is that the shareholding company be resident in another EU country and subject to tax. In the case at hand, in 2005 a Luxemburg company had filed with the Italian tax authorities a claim for refund of the withholding tax it had suffered upon the distribution in 2004. The Luxembourg company was indeed subject to the corporate income tax in its country of residence, so it was quite a surprise when the Italian Tax Agency denied the refund, thereby forcing the company to start litigation. The company won in first but lost in second degree and the case was then brought before the Supreme Court. The outcome was most unfortunate, however, as the Supreme Court confirmed the decision of second degree, arguing that the aim of the Directive is to avoid double taxation and in the case at hand no double taxation could ever occur, given that Luxembourg provided for the full exemption of the dividends received. In other words, the judgment was erroneously focused on the specific dividends being or not being subject to taxation in Luxembourg, and not on whether the company was subject to tax in its country of residence. The conclusions offered by the Supreme Court are patently mistaken: see the plain reading of articles 4 and 5 of the Directive. The Supreme Court did not consider that the exemption on the dividends received granted by Luxembourg, beside being admitted/imposed by the Directive itself, aims at eliminating the economic double taxation of business profits. The refuse to refund the withholding tax, on the contrary, violates the Directive and imposes economic double taxation on those profits.

Avv. Paolo de’ Capitani – (



With ruling no. 57 of 2019, the Italian Tax Agency addresses Switzerland’s tax regime on holdings in relation to the exemption from withholding tax on dividends provided by the tax treaty between the EU and Switzerland of October 26th 2004. In so doing, it also mentions that a dividend exemption in the parent company’s State of residence does not preclude to the application of the withholding exemption. Agenzia delle Entrate, risposta all’interpello n. 57 del 2019. Shortly after the Supreme Court’s judgement no. 32255, with Ruling n. 57 of February 15, 2019, also the Italian Tax Agency had to address the issue of the exemption from withholding tax on dividends distributed by an Italian subsidiary to a parent company resident abroad. In the case at hand the parent company was resident in Switzerland, so that the terms of reference were the provisions of the Agreement between the EU and Switzerland of October 26th 2004 (art. 15). The Swiss company was the sole shareholder of the Italian subsidiary, but the issue at stake was the specific regime for holding companies it enjoyed in Switzerland, providing for the exemption from income taxation at a municipal and cantonal level. As dictated under art. 15 of the Agreement, the exemption of outbound dividends from the Italian withholding tax is granted only if the parent company is subject to the corporate tax in Switzerland and in ruling No. 93 of 2007 the Italian Tax Agency had already clarified that any exemption of the Swiss parent company at the cantonal and/or municipal level would impede the application of the withholding tax exemption. Before the distribution of the profits at hand, however, the parent company had forfeited its status as a holding company under Swiss law, thereby giving up the exemption at the cantonal and municipal level. Furthermore, under Swiss tax law the dividends received would be taxed in the hands of the parent company on a cash basis, irrespective of them having accrued over the previous years. Thus, the Italian Tax Agency confirmed the application of the exemption. It is interesting to note that, unlike in the case decided by the Supreme Court 32255/2018, the Tax Agency also clarified that the Swiss participation exemption regime would not compromise the application of the exemption at source.

Avv. Paolo de’ Capitani – (



The Italian Supreme Court aligns itself with several ECJ’s precedents in stating that the principle of VAT neutrality requires the deduction of input tax to be allowed if the substantive requirements are satisfied, even if the taxable person has failed to comply with some of the formal ones. Cass. civ. Sez. V, sent. 1° marzo 2019, n. 6092. The case presented to the Italian Supreme Court concerned an assessment notice filed towards a pharmaceutical company in relation, amongst other findings, to its deduction of the VAT it paid for services rendered by a EU resident supplier. Intra-EU transactions that fall in the general B2B rule are subject to the reverse charge mechanism, by which the supplier does not charge VAT on the invoice, whereas it is the customer that has to simultaneously pay and deduct VAT. This should have also been the case for the pharmaceutical company and its supplier, and the pharmaceutical company should therefore have complied with these obligations through the above-mentioned simultaneous input and output transcription mechanism. The pharmaceutical company, however, failed to do so, since it paid the VAT directly to the supplier, failing to apply the reverse charge mechanism. The Italian Tax Agency subsequently issued an assessment notice disallowing the deduction of VAT by the pharmaceutical company. Having lost in both first and second degree, the company was forced to bring the case before the Supreme Court, which actually ended up repealing the assessment notice on the issue at stake. The Court, indeed, aligned itself with other ECJ precedents, and stated that the fundamental principle of VAT neutrality requires the deduction of input tax to be allowed if the substantive requirements are satisfied, even if the taxable person has failed to comply with some of the formal requirements (see judgments of 28 July 2016, Astone, C‑332/15, paragraph 45; 19 October 2017, Paper Consult, C‑101/16, paragraph 41; 26 April 2018, Zabrus Siret, C‑81/17, paragraph 44). Therefore, given that the company actually paid the VAT to the supplier, the deduction had to be allowed although the taxpayer had failed to comply with the rules on reverse charge.

Avv. Paolo de’ Capitani – (



In its ruling no. 70 of 2019 the Italian Tax Agency clarifies that company conversions into and from a partnership do not interrupt the holding period of the shares relevant for participation exemption purposes. Agenzia delle Entrate, risposta all’interpello n. 70 del 2019. The taxpayer filing the request of ruling was a company holding 50% of the quotas of a German company, Beta. Alfa had been holding the quotas of the German company for a number of years, but during such period had undergone through a conversion from a limited liability company into a partnership and then back to a limited liability partnership. In the context of a more comprehensive group reorganization Alfa was planning to sell the quotas and was therefore wondering whether the participation exemption would apply. In particular, Alfa was wondering whether the conversion into a partnership (and then back to a limited liability company) could be considered as interrupting the minimum holding period for participation exemption purposes (12 months). The ruling issued by the Tax Agency confirmed that any corporate conversion, just like a merger or a demerger (circular letter 36/E of 2004), is neutral for tax purposes under art. 170 Income Tax Act and therefore cannot be seen as interrupting the holding period.

Avv. Paolo de’ Capitani – (



In its judgements C-116/16 and C-117/16, on one side, and C-115/16, C-118/16, C-119/16 and C-1299/16, on the other, the ECJ addresses relevant issues regarding the concept of beneficial ownership with respect to the exemption from withholding taxes on dividends (for the first group of judgments) and interest payments (for the second group of judgments). Corte di Giustizia europea, sentenze C-116/16 e C-117/16; nonché C-115/16, C-118/16, C-119/16 e C-1299/16. As widely renown, in order to benefit of the exemption from taxation at source provided under the Parent-Subsidiary Directive and the Interest and Royalties Directive, the non-resident entity receiving the payment, whether in the form of dividend or interest/royalties, must meet certain conditions, one of them being the actual beneficial owner of the flow of income. Indeed, precisely the absence of one of the requirements dictated by the Directives sometimes brings the ultimate beneficial owner of the flows to create intermediate structures formally meeting the said requirements. It then becomes crucial to determine whether such intermediate structures can be considered as beneficial owners of the payment. For the purposes of this review, it is sufficient to say that the elaborate company structures put in place in the cases at hand all had in common that some Danish companies were owned by parent companies resident in another EU Member State (Luxembourg, Cyprus or Sweden), which, in turn, were, directly or indirectly, owned by companies resident in third countries. Of course, the transactions between EU companies benefitted from EU law provisions, whilst, instead, the withholding tax exemption on dividend and interest would not be granted, had the payment be made directly toward the non-EU companies. Most of the issues the ECJ had to deal with were common to both groups of judgements, but the correct interpretation of beneficial ownership was explicitly addressed in relation to the Interest and Royalties Directive. According to the ECJ, the “beneficial owner” is the entity which actually benefits from the payment in economic terms. On this regard, since the Interest Directive draws upon Article 11 of the OECD Model Tax Convention and pursues the same objective, the latter’s Commentary must be considered relevant for interpreting the term “beneficial owner”. According to the OECD Model and its Commentary, among other, a company cannot be regarded as the beneficial owner if, although being the formal owner of the interest, it has, as a practical matter, very narrow powers on the income concerned, which render it a mere fiduciary or administrator acting on account of the interested parties. Another issue the ECJ treated in the judgment was whether Member States are required to implement an anti-abuse provision in their domestic laws in order to deny the benefits of the Directives when the conditions for obtaining the withholding tax exemption are met only from a formal point of view. In this respect the ECJ clarified that EU Law cannot be relied on for abusive or fraudulent ends, so it cannot be implemented to protect transactions carried out for the purpose of fraudulently or wrongfully obtaining advantages provided under EU law. This is a general principle of EU law, thus the lack of domestic or agreement-based anti-abuse provisions does not affect the power of Member States to counter tax abuses aimed at unduly obtaining the benefits of a Directive. Although the evaluation on whether an abusive practice has been put in place can only be done on a case by case basis, the Court gave some directions for the scrutiny by the national authorities. According to the Court, circumstances that suggest an abuse of right relate to arrangements in which the structure set up does not really pursue economic purposes, but essentially tax advantages. This may be the case, for example, when the recipient lacks substance or has been interposed in a structure that otherwise would not be covered by the Parent-Subsidiary or the Interest and Royalties Directive. Also, an abuse of right may be detected when the sums are wholly or partially passed on by the recipient, shortly after receiving them. This serves as a clue that the entity is a mere flow-through or conduit company, even if there is no contractual obligation to pass on the payment. The burden of proof that an abuse of rights was put in place falls upon the authorities intending to deny the benefits of a Directive. According to the Court, however, such burden of proof does not extend to the determination of the actual beneficial owner: the only proof the authorities have to bring is that the formal recipient of the flow is not the beneficial owner.

Avv. Paolo de’ Capitani – (



On July 3, 2018 the OECD has published a first “non-consensus” discussion draft on Financial Transactions for public consultation. The discussion draft aims at clarifying the application of the principles included in the 2017 edition of the OECD Transfer Pricing Guidelines (TPG). The document is articulated into four main sections; the first one focuses on the analyses supporting the accurate delineation of the transaction under Chapter I of the TPG, applied to financial transactions. The three other sections address specific issues related to the pricing of financial transactions in relation to: treasury function, guarantees and captive insurance. The first section of the discussion draft elaborates on how the “accurate delineation” applies to the capital structure within a multinational group; this section also outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions; it also clarifies that the guidance does not prevent Countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation. Importantly, this first section also highlights the fact that, where the accurate delineation of the actual transaction shows that a funder lacks the capability (or does not perform the decision-making functions) to control the risk associated with investing in a financial asset, such funder will be entitled to no more than a risk-free return: follows a discussion about how to determine risk-free and risk-adjusted rates of return. The section on treasury function analyzes three types of transactions: intra-group loans, cash pooling and hedging. In relation to intra-group loans, the draft focuses in particular on the use of credit ratings, the effects of group membership and the pricing approaches to determining an arm’s length interest rate (Comparable Uncontrolled Price “CUP”, Cost of Funds, and Bank Opinions). In relation to cash pooling structures, the draft focuses in particular on the rewarding of the pool leader (with a tendency to consider it as a service provider in many cases) and on how the cash pool members should be rewarded. The section on guarantees discusses explicit, implicit and cross-guarantees. This section discusses also five transfer pricing approaches for guarantee fees: the CUP Method, the Yield Approach, the Cost Approach, the Valuation of Expected Losses Approach, and the Capital Support Method. The section on captive insurance includes an overview of the insurance business and of indicators which would be expected in an independent insurer; this section also stresses that the principles of accurate delineation of the actual transaction and allocation of risk, detailed in Chapter I of the TPG, equally apply to captive insurance scenarios, focusing in particular on the concept of control of risk. This section discusses also various approaches for the pricing of premiums: CUP Method, Actuarial Analysis, and a two staged approach which takes into account both profitability of claims and return on capital. The discussion draft also includes a number of specific questions to commentators on which inputs from stakeholders are considered to be particularly relevant to support further work on the next discussion draft. By early September 2018, the OECD had received over 900 pages of written comments from a large number of contributors. At this stage, no further actions have been disclosed by the OECD and it is not clear when a new discussion draft could be published.

Dott. Alberto Pluviano – (



By decision February 14th, 2019, No. C-531/17, the EU Court of Justice confirms an important principle: the VAT exemption cannot be denied to the importer, who acted in good faith, if, following a subsequent intra-Community transfer of the goods, the tax has not been paid. The case concerns an Austrian enterprise which, in the course of its transport activities, as an indirect representative of two Bulgarian companies, has released for free circulation goods coming from Switzerland under the Customs procedure “Code 42”, i.e. transit code, as these goods were destined to be transferred to Bulgaria. Having regard to the subsequent transfer, the conditions provided for by the EU legislation subsisted, pursuant to art. 143 lett. d, VAT Directive, for exemption from the payment of VAT at the importation. However, the Customs Authority had requested the importing company to pay the VAT by claiming that these assumptions had not been realized since the beneficiaries of the goods in Bulgaria had simulated a fictitious intra-Community transfer. According to the EU Court, the right to the exemption of an intra-Community supply must be denied only when it is the same taxable person who commits a fraud or knew, or should have known, that the operation he carried out was part of a tax evasion. In case of good faith, the importer will benefit from this right.

Avv. Sara Armella – (

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