Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

February 4, 2019

Italian Supreme Court denies withholding tax exemption under EU Parent-Subsidiary Directive in absence of actual dividend taxation at EU parent company level

Executive summary

The Italian Supreme Court (the Court), in its decision n. 32255 of 13 December 2018, denied the Italian withholding tax exemption under the European Union (EU) Parent Subsidiary Directive1 (the EU Directive) by claiming that no double taxation existed given the fact that the Luxembourg parent benefitted from a local dividend exemption regime.

The reasoning followed by the judges does not appear to be in line with a correct interpretation of the EU Directive nor in line with previous decisions by the same Supreme Court.

This Alert examines the Court’s reasoning in the instant case as well as its recent (and contrasting) position on the same principles stated in the decision.

Detailed discussion

Supreme Court case n. 32255/2018

The case originates from a dividend withholding tax refund claimed by a Luxembourg company. In the lack of an official reply by the Tax Office, the company successfully appealed before the tax court of first degree. However, the tax court of second degree denied the refund on the position that the Luxembourg company did not meet all of the EU Directive’s requirements and specifically due to the lack of an actual taxation of the dividend in the hands of the recipient.2

Thus, although the Luxembourg company demonstrated that it had been subject to the local income tax (the Impot sur le revenue des collectivites) as required by the EU Directive, the judges disallowed its application.

The company appealed to the Supreme Court which confirmed the second degree tax court’s decision by stating that the refund of the Italian withholding tax would have entailed a double tax exemption since the dividend would have not been subject to tax in Italy (in the case of a withholding tax refund) nor in Luxembourg (due to the local dividend exemption regime).

The Supreme Court stated that the dividend exemption regime provided for by the Luxembourg legislation was per se able to avoid any double taxation, without making any reference to the difference between “juridical double taxation” (avoided via the dividend exemption regime) and “economic double taxation” which in the instant case would clearly not be avoided since the profits generated by the Italian company would remain subject both to Italian corporate income tax and, upon distribution, to the Italian dividend withholding tax.

To support the risk of a double tax exemption, the Supreme Court referenced a previous decision issued in 2016 (see below). However, it is important to note that the conclusions of the 2016 case, though they appear correct in principle, also appear to be not applicable to the 2018 decision as they were based on a different set of facts.3

Supreme Court case n. 27111/2016

The 2016 case originated from a refund request filed by a German company of the underlying foreign tax credit (FTC) associated with an Italian source dividend benefitting from the withholding tax exemption under the EU Directive.

The claimant argued its right to benefit from the FTC under the Double Tax Treaty (DTT) with France along with the withholding tax exemption provided for by the EU Directive.4

In that occasion, after an accurate and detailed description of the mechanism set forth by the EU Directive, the Court denied the FTC by stating that the withholding tax exemption already avoided any sort of double taxation, so that the granting of a FTC would have simply added an (undue) benefit, by triggering a de facto double tax exemption.

Therefore, it appears that the purported risk of double-exemption in the 3225/2018 case is based on facts and circumstances that differ from those in the 27111/2016 case.

Supreme Court case n. 26377/2018

In addition, it is important to note that in another recent decision, the Supreme Court explicitly stated that notwithstanding that a dividend exemption regime applies at the level of an EU parent company, the latter would suffer economic double taxation if a dividend withholding tax were to apply in Italy.5

While the facts concerning this decision do not relate to the application of the EU Directive,6 the judges clearly explained that it is not correct to subordinate the reimbursement of the withholding tax to the fact that the foreign company has actually “disbursed” the tax on the Italian dividend in the EU country of residence; on the contrary, it is (necessary and) sufficient that this dividend is included in the total income even though there is no effective tax levy. This conclusion holds true also in the light of the economic double taxation principle; (…) the same income would be taxed both at the level of the subsidiary that generated the profits and at the level of the recipient of the dividend.

Supreme Court case n. 25219/2018

In another recent case,7 the Supreme Court affirmed principles which again seem inconsistent with the conclusions achieved by the judges in the instant case, decision n. 3255/2018.

This case related to the taxation of the capital gain arising from the sale of an Italian participation held by a German company. As known, based on Article 13 of the DTT between Italy and Germany, such income shall be taxable only in the seller’s Country of residence (i.e., Germany).

According to the Italian tax office, since Germany had not taxed the gain, the gain should have been subject to Italian corporate income tax to avoid a case of double exemption. The Supreme Court did not uphold the tax office’s position by ruling that: (i) the DTT may not be overridden by domestic provisions; and (ii) the lack of an actual taxation in Germany does not allow the disapplication of the DTT.

While the Court did not provide additional technical positions underlying its decision, one may infer that they considered that a lack of actual taxation of the gain in the residence country should not cause the denial of a DTT application, being sufficient that the taxpayer is “liable to tax” without being actually “subject to tax.”


In addition to the above considerations, Supreme Court case 32255/2018 seems to be in contrast with the rationale and language of the EU Directive. Article 4(1)(a) allows the EU Member State of the parent company to refrain from taxing the dividends (alternatively to providing a credit under Article 4(1)(b)) while Article 5 mandates that, at the same time, profits which a qualifying EU subsidiary distributes to its EU parent shall be exempt from any withholding tax.


1. Directive 90/435/EC transposed in the Italian legislation by Article 27-bis of Presidential Decree n. 600 of 29 September 1973.

2. A similar decision was issued in case 25264 of 25 October 2017 where a Dutch shareholder was denied a dividend withholding tax refund. However, from the reported facts, it is not clear whether the denial was based on the lack of formal filing requirements or on the existence of a dividend exemption regime in the Netherlands.

3. Case n. 27111 of 28 December 2016.

4. While the Italy-Germany DTT did not provide for any FTC, the attorney claimed the application of the DTT between Italy and France (Article 10.4.b) on the basis the EU freedom of establishment and the EU principle of free movement of capital by stating that a German company could not be treated less favorably than another EU (French) company.

5. Case n. 26377 of 19 October 2018.

6. The case concerned a United Kingdom (UK) company claiming the refund of the Italian FTC (under Article 10(4) of the Italy-UK DTT) on the dividends paid by its Italian subsidiary. The Court confirmed the right to the refund stating that the fact that the dividend benefitted from an exemption regime in the UK was not sufficient by itself to avoid the economic double taxation. While concluding as such, the judges made a parallel by saying that, as a principle, economic double taxation could (alternatively) be avoided by recognizing a withholding tax exemption.

7. Case n. 25219 of 11 October 2018.

For additional information with respect to this Alert, please contact the following:

Studio Legale Tributario, International Tax Services, Milan
  • Marco Magenta |
  • Simone De Giovanni |
Studio Legale Tributario, International Tax Services, Rome
  • Daniele Ascoli |
Studio Legale Tributario, International Tax Services, Bologna
  • Mario Ferrol |
Ernst & Young LLP (United Kingdom), Italian Tax Desk, London
  • Domenico Borzumato |
Ernst & Young LLP (United States), Italian Tax Desk, New York
  • Emiliano Zanotti |
  • Anna Rizzi |
  • Michela Antonella Prencipe |



The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


Copyright © 2024, Ernst & Young LLP.


All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.


Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.


Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or Please refer to the privacy notice/policy on these sites for more information.

Yes, I accept         Find out more