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Italy: Understanding the ‘subject-to-tax’ requirement in the PSD

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The Supreme Court has taken a stronger stance on the PSD

Gianluca Nieddu and Barbara Scampuddu of Hager & Partners analyse recent Supreme Court decisions and explain why it seems clear that EU holding company structures are facing significant challenges.

The cross-border flow of dividends between EU tax resident corporations is a complex matter and requires careful design of the underlying tax strategy. In particular, the Parent-Subsidiary Directive (PSD) applies to distribution of profits by subsidiaries of a member state to parent companies resident in another member state.

Outlined below are two peculiar decisions of the Italian Supreme Tax Court about the possibility for a foreign parent company (in both cases resident in Luxembourg) to benefit from the PSD as implemented in Italy by Article 27-bis of Presidential Decree No. 600/1973.

The main takeaways from the Supreme Court decisions are: 

  • The relevance of the place of effective management, to assess the existence of an abuse of the directive; and 

  • The interpretation of the subject-to-tax requirement. 

These aspects have to be carefully scrutinised especially in cases of European holding and sub-holding companies which simply hold equity interests, rather than being actively engaged in business, such as the sale of goods or provision of services.

Decision No. 32255/2018 

The case originates from an Italian corporation paying dividends to its Luxembourg parent, applying a 27% withholding tax upon distribution. The Luxembourg company filed a claim for refund of the withholding tax with the Italian Tax Administration, pursuant to the EU PSD’s withholding tax exemption.  

Lacking an official reply from the Tax Office, the company successfully appealed before the tax court of first degree which ruled in favour of the taxpayer. The Revenues then appealed and the regional tax court decided in favour of the tax office, reversing the first degree judgment and validating the withholding tax. In turn, the Luxembourg company filed an appeal with the Supreme Tax Court.

The Supreme Court denied the exemption of the Italian withholding tax (provided by the PSD) on the grounds that no double taxation existed because the parent benefitted from a full participation exemption on dividends under Luxembourg domestic law, even if the Luxembourg company demonstrated that it was subject to domestic income tax as required by the EU Directive.

Decision No. 25490/2019

In the case, an Italian corporation applied a withholding tax on the dividends to its Luxembourg parent at the reduced rate of 15% pursuant to the tax treaty between Italy and Luxembourg. The latter filed a request for refund of the withholding tax claiming the exemption provided by the EU PSD. The Italian Revenues rejected the request of a refund and assessed the full 27% withholding tax rate provided for under Italian tax framework. The Luxembourg company filed a petition to the Provincial Tax Court, which endorsed the assessment of the additional withholding tax. 

The Supreme Court held that an abuse of the PSD could exist where the place of effective management of the parent company is located outside the EU state of residence (Luxembourg, in the particular case). The Supreme Court upheld this argument pointing out that, even if a holding company cannot be required to have the same level of economic substance as an industrial or commercial entity, whenever it lacks any meaningful connection to the country in which it is legally organised, such as a place of effective management, and operates as a mere legal conduit for the purpose of the collection and transfer of the dividends to its ultimate owner, it is not eligible for the benefits of the directive or those provided by double tax treaties.

It is also worth recalling that, in order for the directive to apply, both the parent and the subsidiary must be “subject to one of the taxes listed in Annex I, Part B, without the possibility of an option or of being attempt, or to any other tax which may be substituted for any of those taxes”. The Supreme Court – similarly to Decision No. 32255/2018 – held that such a condition was not met in the case at hand, because the dividends received by the Luxembourg entity were not taxed in Luxembourg due to the application of the domestic participation exemption regime.

Final remarks

The decisions confirm the path already traced by other decisions of the Supreme Court on the same topic. Starting from this specific topic, it is possible to formulate a more general consideration: it seems clear that EU holding company structures are under significant challenges. In this view, taxpayers should carefully evaluate business models based on intermediate holding companies, especially when the group structure – like in the cases ruled by the two Supreme Court decisions – could generate the doubt that its scope may be limited to benefit from the withholding tax exemption with the consequent suspect of abuse of law. 

Therefore, in order to meet the ‘subject to tax’ requirement, especially in the case of applying PSD, particular attention has to be paid to all cases where the recipient of the dividends has no other economic activities rather than receiving and paying dividends, no local directors, no personnel, no premises and equipment and no local management.

Gian Luca Nieddu

T: +39 02 7780711 


Barbara Scampuddu 

T: +39 02 7780711 


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