In Europe, dividend flows distributed between companies belonging to the same group can benefit from specific advantages provided for by Directive 90/435/EC (the so-called parent-subsidiary directive), introduced to avoid double economic taxation.
Directive 90/435/EC, under certain conditions, to reduce to zero the withholding on account through the tax on the distribution of dividends paid by subsidiaries to Headquarters (parent company), located in different countries of the European Union.
In this regard, at the national level, two types of taxation are envisaged for dividends paid to foreign associates:
- The reimbursement scheme, whereby the resident who pays the income streams applies the withholding tax by means of the measure referred to in article 27, third subparagraph, D.P.R. 600/1973 (1.20%).In this first case, the non-resident parent company that received the dividends may request reimbursement of withholding tax;
- The exemption scheme provided for in article 27 to paragraph (3) of D.P.R. 600/1973: In this case, the resident company may, at the request of the non-resident company, under the special conditions laid down for the application of the Parent-Subsidiary directive, avoid the application of withholding tax as taxes.
Exemption from dividend payments from a company resident in Italy
There are specific advantages, stipulated at international level, which extends the exemption scheme to dividends paid by a company resident in Italy to its parent company domiciled in Switzerland.
The payment of the income is made by the applicant company (ALFA), 100% owned by the Switzerland based parent company Beta S.A.
The foreign parent company has the "holding status" and could, under Swiss Confederation Law, be subject to a favorable tax system under which income would be subject only to federal taxes, without the application of cantonal and municipal (taxes are limited to a cantonal capital tax, with a rate of 0.075%) taxes.
However, unlike in the past, since the fiscal period of 2017, Beta S.A. has waived the anticipated benefits for Swiss holdings, by sending a specific communication to the Swiss tax administration, which issued a certificate stating that the parent company does not benefit from any tax reduction as a "holding company " or "auxiliary company " and is subject to cantonal, municipal and federal taxes.
In the interests of integrity, the applicant company stated that:
- The dividends will be distributed by Alfa company in 2019;
- The income received by the non-resident parent company will be subject to tax in Switzerland according to the "cash" criterion, based on the ordinary system, as defined in the rules of the distribution year;
- Beta S.A. is a company domiciled in Switzerland, has no permanent establishment in Italy, represents an autonomous centre of interest and cannot be regarded as a purely artificial assembly;
- The foreign company has formally waived the tax advantage offered to holding companies. Therefore, in the case of a company normally subject to the three levels of income tax in force in Switzerland, the distribution of profits must be exempt from withholding in Italy, in accordance with article 15 of the agreement between the European Union and the Swiss Confederation of October 26, 2004 (the so-called "parent-subsidiary" directive with Switzerland).
Taking note of the arguments expressed at the Conference, the Revenue Agency recalled that article 15 of the agreement of October 26, 2004 between the European Union and the Swiss Confederation provides that "dividends paid by subsidiaries to parent companies shall not be subject to "in the State of origin", provided that the conditions laid down in the Convention are fulfilled.
Firstly, both companies must be subject to direct taxes on profits, without favoring exemptions, and must take the form of a capital company.
How to benefit from the parent-subsidiary directive
With regard to Resolution 93/E/2007, the Revenue Agency itself clarified the obligations to benefit from the direct tax, stating that it could not be considered as part of the Swiss companies’ assumptions “Yes" although they are not totally tax-exempt, they can benefit from exemptions from at least one of the three levels (municipal, cantonal and federal) of income tax due to specific provisions of the law or also because of administrative measures."
Specifically, Swiss companies wishing to benefit from the parent-subsidiary directive, in accordance with the provisions of article 15 of the aforementioned international agreement stipulated in 2004, should not benefit, in application of statutory or administrative provisions, of special systems that grant exemption from one of the three levels of direct taxation (federal, cantonal and municipal) on income.
This means, it’s decisive for the fact that Beta S.A. has formally waived, from the 2017 financial year, to the Swiss holding system.
In addition, the dividends of the Alfa Company will be distributed to Beta S.A. in 2019 and will be taxed in accordance with the ordinary system in force in the Swiss Confederation, consisting of the application of the appeal. "participation reduction", a similar institution to the "participation exemption" applied in Italy which, as is known, cannot be regarded as a favorable tax regime.
In conclusion, on the basis of the logical-legal arguments referred to above, the Revenue Agency considered that the dividends distributed by Alfa, in relation to the parent company Beta S.A, could benefit from the exemption provided for in the agreement between the European Union and Swiss Confederation of October 26, 2004, without prejudice to the verification and existence of all other conditions laid down in the Treaty.