On December 19, 2008, the Attorney General (AG) at the European Court of Justice (ECJ) filed his opinion in Aberdeen Property Fininvest Alpha (C-303/07).
The case concern Finnish taxation of dividends paid by a Finnish company to a Luxembourg SICAV investment fund owning 100 percent of the stock of the Finnish company.
Under Finnish law, the dividends paid to the Luxembourg fund are subject to Finnish withholding tax. The Luxembourg fund does not qualify for the dividend withholding tax exemption granted under the EU parent subsidiary directive, because it is not organized according to one of the corporate forms enumerated in the directive and is not subject to corporate tax in Luxembourg.
Dividends paid to a Finnish company or investment fund are exempt from withholding tax to eliminate double taxation of corporate profits.
The Attorney General in his opinion took the position that the Finnish withholding tax violates the EC treaty.
According to the AG, the EC treaty still applies to inter-company dividends that fall outside the scope of the parent-subsidiary directive. The treaty freedom of establishment and free movement of capital prohibit member states from taxing outbound dividends less favorably than domestic dividends. The position of a Luxembourg investment fund Sicav is comparable to that of domestic company or fund, even though the Luxembourg fund Sicav is not subject to tax in Luxembourg.
The opinion is not binding on the ECJ, even though the Court tends to rule according to AG opinions in most of the cases. If the ECJ accepts the AG opinion, the case would be a major step ahead towards the elimination of dividend withholding tax in the EU.
Italian taxation of domestic dividends
Domestic dividends paid to corporate shareholders are not subject to withholding tax. 95 percent of the dividend is exempt to the recipient company, leading to an effective tax of 1.375 percent (5 percent taxable dividend time 27 percent corporate tax rate time).
Dividends to domestic investment funds are not subject to withholding tax (the fund is subject to 12.5 percent tax on the net increase of its asset value at the end of the tax year).
Italian Taxation of outbound dividends
The ordinary withholding tax on outbound dividends is 27 percent. The withholding tax on inter-company dividends paid to treaty partners is typically reduced to 5 percent.
Dividends paid to to EU companies (entities resident in an EU member state and subject to a corporate tax in the residence state) are subject to 1.375 percent withholding tax, regardless of the size of stock owned in the Italian distributing company. This equalizes the treatment of outbound and domestic dividends to corporate shareholders.
Inter-company dividends to a EU parent company are exempt from withholding under the EU parent subsidiary directive.
Implications of Aberdeen Property Fininvest Alpha
The AG opinion in Aberdeen Property Fininvest Alpha would imply that a EU investment fund not subject to tax in its own country of organization could still claim the exemption from dividend withholding tax that is granted to Italian investment funds, or the reduced 1.375 dividend withholding tax granted to other EU companies, instead of the ordinary 27 dividend withholding tax on dividend income received from Italian companies.