Italy - Supreme Court rules on “subject to tax” test

Italy’s Supreme Court ruled on 6 June 2023 that to qualify for the withholding tax exemption for royalties under the 2004 EU-Switzerland savings agreement, it is not necessary for the recipient to demonstrate that tax was actually paid on the royalties in the state of residence. It is sufficient that the royalties are taken into account in determining the recipient’s taxable base.

The case before the court involved a Swiss company that had a service contract with its Italian subsidiary and under which the subsidiary paid the Swiss company royalties over a period of years. The Italian subsidiary deducted a 5% withholding tax (as per the Italy-Switzerland tax treaty). The Swiss company then requested a refund of the withholding tax paid based on the EU-Switzerland savings agreement. Both the Italian tax authorities and Italy’s lower courts denied the refund on the grounds that the Swiss company failed to prove that tax was actually paid in Switzerland and this was a prerequisite for obtaining a refund.

The Supreme Court concluded that the refund request should be granted if the “liability to tax” requirement is met—it is not necessary to prove that the tax was actually paid. Notwithstanding that the Supreme Court ruled differently in some earlier decisions, the new decision is in alignment with the most recent case law (e.g., the court reached the same conclusion in a case involving dividend withholding tax). Potentially affected taxpayers should continue to monitor developments.

Gianmaria Del Bourgo Ricco
Massimo Pellecchia
BDO in Italy