Link between the notion of the beneficial owner and withholding taxes on dividends.

Application of double tax treaties with respect to frontier workers employed by public bodies.

CJEU sheds light on the freedom to provide services and the principle of proportionality.

CJEU landmark State Aid judgement (“Apple case”)

CJEU establishes VAT refund procedure on invoices in the event of a bankrupt supplier 

Link between the notion of the beneficial owner and withholding taxes on dividends

The decision no. 23628 of 3 September 2024 issued by the Italian Supreme Court dealt with a case whereby the plaintiff requested a refund on the Italian withholding tax paid on dividends pursuant to Art. 27-bis of Presidential Decree 600/73 which implements the Parent-Subsidiary Directive (Directive 2011/96/EU) in Italy. The Supreme Court held that in order to do so, it must be proven that the foreign receiving company is the beneficial owner, by way of three tests:

• the “substantive business activity test”, which verifies whether an actual economic activity is carried out by the recipient entity, and thereby, excludes an artificial structure;

• the “dominion test”, which assesses whether the recipient entity can effectively dispose of the income without the obligation to remit the income to a third party;

• the “business purpose test”, which examines the economic motives for the interposed recipient entity.

The judges found that the “dominion test” was successfully demonstrated since the recipient company retained a significant part of the dividends for itself, without any obligation to transfer them to third parties.

Application of double tax treaties with respect to frontier workers employed by public bodies

With its decision no. 25608 of 25 September 2024, the Italian Supreme Court upheld that remuneration received by an Italian citizen residing in France, for services provided as a frontier worker for employment in the Municipality of Ventimiglia, are taxable only in Italy on the basis of Art. 19(1)a) of the Italy-France tax treaty.

That provision states that remuneration paid by a State or local authority to an individual in consideration for services rendered to that State or to that subdivision or entity is taxable only in that State. The rule therefore refers to all remuneration, other than pensions, paid by public bodies for services rendered to such bodies, without objective limitations.

Article 15 of the Italy-France tax treaty, which concerns remuneration deriving from employment relationships in the private sector, does not apply to frontier workers.

CJEU sheds light on the freedom to provide services and the principle of proportionality

The European Court of Justice held in its decision C387/22 dated 26 September 2024 that exemptions granted by Member States on employment income to employees working in the national territory, and excluding such exemption whereby said employee is posted abroad, are legitimate on the condition that the exemptions are appropriate for attaining the objective pursued and that the restrictions on the fundamental freedoms comply with the principle of proportionality.

In the case under review, it was found that the exemption from tax provided for by Romanian legislation on employment income derived from the construction sector, which is however denied for workers seconded abroad, was considered legitimate due to “the specific issues of the Romanian construction sector linked to the shortage of labour on account of the migration of qualified workers in that field abroad for wage reasons”.

CJEU landmark State Aid judgement (“Apple case”)

The European Court of Justice ruled in its decision C465/20 dated 10 September 2024 on the well-known “Apple case”. It held that the advantageous regime granted to two Irish incorporated companies of the Apple Group (Apple Operations International Ltd (AOI) and Apple Sales International Ltd (ASI)) by means of transfer pricing rulings provided by the Irish tax authorities represented selective State aid that is incompatible with EU law.

In particular, the Court held that the transfer pricing rulings resulted in a profit allocation that was incompatible with the internal market because “by not allocating the profits deriving from the Apple Group’s IP to ASI’s and AOE’s branches, thereby acting in breach of the arm’s length principle, the Irish tax authorities had conferred an advantage on ASI and AOE for the purposes of Article 107(1) TFEU in the form of a reduction in their respective annual chargeable profits”.

Finally, the Court of Justice of the European Union, in ordering the recovery of the State Aid that was illegally granted, held that such an obligation contravenes neither the principle of legal certainty nor the principle of the protection of legitimate expectations.

CJEU establishes VAT refund procedure on invoices in the event of a bankrupt supplier

With its decision on the case C-83/23 issued on 5 September 2024, the European Court of Justice maintained that whereby the recipient of the service receives an invoice from the supplier which files for insolvency, the former cannot, as a first court of action, claim a refund of the VAT paid but not due directly from the tax authorities of its Member State.

The Court of Justice laid out the procedure to be followed in the case of VAT that has been wrongly charged and paid by the supplier. If the parties have acted in good faith:

• the supplier can obtain a refund of the VAT unlawfully paid to the tax authorities;

•the recipient may bring a civil action for recovery of the undue amount against the same supplier.

As an exception to the general procedure, in cases of excessive difficulty (for example due to the insolvency of client or the liquidation of the company) the recipient may file a request for the recovery of the undue VAT directly to the tax authority (however this principle is not applicable to the present case as the Member State tax authorities had already refunded the tax to the supplier).

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Fazzini Holzmiller & Partners