Italian Tax Amnesty Doesn't Violate Abuse of Rights Principle, ECJ Says

Italian Tax Amnesty Doesn't Violate Abuse of Rights Principle, ECJ Says

The European Court of Justice held in 3M Italia (C-417/10) that the application of an Italian tax amnesty to a case involving direct taxation did not violate the EU abuse of rights principle, the state aid rules, or the obligation to ensure the effective application of EU law. 3M Italia's U.S. parent, 3M Co., gave the usufruct of the shares it held in 3M Italia to another U.S. company, Shearson Lehman Hutton Special Financing Inc. Shearson then transferred the usufruct rights over the 3M Italia shares to another Italian company, Olivetti &amp; C.; 3M Co. retained voting and rescission rights. Consequently, when distributing dividends, 3M Co. withheld the 10 percent non-final withholding tax applicable to dividends paid to domestic parent companies instead of the 32.4 percent final withholding tax applicable to dividends paid to foreign parent companies. The Italian tax authority contended that the transfer was a sham and that the higher withholding tax rate should have been applied. The tax authority therefore issued deficiency assessments against 3M Italia for the 1989-1991 tax years seeking the full withholding amount as well as penalties and interest. After the Tax Court of First Instance of Naples and the Tax Court of Appeal of Campania annulled those assessments, the tax authority appealed to the Supreme Court of Cassation. While the appeal was pending, 3M Italia sought to participate in a 2010 tax amnesty under which proceedings that had been pending for more than 10 years -- and in which the tax authority had been unsuccessful at first and second instance -- could be settled with the taxpayer paying 5 percent of the value of the deficiency. The Supreme Court of Cassation referred the matter to the ECJ, asking whether the abuse of rights principle set out in a VAT case, Halifax (C-255/02), applies only to cases involving harmonized taxes or if it also applies to direct taxes; whether the settlement denied the Italian court the right to review the abuse question; and whether the settlement constituted state aid. The ECJ said that no general principle exists in EU law that might entail an obligation on member states to combat abusive practices in the field of direct taxation and thereby preclude the application of the type of tax amnesty at issue. The Court held that the tax amnesty thus did not violate the EU principle of the prohibition of abuse of rights and article 4(3) of the Treaty on the European Union, which requires member states to take appropriate measures to ensure they fulfill their EU obligations. The Court further found that the tax amnesty did not affect any of the freedoms guaranteed by the Treaty on the Functioning of the European Union and did not constitute state aid because the amnesty was not selective.

For an ECJ news release, see Doc 2012-6615 <a href="/lr/resolve//18f8t"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2012 WTD 62-28: Court News Releases"/></a> <a href="https://s3.amazonaws.com/pdfs.taxnotes.com/2012/2012-6615-1.pdf" title="PDF: 2012-6615"><img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/pdficon_small.gif" width="14" height="14" border="0"/></a>. For the ECJ judgment in a related case (C-500/17), see Doc 2012-6603 <a href="/lr/resolve//18f90"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2012 WTD 62-27: Judgments"/></a> <a href="https://s3.amazonaws.com/pdfs.taxnotes.com/2012/2012-6603-1.pdf" title="PDF: 2012-6603"><img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/pdficon_small.gif" width="14" height="14" border="0"/></a>. For prior analysis, see Doc 2010-24608 <a href="https://s3.amazonaws.com/pdfs.taxnotes.com/2010/2010-24608-1.pdf" title="PDF: 2010-24608"><img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/pdficon_small.gif" width="14" height="14" border="0"/></a>or 2010 WTD 228-7 <a href="/lr/resolve//190hp"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2010 WTD 228-7: News Stories"/></a>. For the reference document, see Doc 2010-22071 <a href="https://s3.amazonaws.com/pdfs.taxnotes.com/2010/2010-22071-1.pdf" title="PDF: 2010-22071"><img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/pdficon_small.gif" width="14" height="14" border="0"/></a> or 2010 WTD 196-28 <a href="/lr/resolve//191v3"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2010 WTD 196-28: Other Court Documents"/></a>.

The European Court of Justice held in 3M Italia (C-417/10) that the application of an Italian tax amnesty to a case involving direct taxation did not violate the EU abuse of rights principle, the state aid rules, or the obligation to ensure the effective application of EU law.

The European Court of Justice held in 3M Italia (C-417/10) that the application of an Italian tax amnesty to a case involving direct taxation did not violate the EU abuse of rights principle, the state aid rules, or the obligation to ensure the effective application of EU law. 3M Italia's U.S. parent, 3M Co., gave the usufruct of the shares it held in 3M Italia to another U.S. company, Shearson Lehman Hutton Special Financing Inc. Shearson then transferred the usufruct rights over the 3M Italia shares to another Italian company, Olivetti & C.; 3M Co. retained voting and rescission rights. Consequently, when distributing dividends, 3M Co. withheld the 10 percent non-final withholding tax applicable to dividends paid to domestic parent companies instead of the 32.4 percent final withholding tax applicable to dividends paid to foreign parent companies. The Italian tax authority contended that the transfer was a sham and that the higher withholding tax rate should have been applied. The tax authority therefore issued deficiency assessments against 3M Italia for the 1989-1991 tax years seeking the full withholding amount as well as penalties and interest. After the Tax Court of First Instance of Naples and the Tax Court of Appeal of Campania annulled those assessments, the tax authority appealed to the Supreme Court of Cassation. While the appeal was pending, 3M Italia sought to participate in a 2010 tax amnesty under which proceedings that had been pending for more than 10 years -- and in which the tax authority had been unsuccessful at first and second instance -- could be settled with the taxpayer paying 5 percent of the value of the deficiency. The Supreme Court of Cassation referred the matter to the ECJ, asking whether the abuse of rights principle set out in a VAT case, Halifax (C-255/02), applies only to cases involving harmonized taxes or if it also applies to direct taxes; whether the settlement denied the Italian court the right to review the abuse question; and whether the settlement constituted state aid. The ECJ said that no general principle exists in EU law that might entail an obligation on member states to combat abusive practices in the field of direct taxation and thereby preclude the application of the type of tax amnesty at issue. The Court held that the tax amnesty thus did not violate the EU principle of the prohibition of abuse of rights and article 4(3) of the Treaty on the European Union, which requires member states to take appropriate measures to ensure they fulfill their EU obligations. The Court further found that the tax amnesty did not affect any of the freedoms guaranteed by the Treaty on the Functioning of the European Union and did not constitute state aid because the amnesty was not selective.

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Italian Tax Amnesty Doesn't Violate Abuse of Rights Principle, ECJ Says