EC Tells Italy To Amend Interest And Royalties Tax Law

by Ulrika Lomas, Tax-News.com, Brussels

10 January 2007

The European Commission has called upon Italy to implement correctly an European directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different member states.

The Commission has warned the Italian government that it will refer the matter to the European Court of Justice if it does not respond to its reasoned opinion, the second stage of infringement proceedings, within two months.

The aim of the directive is to abolish taxation of interest and royalty payments made between associated companies in different member states in the country at source, and thereby to ensure the equality of tax treatment between national and cross-border transactions.

In the legislative decree implementing the directive, Italy has restricted the scope of the application of the directive's provisions on interest and royalty payments accrued on or after 1 January 2004. By this, Italy aimed to prevent fraud and tax evasion in cases where payments of interest and royalties (which had become payable before the entry in force of the directive) were intentionally delayed in order to benefit from the exemption under the directive.

However, the Commission considers that the relevant Italian provisions, excluding the benefits of the directive for any interests and royalty payment having become payable before 1 January 2004, are disproportionate, and go beyond what is necessary to achieve their legitimate purpose.

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