EU Commission Rules Against Italy On Corporate Tax

by Ulrika Lomas, Tax-News.com, Brussels

24 July 2003

The European Commission has ruled that the Italian tax authorities are applying the directive relating to an exchange of shares between companies established in different member states too restrictively and will now initiate the second stage of infringement proceedings that could ultimately land the Italian government in the European Court of Justice.

"Directive 90/434/EEC, which concerns, inter alia, the taxation of exchanges of shares between companies of different Member States, establishes a neutral tax system for such transactions," the commission annouced in a statement this week.

It continues: "Under Article 8 of the Directive, shareholders in the transferring company do not have to pay income or capital-gains tax on shares in the acquiring company received in exchange for shares in their company. The application of this rule is, however, subject to the condition that shareholders do not assign the shares received a value for tax purposes higher than that the shares exchanged had immediately before the exchange."

"Though Legislative Decree No 544/1992 transposed this principle properly, in practice the Italian tax authorities not only require that the value for tax purposes of the shares be equal but that that value be the same as the value recorded in the accounts (exclusion of the "double binary" system).

"The Commission believes the second condition to breach Directive 90/434/EEC in that it restricts rights accorded by Community law. A Member State is not allowed to subject the common tax system to conditions other than those provided for in the Directive. The Court of Justice has ruled that a reduction in tax revenue does not constitute a pressing reason of public interest justifying a measure that would otherwise violate a fundamental freedom under the Treaty. This case-law also applies to breaches of a Community directive."

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