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Italian dividend tax incompatible with EU rules: Court

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A new reformed tax regime for Italian-sourced dividends is incompatible with EC legislation on free movement of capital and freedom of establishment, according to a ruling by the European Court of Justice on 1 December 2009.

The Italian legislation in question refers to the reform on corporation tax, pursuant to the 2003 legislative Decree, which imposed a tax of 27%  on the profits that were distributed to tax payers who were not residing in Italy. 

 Following a letter of formal notice on 18 October 2005, the Commission brought an action against the Italian Republic before the European court of Justice, in hopes of obtaining an official declaration. 

The Commission maintained that because dividends distributed to companies established in other Member States are subject to a less favourable tax regime, Italy had failed to fulfil its obligations under Community and EEA law. 

The fight against tax evasion was used as a pretext for reform on corporation tax in the Italian Republic's defence. The legislative reform was deemed incompatible because it could not guarantee compensation for the difference in treatment in all cases.  

In addition the difference in treatment could not be justified by reference to the fight against tax evasion because Italian legislation applied generally, and not purely to artificial attempts to circumvent tax law.  

The European Court of Justice declared that Italy had failed to fulfil its obligations under Article 56 EC and Article 40 of the EEA Agreement as regards the free movement of capital between Member States and the States party to that Agreement. However, it dismissed the Commission's action in respect of Articles 31 and 40 of the EEA Agreement.


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