INTERNATIONAL TAX PLAZA - The opinion of the Advocate General in the joined Cases C‑92/24 to C‑94/24, Banca Mediolanum, Banca Mediolanum – II and Banca Mediolanum – III (The interpretation of Article 4 of the Parent Subsidiary Directive)

Details: Published: 27 March 2025

On March 27, 2025 on the website of the Court of Justice of the European Union (CJEU) the opinion of Advocate General Kokott in the joined Cases C‑92/24 to C‑94/24, Banca Mediolanum SpA and Others versus Agenzia delle Entrate – Direzione Regionale della Lombardia, ECLI:EU:C:2025:223, was published.

Introduction

The road towards a common system of company taxation at the European Union level is long and difficult. Even if Article 4(4) and (5) of Directive 2011/96/EU have made reference to such a system – which is still to be defined – since 1990 (at that time, still Article 4(3) of Directive 90/435/EEC), the Member States have not yet been able to reach an agreement. Hence, there is only an ad hoc agreement within the framework of the Parent-Subsidiary Directive with regard to the fact that the profits of a subsidiary that have already been taxed in one Member State should not be taxed a second time, as income of the receiving parent company, in another Member State on the occasion of a distribution of profits.

In that respect, the aim is to avoid cross-border double taxation of the profits of two entities that are affiliated under company law. The question that the Court of Justice has now to clarify in the present proceedings concerns the scope of the double taxation that is to be avoided. Is it the case that any further tax burden on distributed dividends should be avoided, or is it ‘only’ a matter of avoiding double taxation by way of corporation tax (or a comparable tax)?

More specifically, Italy, like many other Member States, does not have only one direct tax that is payable by companies and linked (in whole or in part) to the income generated (in Germany there is, for example, the Gewerbesteuer (trade tax). The present case concerns an Italian regional tax on productive activities (imposta regionale sulle attivita’ produttive; ‘IRAP’), which has been levied since the late 1990s and was thus already in existence when the Parent-Subsidiary Directive was recast in 2011. In the case of banks, that tax includes 50% of their dividend income in its basis of assessment. It follows from the above that the bank resident in the region, as the parent company, is not required to pay any further corporation tax on the dividends received, since Italy has implemented the Parent-Subsidiary Directive in that respect. However, those dividends are partially covered by IRAP, which is levied in Italy on all persons carrying on a commercial activity. If those persons are companies, IRAP is levied in parallel to corporation tax. That results in further (collateral) taxation of those dividends.

Indeed, the received dividends could also be subject to other types of taxes. For example, they would also be included in the basis of assessment for a wealth tax, in so far as such a tax is still levied (Italy abolished it in 1993). Similarly, if and as soon as the parent company purchases an item of real estate with its profits (which includes the received dividends), they would be indirectly subject to real estate transfer tax.

The greater the number of different types of taxation that a Member State has, the greater the likelihood that the received dividends will also be subject, at least indirectly, to one of the other taxes, thus leading to a form of double taxation. The question to be decided in the present case is therefore whether the Member States should be prohibited, under the Parent-Subsidiary Directive, not only from further taxing parent companies of internationally active groups by means of corporation tax (or a comparable tax), but also from taxing such group companies by means of a wealth tax, a real estate transfer tax, or another existing, non-harmonised tax that also includes in its basis of assessment some or all of the received dividends.

That question is of a sensitive nature because the answer ultimately concerns the powers of taxation of the Member States which, with few exceptions, are not limited by harmonised rules in the area of direct tax law. Moreover, a political agreement on a common system of company taxation has also not yet been reached. It may be the case that, in a Union based – according to Article 2 TEU – on the value of democracy and the rule of law, a far-reaching restriction of the tax autonomy of the Member States should, in cases of doubt, be left primarily to the national legislature.

The three sets of main proceedings and the question referred for a preliminary ruling

20. In the 2014 tax year, Banca Mediolanum SpA (‘the bank’) held shares in several companies, which took one of the forms set out in Annex I, Part A to the Parent-Subsidiary Directive, were resident for tax purposes in Ireland, Luxembourg and Spain, and were subject to corporation tax in those countries.

21. The bank received dividends totalling EUR 231 912 007.51 from the above-mentioned subsidiaries during the 2014 tax year. The subsidiaries did not withhold any tax at source at their place of residence on the dividends paid to the bank, since all of the conditions laid down in Article 5 of the Parent-Subsidiary Directive were satisfied.

22. The bank entered those dividends as income and included them in the intermediation margin. In that respect, the bank included the aforementioned dividends in the basis of assessment for corporate income tax (IRES) relating to the aforementioned tax year 2014 up to a maximum of 5% of the total amount, in accordance with Article 89 of the Italian Tax Consolidation Act (TUIR).

23. The bank is classified as a financial intermediary within the meaning of Article 6 of Legislative Decree No 446. Thus, that company also included, in its IRAP tax return submitted for the tax period 2014, 50% of the total amount of those dividends in the basis of assessment for that tax. Applying the tax rate of 5.57%, that resulted in a new tax liability based on IRAP.

24. On 4 June 2019, the bank submitted a request to the Direzione Regionale della Lombardia dell’Agenzia delle Entrate (Lombardy Regional Directorate of the Revenue Agency, Italy; ‘the Tax Office’) for a refund of the IRAP paid, since it was of the opinion that Article 6(1) of Legislative Decree No 446 was contrary to Article 4 of the Parent-Subsidiary Directive, which precludes dividends distributed by subsidiaries to parent companies from being taxed at more than 5% of their amount.

25. By decision of 16 October 2020, the Tax Office rejected that request. In particular, in the statement of reasons, the Tax Office maintained that Article 6 of Legislative Decree No 446 was not contrary to Article 4 of the Parent-Subsidiary Directive, since that provision was not applicable to IRAP, but only to income taxes (payable by corporations).

26. By an application served on 15 December 2020, the bank initiated judicial proceedings challenging that decision. The Tax Court of Milan dismissed that application on the ground that the prohibition laid down in Article 4 of the Parent-Subsidiary Directive does not apply to IRAP tax. By an appeal lodged on 31 January 2023, the bank challenged that judgment before the referring court.

27. In the light of the foregoing, the Corte di giustizia tributaria di secondo grado della Lombardia (Tax Court of Appeal, Lombardy, Italy) stayed the proceedings and referred the following question to the Court of Justice:

‘Is the claim made by the Italian Republic, contained in Article 6(1) of Legislative Decree No 446/1997, to subject to IRAP 50[%] of dividends received by financial intermediaries resident in Italy, which are classified as parent companies for the purposes of [the Parent-Subsidiary Directive], and distributed by companies resident in other Member States of the European Union, which are classified as subsidiaries within the meaning of that directive, without authorising the parent companies to deduct from IRAP the fraction of corporation tax relating to those profits paid by the subsidiaries, not incompatible with the prohibition on subjecting profits received by parent companies resident in one Member State from subsidiaries resident in other Member States to taxation at a percentage rate exceeding 5[%] of the amount referred to in Article 4 of that directive?’

28. In the proceedings before the Court of Justice, Banca Mediolanum, the Italian Republic and the European Commission submitted written observations. In accordance with Article 76(2) of the Rules of Procedure of the Court of Justice, the Court did not consider it necessary to hold a hearing.

The conclusion of the Advocate General

Advocate General Kokoot proposes that the Court answer the question referred for a preliminary ruling by the Corte di giustizia tributaria di secondo grado della Lombardia (Tax Court of Appeal, Lombardy, Italy) as follows:

Article 4 of Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States must be interpreted as precluding the taxation of the received dividends by the Member State of the parent company by means of an additional tax such as IRAP, in so far as that tax is to be regarded as either a corporation tax or another tax that is comparable to a corporation tax. The determination of comparability is to be made on the basis of the nature of IRAP and its object of taxation. That is a question of national law. The ultimate classification of IRAP is therefore a matter for the referring court.

Legal context

European Union law

7. According to Recital 3 of the Parent-Subsidiary Directive, the objective of that directive is to exempt dividends and other profit distributions paid by subsidiary companies to their parent companies from withholding taxes and to eliminate double taxation of such income at the level of the recipient parent company.

8. Article 2(a)(iii) of the Parent-Subsidiary Directive states:

‘For the purposes of this Directive the following definitions shall apply:

(a) “company of a Member State” means any company which:

…

(iii) moreover, is subject to one of the taxes listed in Annex I, Part B, without the possibility of an option or of being exempt, or to any other tax which may be substituted for any of those taxes.’

9. Article 4 of the Parent-Subsidiary Directive provides:

‘1. Where a parent company or its permanent establishment, by virtue of the association of the parent company with its subsidiary, receives distributed profits, the Member State of the parent company and the Member State of its permanent establishment shall, except when the subsidiary is liquidated, either:

(a) refrain from taxing such profits to the extent that such profits are not deductible by the subsidiary, and tax such profits to the extent that such profits are deductible by the subsidiary; or

(b) tax such profits while authorising the parent company and the permanent establishment to deduct from the amount of tax due that fraction of the corporation tax related to those profits and paid by the subsidiary and any lower-tier subsidiary, subject to the condition that at each tier a company and its lower-tier subsidiary fall within the definitions laid down in Article 2 and meet the requirements provided for in Article 3, up to the limit of the amount of the corresponding tax due.

…

3. Each Member State shall retain the option of providing that any charges relating to the holding and any losses resulting from the distribution of the profits of the subsidiary may not be deducted from the taxable profits of the parent company.

Where the management costs relating to the holding in such a case are fixed as a flat rate, the fixed amount may not exceed 5% of the profits distributed by the subsidiary.

4. Paragraphs 1 and 2 shall apply until the date of effective entry into force of a common system of company taxation.

5. The Council, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, shall, at the appropriate time, adopt the rules to apply as from the date of effective entry into force of a common system of company taxation.’

10. Article 7(1) of the Parent-Subsidiary Directive provides:

‘1. The term “withholding tax” as used in this Directive shall not cover an advance payment or prepayment (précompte) of corporation tax to the Member State of the subsidiary which is made in connection with a distribution of profits to its parent company.’

11. The taxes listed in Annex I, Part B, include, for example:

– Körperschaftssteuer in Germany,

– imposta sul reddito delle società in Italy.

Italian law

12. Decreto Legislativo 15 dicembre 1997, n. 446 (Legislative Decree No 446 of 15 December 1997; ‘Legislative Decree No 446’) governs the IRAP. Under Article 2 of Legislative Decree No 446, the condition for the application of IRAP is the regular exercise of an independently run activity whose object is the production of or trade in goods or the provision of services. According to that provision, the activity carried on by companies and organisations is, in any event, a condition for the application of the tax.

13. According to information published on the internet by the Autonomous Province of Bolzano – South Tyrol (Italy), any person who carries on a commercial activity in the province of Bolzano is liable to pay tax in that respect, even if they do not have their legal place of establishment or residence in the province. In that respect, the exercise of institutional activities by public entities is also subject to IRAP. It is the net value of production generated by the taxable person that is to be subjected to taxation. To that end, the usual taxable profit is adjusted for certain items such as the financial result (that is to say, financial expenses and financial income) or personnel costs.

14. In that respect, Article 3 of Legislative Decree No 446, points (a) and (e), also includes, among the persons liable to IRAP ‘companies under Italian law known as ‘società per azioni’, ‘società in accomandita per azioni’, ‘società a responsabilità limitata’, ‘società cooperative’, ‘società di mutua assicurazione’, and private and public entities whose activity is wholly or principally commercial’. In 2014, however, individual traders and freelancers were still covered by IRAP.

15. Article 4 of Legislative Decree No 446 determines the basis of assessment for IRAP as the ‘net value of production deriving from activity carried on within the region’.

16. Article 6 of Legislative Decree No 446 establishes that, for banks and other financial intermediaries, the basis of assessment for IRAP is determined by the algebraic sum of the following items in the income statement:

(a) intermediation margin reduced by 50% of the dividends;

(b) depreciation/amortisation of tangible/intangible assets for functional use in the amount of 90%;

(c-bis) net value adjustments and write-backs for credit risk, limited to those relating to loans to customers credits stated in the financial statement under that heading.

17. Consequently, for banks resident in Italy, 50% of the dividends distributed by subsidiaries resident in other EU Member States are included in the IRAP basis of assessment if those dividends are included in the intermediation margin.

18. According to information published on the internet by the Autonomous Province of Bolzano – South Tyrol, the normal tax rate is 3.3%; by contrast, the tax rate for insurance companies is 5.8% and for public authorities it is 8.5%. Under Article 16(1-bis) and (3) of Legislative Decree No 446, with regard to banks and other financial intermediaries, IRAP applies at the rate of 4.65% and the regional authorities may vary that rate up to a maximum of 0.92 percentage points.

19. Such banks and other financial intermediaries are not permitted to deduct from IRAP the fraction of (foreign) corporation tax paid by the subsidiaries in their Member State of residence.

From the legal assessment made by the Advocate General

29. The somewhat complicated question which the Court is being called upon to answer in the present case can be summarised as follows: Does the prohibition on taxation of profit distributions received at the level of the parent company under Article 4 of the Parent-Subsidiary Directive apply only to direct double taxation resulting from the taxation of profits by means of corporation tax (or a comparable tax) or also to indirect double taxation resulting from another tax (in the present case, IRAP) that partially includes such dividends in its basis of assessment?

30. Since it is undisputed that Italy has correctly transposed the Parent-Subsidiary Directive with respect to corporation tax (those dividends are taxed only at a rate of 5%), it therefore follows that the dividend income would be subject to taxation that would then exceed the maximum amount of 5% provided for in Article 4(3) of the Parent-Subsidiary Directive.

A. Preliminary remarks

31. It is apparent from recital 3 of the Parent-Subsidiary Directive that that directive pursues the objective of eliminating double taxation of profits distributed by a subsidiary to its parent company at the level of that parent company.

32. To that effect, Article 4(1) of the Parent-Subsidiary Directive leaves the Member States a choice between two systems, namely between a system of exemption and one of deduction. However, Article 4(3) of that directive provides that each Member State is to retain the option of providing that any charges relating to the holding and any losses resulting from the distribution of the profits of the subsidiary may not be deducted from the taxable profits of the parent company. It is also clear from that provision that where the management costs relating to the holding in such a case are fixed as a flat rate, the fixed amount may not exceed 5% of the profits distributed by the subsidiary.

33. In respect of profits distributed to a resident parent company by a non-resident subsidiary, Article 4 of that directive thus seeks, with the exception of the 5% mentioned above, to avoid that subsidiary being taxed thereon in its State of establishment first and the parent company then being taxed on the same profits in its State of establishment.

34. In Articles 4 and 5, the Parent-Subsidiary Directive makes a fundamental decision about the allocation of the power to tax a subsidiary’s profits. In principle, the Member State of the subsidiary has the sole right to tax its profits. This is intended to ensure that distributions of profit that fall within the scope of the Parent-Subsidiary Directive are fiscally neutral. The same applies to chains of companies, since double or multiple taxation is to be eliminated also where profits are distributed through the chain of subsidiaries to the parent company.

35. Consequently, it is incompatible with the Parent-Subsidiary Directive if the profits of a company further up the chain are subject to a higher tax burden than that permitted by Article 4 of that directive. In that regard, it cannot be of significance whether that burden takes hold when dividends are received or instead when they are redistributed. A different interpretation would mean that a Member State could avoid its obligations under that directive by changing the way it levies taxes. For that reason, the Belgian ‘fairness tax’, which, under certain conditions, provided for a subsequent increase in the corporation tax payable by the parent company on the occasion of a distribution of dividends, was held to be incompatible with that directive.

36. However, notwithstanding the moment of taxation (upon receipt or redistribution of the dividends), all of the other requirements in Articles 1 to 3 of the Parent-Subsidiary Directive must always be met with respect to each distribution. That presupposes that there is a double taxation that the Parent-Subsidiary Directive aims to avoid.

B. What is the relevant double taxation that the Parent-Subsidiary Directive is intended to avoid?

37. In the present case, the decisive question thus arises as regards the relevant double taxation that the Parent-Subsidiary Directive is intended to avoid by means of its Articles 4 and 5.

38.. According to recital 3 of the Parent-Subsidiary Directive, the objective of that directive is to exempt dividends and other profit distributions paid by subsidiary companies to their parent companies from withholding taxes and to eliminate double taxation of such income at the level of the parent company. It is therefore a matter of avoiding double taxation of dividend income.

39. Normally, double taxation always relates to one person who is taxed twice, whereby both taxes have the same object of taxation. The classic case is that of an employee who has to pay income tax at the place of employment (e.g. Germany) and then again at the place of residence (e.g. France). Those situations are generally governed by double taxation agreements entered into between the States concerned.

40. In contrast, there appears to be consensus that there is no double taxation where the same employee is required to pay income tax on his income as an employee in Germany, but spends that income in France and is then subject to VAT, or if he or she saves that income and then incurs a corresponding French wealth tax at the end of the year. Both a wealth tax and VAT are linked to a different object of taxation (respectively, the holding of assets, or the cost of a consumer good).

41. By contrast, the Parent-Subsidiary Directive concerns two different persons (the parent company and the subsidiary). However, if that directive is intended to avoid double taxation of two different persons, the usual understanding of double taxation suggests that the two taxes (on the subsidiary and the parent company) are identical.

42. That understanding is also supported by the wording of recital 3, which refers to double taxation of such income. It must therefore be a tax on income in respect of both persons. Article 4(4) limits the exemption of dividend income until the date of effective entry into force of a common system of company taxation. The background to that provision appears to be the expectation that the common system of company taxation referred to therein will avoid double taxation already in the system. However, a common system of company taxation does not, in principle, affect types of tax other than corporation taxes that tax the income of companies.

43. In the same vein, Article 2(a)(iii) of the Parent-Subsidiary Directive clearly indicates which taxes the EU legislature had in mind for the purposes of avoiding double taxation. That provision extends the scope of that directive to companies subject to the taxes listed in Annex I, Part B. That list includes, inter alia, the German Körperschaftsteuer and the Italian imposta sul reddito delle società (both of which are corporation taxes). However, that lists makes no mention of a wealth tax, value added tax, or a tax on productive activities such as IRAP. However, Article 2(a)(iii) refers also to any other tax which may be substituted for any of those taxes. In that regard, it is also possible to speak of a substitution if the taxes mentioned therein are partially substituted by another tax in terms of time or scope, that is to say, where it extends or supplements them.

44. The whole issue therefore distils down to the question of when it can be said that another tax (in the present case, IRAP) substitutes for, or supplements, the respective corporation tax by virtue of the fact that it is comparable to that corporation tax. In that regard, the Court has already had to adjudicate in two cases, in which the Member States levied another tax in parallel, or in addition, to corporation tax.

45. The arguments advanced by the referring court, the bank and the Commission are ultimately based solely on those two decisions. In their view, the Court of Justice held in those judgments that Article 4 of the Parent-Subsidiary Directive prohibits EU Member States from subjecting more than 5% of dividend amounts distributed by subsidiaries to parent companies to any form of taxation and hence that its scope is not confined solely to corporation tax (or a comparable tax). However, in my view, that interpretation is based on a misunderstanding.

46. In fact, the two decisions related to completely different additional taxes, as Italy rightly points out. In the decision on the Belgian ‘fairness tax’, the outcome was that a subsequent increase was applied to the corporation tax payable by the parent company if it redistributed the received dividends, even though it had itself paid little or no corporation tax. That amounted to nothing other than a subsequent (and direct) corporation tax, which was simply linked to the redistribution of the dividends and not to the receipt of those dividends. It is obvious that that direct tax burden imposed on the received dividends at the time of their redistribution is incompatible with Article 4 of the Parent-Subsidiary Directive, and the Court has also ruled to that effect.

47. The case of AFEP and Others (also) concerned a contribution in addition to corporation tax – in that case in the amount of 3% – that was levied upon the distribution of dividends by the parent company, and therefore also upon a redistribution. It is true that, in paragraph 33 of that judgment, the Court stated: ‘that it is irrelevant whether or not the tax measure is classified as corporation tax. In that regard, it suffices to note that Article 4(1)(a) of [the Parent-Subsidiary Directive] does not make its application subject to a tax in particular.’

48. However, the Court then continued as follows: ‘That provision provides that the Member State of the parent company is to refrain from taxing the profits distributed by the non-resident subsidiary thereof. That provision thus seeks to avoid Member States adopting tax measures which lead to double taxation of parent companies in respect of those profits.’ Furthermore, the operative part of that judgment is even clearer, since it states that Article 4(1) of the Parent-Subsidiary Directive precludes ‘the levy of a tax when the parent company distributes dividends and the basis of assessment of which tax is the amounts of the dividends distributed, including those coming from that company’s non-resident subsidiaries’.

49. It therefore follows that that case was also a matter of double taxation of profits: firstly, by means of the corporation tax paid by the subsidiary and, secondly, by the subsequent contribution in addition to corporation tax paid by the parent company, which was directly linked to the redistribution of the dividends. It is obviously the case that a contribution in addition to corporation tax levied on received dividends on the occasion of a distribution of dividends by the parent company is a direct taxation on those dividends, and is therefore – if taxation at the permitted 5% has already taken place elsewhere – a violation of Article 4 of the Parent-Subsidiary Directive, and the Court has ruled likewise. In that respect, and contrary to the arguments advanced by the Commission, those two judgments in no way amount to a broad interpretation of Article 4(1) of the Parent-Subsidiary Directive, but are merely based on a teleological interpretation of that provision.

50. However, the present case concerns neither the (re)distribution of dividends nor a subsequent, additional corporation tax. It cannot therefore be inferred from the above rulings that no other type of tax may factor the received dividends into its basis of assessment (as would be done, for example, in the case of a wealth tax). On the contrary, a different tax of that nature was not the subject of those decisions.

51. For the same reason, the textual formulation that is sometimes applied by the Court, according to which the Parent-Subsidiary Directive precludes indirect taxation of dividends received by the parent company, is not relevant in the present case. That formulation concerned a rule that resulted in subsequent taxation of the (in fact tax exempt) dividends by means of corporation tax (and not another type of tax). That statement by the Court therefore relates also to a subsequent levying of corporation tax, which is not at issue in the present case.

52. Consequently, the as yet still unresolved and decisive legal question remains as to when another tax, such as IRAP in the present case, can be regarded as a corporation tax or another tax that – as Article 2(a)(iii) of the Parent-Subsidiary Directive states in connection with the personal scope of that directive – substitutes for or supplements any of those taxes.

C. When does another tax substitute for corporation tax?

53. The question as to when a tax substitutes for one of the taxes listed in Annex I, Part B, could be answered strictly and formally. There is no substitution where the tax is levied in parallel with the corporation tax. However, that would allow Member States to introduce another corporation tax under a different name, by means of a different method of taxation, thereby undermining the objectives of the Parent-Subsidiary Directive.

54. As I have already stated in the context of the Belgian ‘Fairness Tax’, a Member State cannot avoid its obligations under the Parent-Subsidiary Directive simply by changing the way it levies taxes.

55. It therefore follows that neither the moment of collection (inflow or outflow of dividends), nor the name of a tax (fairness tax instead of a corporation tax) is relevant for the purposes of assessing whether IRAP substitutes for corporation tax (in Italy, the imposta sul reddito delle società). It can therefore depend only on the object of taxation and the legal nature or character of IRAP. The decisive factor for the purposes of the present case is therefore the comparability of IRAP with the imposta sul reddito delle società.

56. Is the IRAP also a tax on income that covers the same object of taxation as the imposta sul reddito delle società or does it have a different basis of taxation or a different object of taxation? It is, however, virtually impossible for the Court to answer that question concerning the legal nature and character of IRAP because the answer is to be found only in Italian tax law. Consequently, that decision must ultimately be taken by an Italian court and, to that end, the following considerations may be helpful.

57. If the national court were to conclude that IRAP is so similar to the imposta sul reddito delle società that IRAP can be said to substitute for it (or supplement and increase it, as was the case with the Belgian ‘fairness tax’ or the French contribution in addition to corporation tax), then it will also be covered by Article 4 of the Parent-Subsidiary Directive. If, on the other hand, IRAP has a different basis or object of taxation (such as a wealth tax or a real estate transfer tax), then it is not covered by Article 4 of the Parent-Subsidiary Directive, even if the dividend income is included in its basis of assessment, whether in whole or in part. That is because, as the interpretation of the wording, as well as the spirit and purpose, of the Parent-Subsidiary Directive has shown, that directive was not intended to limit all of the powers of the Member States to levy tax, but merely to avoid a double taxation of such income (dividend income).

58. Interestingly, there appeared to be a view in Italy that IRAP was a second value added tax, as shown in the judgment in Banca popolare di Cremona. In its judgment in that case, the Court rejected that view on the ground that IRAP was a tax on the net value of a company’s production, which was not designed to be passed on to the end consumer. The very fact that, in 2003, an Italian court asked the Court whether IRAP violated (what is now) Article 401 of the VAT Directive as a second value added tax, while another Italian court is now seeking to ascertain whether taxation by means of IRAP violates the Parent-Subsidiary Directive, is already clear evidence of the apparent difficulty in categorising IRAP for the purposes of taxation law.

59. In any case, as all parties have unanimously submitted, the Italian Corte costituzionale (Constitutional Court, Italy) has stated that IRAP taxes a different ability to pay on the part of the taxpayer than that which is taxed by the previous taxes (which thus includes income tax and corporation tax). In its observations, the Commission also assumes that it is a hybrid tax, in respect of which the object of taxation is difficult to determine.

60. In so far as can be seen in the context of the case at issue, it does not appear that the imposta sul reddito delle società has been substituted for by IRAP. In the instant case, some particularities are discernible that militate against IRAP constituting a second tax on income that would be comparable to a corporation tax.

61. For example, unlike income tax, which taxes a person’s income, IRAP also appears to be levied in cases where losses are recorded under income tax law. The background reason for that lies in the fact that 90% of a bank’s management costs are added back to the intermediation margin, thereby increasing the basis of assessment. In a case where the income amounted to EUR 1 million and the management costs amount to EUR 1 million, no income tax would be payable as the profit would be zero. However, if my understanding of Italian law is correct, IRAP would be levied in such a case on a basis of assessment of EUR 900 000. Hence, it does not appear to be primarily a tax on income.

62. That also explains the add-back of 90% of the depreciation in respect of the functionally used assets. Their depreciation reduces the profit for income tax purposes, but that is reversed at the rate of 90% for the purposes of the IRAP calculation. That suggests that the existing assets are taxed at their value (predominantly without depreciation) if they are used for commercial activity within the region. The two modifications that are made to the income tax result are more indicative of a special form of wealth tax, that is to say of a tax on property, and less indicative of an income tax character on the part of IRAP.

63. In end effect, the latter also highlights the fact that the actual income used for the purposes of levying IRAP is significantly modified and those modifications vary from one economic sector to another. For example, it is only in the case of banks that the net result appears to be reduced in the amount of 50% of the received dividends, while the management costs and depreciations of 90% of the functionally used assets appear to be increased.

64. Moreover, the tax rates are neither uniformly progressive (depending on ability to pay) nor uniformly linear (as is usual for corporation tax); instead, there are different tax rates depending on the sector. That is also unusual for a tax on income. Similarly, non-resident taxable persons are also covered if they have carried on their activities in the region concerned. In that respect also, the focus does not appear to be on income (or profit), but rather on the performance of a value-adding activity. The activities of public authorities are also covered and are even taxed at the highest rate, which is also rather unusual for a tax on income – which is linked to revenue from economic activities.

65. All of the above factors indicate a hybrid tax that combines a type of wealth tax (in Italy, the classical wealth tax was abolished in 1993), a type of tax on assets such as real property (sector-specific tax rates, a sector-typical basis of assessment, a property aligned and objectified result) and a type of activity tax (which is intended to cover the value-adding activity within the region) and which is levied at the regional level. In any event, it is of a different legal nature or character from corporation tax, which is why it probably does not substitute for it, or supplement it in part, and is therefore probably not comparable to it.

66. If that is correct, then the indirect taxation of those dividends by means of IRAP would not be covered by the prohibition on double taxation laid down in Article 4 of the Parent-Subsidiary Directive. If, on the other hand, and similarly to the Belgian ‘Fairness Tax’, IRAP were to constitute an additional corporation tax that – like corporation tax – is linked to income, and thus taxes the dividends again in a comparable manner, then that tax would be covered by the prohibition on double taxation laid down in Article 4 of the Parent-Subsidiary Directive.

Conclusion

I therefore propose that the Court answer the question referred for a preliminary ruling by the Corte di giustizia tributaria di secondo grado della Lombardia (Tax Court of Appeal, Lombardy, Italy) as follows:

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