The Italian FTT is levied on transactions with derivatives having as their underlying assets financial instruments issued by an Italian company, irrespective of the residence state of the contracting parties or the jurisdiction where the transaction is concluded. The ECJ was asked to decide whether the scope of the Italian financial transaction tax violates EU Law (Case C-565/18, Société Générale).
This case is interesting, as it concerns the question whether Italy has stretched its territorial competences to levy taxes too far . The scope of the Italian FTT is indeed broad, given that it applies to all kinds of transactions with derivatives where the underlying instrument is issued by an Italian company, even if the parties involved are non-residents or if the transaction takes place outside of Italy. The applicant argued that the tax is not in conformity with EU law, because (i) it discourages non-resident investors from investing in derivatives that involve assets governed by Italian law; and (ii) the tax leads to administrative and reporting obligations in Italy, possibly on top of those applicable in the state of residence of the parties involved.
In his Conclusion of 28 November 2019, Advocate-General Hogan stated that the application of the EU fundamental freedoms has some specific characteristics in the field of taxation. According to him, the levy of a tax on a certain transaction carried out by non-residents always hinders or restricts the exercise of the fundamental freedoms in some way or another, even if the restriction does not discriminate or make a distinction between domestic and cross-border transactions. He added that the concept of ‘restriction’ has to be interpreted, however, in a more limited manner in the context of taxation. In casu, one should rather examine whether the Italian FTT makes it less attractive for non-residents, as compared to Italian residents, to invest in products derived
from financial instruments issued by Italian companies. In that regard, both the A-G and the Court come to the conclusion that residents and non-residents are taxed equally on the (domestic and/or cross-border) transactions falling within the scope of the tax. Hence, the free movement of capital is not violated.
Non-residents confronted with the tax are nonetheless subject to certain formal obligations (e.g. filing a tax return). The ECJ was not able to decide whether these formal obligations violate EU Law, since the Italian referring court did not provide (sufficient) information on the administrative and filing formalities. It is important to note that the ECJ examined in a recent case whether certain formalities imposed on Belgian residents in order to levy the Belgian FTT on transactions involving a foreign intermediary could be considered a breach of EU Law (Case C-725/18, A. Van Zantbeek VOF). The ECJ decided that the Belgian rules indeed established a difference in treatment, but that the additional obligations were proportionate and could thus be justified. The Italian judge will have to determine whether the same can be said of the Italian rules.
This case shows that, in the absence of further harmonization of these kinds of taxes at EU level, Member States are in principle allowed to set a broad territorial scope for these taxes. However, the practical implementation of such a broad scope will inevitably lead to burdensome obligations for the taxpayer.
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Matthias Vekeman - Associate (firstname.lastname@example.org)