An analysis by Alma LED, Taxand Italy
The Italian Tax Authorities have clarified the application of the Italy-Germany Double Taxation Treaty (ITA-GER DTT) to a German partnership’s capital gains from the sale of an Italian subsidiary. Generally, partnerships are not subject to taxation in their home state, but their partners can benefit from tax treaty provisions. However, in specific cases, partnerships can be considered residents of their home state for tax treaty purposes.
In this instance, the Italian Tax Authorities have determined that a German partnership, comprised solely of German partners with income taxed in Germany, is entitled to ITA-GER DTT provisions, resulting in capital gains from the Italian subsidiary sale being taxed solely in Germany under Article 13, Paragraph 4 of the treaty.
Our Italian firm, Alma LED, analyse this ruling and its implications in further detail below.
In the tax ruling n. 418 of August 16, 2023, the Italian Tax Authorities (“ITA”) have provided clarifications regarding the applicability of the Italy-Germany Double Taxation Treaty (“ITA-GER DTT”) to a German partnership in relation to capital gains realized from the sale of an Italian subsidiary.
As a general rule, when a partnership is treated as fiscally transparent in a State, the partnership itself is not “liable to tax” in that State and so it cannot be considered to be a resident thereof for tax treaty purposes. Consequently, the application of the tax treaty to the partnership as such would be refused. In such situations, the partners of the partnership should be entitled, with respect to their shares of the income, to the treaty benefits to the extent that the partnership’s income is allocated to them for taxation purposes in their States of residence.
However, there are certain cases in which the States involved have included – under certain circumstances – partnerships within the coverage of their tax treaties.
One example is the special provision provided at par. 2 of the Protocol to the ITA-GER DTT in which it is stated that: “a partnership is deemed to be a resident of a Contracting State in the sense of paragraph 1 of Article 4 if it has been established in accordance with the law of that State or if the main object of its activities is in that State. However, the limitations to the right to tax of the other Contracting State as provided in Articles 6 to 23 apply only insofar as the income derived from that State or the capital situated therein is subject to tax in the first-mentioned State”.
In other terms, according to the Protocol of the ITA-GER DTT, a partnership established in a State (e.g. Germany) is considered to be tax resident therein and can, therefore, benefit from the tax treaty insofar as its income is subject to tax in that State (e.g. Germany).
That being said, in the case analyzed in the Ruling at stake, the ITA noted that the German partnership was entitled – as tax resident – to the provisions of the ITA-GER DTT because it was established in Germany, all its partners were German and the income derived was entirely taxable their hands in Germany. Therefore, the ITA concluded that, under art. 13 par. 4 of the ITA-GER DTT, the capital gains deriving from the sale of the Italian subsidiary should have been taxed only in Germany.
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