The CJEU clarifies the limits on the taxation of dividends under taxes other than corporate income tax

The Court of Justice of the European Union was asked by an Italian court to rule on the compatibility of the Regional Tax on Productive Activities (“IRAP”) and, more specifically, on the inclusion of 50% of dividends in the tax base for financial intermediaries.

In a ruling issued last Friday, the Court of Justice had to clarify the scope of the dividend exemption provided for in Article 4 of the Parent-Subsidiary Directive. As a reminder, this article provides that Member States may“retain the option to provide that expenses relating to the shareholding and capital losses resulting from the distribution of the subsidiary’s profits are not deductible from the parent company’s taxable profit.” In such cases, “management expenses related to the shareholding are determined on a flat-rate basis, and the flat-rate amount may not exceed 5% of the profits distributed by the subsidiary.”

The Court of Justice was therefore required to clarify which taxes should be taken into account when determining the 5% cap on dividends. Did this refer solely to corporate income tax, or did this 5% limit also apply to other taxes?

In its judgment, the Court clearly heldthat “the exemption system precludes national legislation that allows dividends received by a parent company from its subsidiaries resident in other Member States to be included in the tax base for a tax such as IRAP, in addition to the inclusion of those dividends, to the extent of 5% of their amount, in the tax base for a corporate income tax such as IRES.”

This decision thus opens up new possibilities under French law. Please feel free to contact us to discuss this further via this link.

CJEU, August 1, 2025, Cases C-92/24 to C-94/24

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