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Dividends paid by a parent company on the basis net income from subsidiaries considered legitimate
19. November, 2019The Appeal Court of Iceland pronounced a judgement in a case brought by Birgir Már Björnsson, Attorney at LEX, on behalf of International Seafood Holdings S.á.r.l. against the state.
In the case, it was argued whether the ruling of the Director of Internal Revenue, upheld in the District Court in Reykjavík, should by annulled. The case concerned the legitimacy of dividends paid by parent company based on net income from subsidiaries cf. paragraph 1 Article 73 cf. paragraph 1. Article 74 in Act. no. 138/1998 on Private Limited Companies.
Until now, the opinion of the Director of Internal Revenue and the Internal Revenue Committee, as confirmed by the District Courts, was that dividend payment of a parent company under these circumstances was unlawful since the dividend payment was not based on distributed and received dividends from a subsidiary.
In the case, the Appeal Court agreed with arguments made by Icelandic Seafood International S.á.r.l. that the net income from subsidiaries were properly recognized as a parent company’s profit under the Act on Accounts no. 3/2006 and as such formed a free funds of the parent company cf. paragraph 1 Article 74 in Act. no. 138/1998 on Private Limited Companies. At the same time, the Appeal Court agreed that any restrictions on the disposal of such funds in the form of dividends to shareholders, which did not receive direct legal reference in the provisions of Act. no. 138/1998 on Private Limited Companies, were prohibited. Furthermore, the Appeal Court stated that amending Act no. 73/2016 did not entail the legalization of an earlier rule stating that net income of subsidiaries should be considered restricted equity in the parent company´s annual accounts, but rather that the amending Act no. 73/2016 was an introduction of a new legal rule based on a European Directive. Thus, the Appeal Court revoked the decision of the Director of Internal Revenue and ordered the state to reimburse paid capital income tax in addition to paying legal cost.
According to the judgment of the Appeal Court, other parties who have been subject to taxation in similar circumstances may be entitled to a claim against the Icelandic state.
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