3D I was a capital company with its corporate seat in Crema, Italy. It transferred a branch of its business that was also located in Italy to a company established in Luxembourg. Following that transaction, the branch that had been transferred became a permanent establishment, in Italy, of that Luxembourg company and 3D I received shares in that Luxembourg company. Those shares were recorded on 3D I’s balance sheet at a higher value than the value for tax purposes of the branch that had been transferred. 3D I elected to pay substitution tax at a rate of 19% in respect of that transaction, as provided for by articles 1(1) and 4(2) of Legislative Decree No 358/1997, thereby foregoing the regime of fiscal neutrality provided for in article 2(2) of Decree No 544/1992. Accordingly, 3D I paid €2960484·85, corresponding to the amount of substitution tax payable. After the payment of that tax, the capital gains listed in the accounts following the transfer were distributed, since the difference between the value for tax purposes of the branch of activity that had been transferred and the value that had been attributed to the shares received as payment for the transfer had also been recognised for tax purposes (the book values of those shares were realigned with their values for tax purposes).
Upon becoming aware, in particular, of the judgment in X v Riksskatteverket (Case C–436/00) [2002] ECR I–10829, 3D I asked the Italian tax authorities to refund the substitution tax which it had paid. After that request for reimbursement had been implicitly rejected by the Inland Revenue, 3D I brought an action before the Commissione tributaria provinciale di Cremona (Provincial Tax Court, Cremona) which rejected the appeal on the ground, inter alia, that 3D I had freely chosen the regime of substitution tax and that it had obtained the benefit of having the difference in value taxed at a rate that was highly favourable in comparison with that at which 3D I would normally have had to pay tax in the event of realisation of the capital gain. 3D I appealed against that ruling to the Commissione tributaria regionale di Milano (Regional Tax Court, Milan) which stayed the proceedings and made a reference to the Court of Justice.
Articles 2, 4 and 9 of Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different member states did not preclude the consequence of a transfer of assets being the taxation of the transferring company on the capital gain arising from that transfer, unless the transferring company carried over in its own balance sheet an appropriate reserve fund equivalent to the capital gain arising upon that transfer.