Fund Taxation Alert 2022-10

In 2022, we are observing several positive decisions being rendered to investment funds across the different court levels in Italy. It is the right moment to provide an update on these evolutions in Italy.

On 7 February 2022, the Italian Provincial Tax Court of Pescara (currently renamed “Court of Justice of first instance” according to the recent reform of the tax process) issued a decision confirming that a Luxembourg SICAV UCITS is entitled to a refund of the withholding tax (“WHT”) imposed on dividends distributed by Italian companies, considering the incompatibility of national Italian provisions with the free movement of capital under the Treaty on the Functioning of the EU (TFEU).

It was the first positive decision in favor of a foreign investment fund covering the full discriminatory tax treatment occurred as of July 2011 (i.e., where a tax exemption regime was introduced for Italian investment funds) and came in line with past rulings of the Court of Justice of the European Union (“CJEU”). After this date, another Luxembourg SICAV UCITS received a similar decision. However, the Italian Tax Authorities launched the appeal against the positive decisions to the Regional Tax Court in Pescara. The hearing in both cases will take place before year end.

 On 7 July 2022, a decision where the Supreme Court of Cassation (“the Court”) confirmed that a German investment fund is entitled to a refund of the WHT imposed on dividends distributed by Italian companies in 2003. The dedicated German investment fund, which was held by a German insurance company, requested the refund of the difference between the Double Tax Treaty (“DTT”) rate of 15% and the substitute tax of 12.5%, the system that was applied at the time the dividends were received and was in force until June 2011.

The Court confirmed that the German funds can be compared to Italian funds since they meet the same objective conditions, meaning the difference in treatment constitutes a restriction to the movement of capitals. The Court concluded that the German investment fund should be entitled to a full refund of the 15 % withholding tax, since Italian funds that were only held by non-Italian, white-listed investors could, under a special rule (repealed in June 2011), benefit from a full tax exemption as a derogation from the normally applicable 12.5% substitute tax.

This is the first ruling by the Court on this specific matter, validating the jurisprudence of the CJEU on the violation of the free of movement of capital pursuant to article 63 TFEU.

Similarly, on 6 July 2022, the Court issued another positive decision confirming that the Italian tax treatment of dividends paid to investment funds resident in the United States (“US”) was discriminatory and in breach of EU law. In this case, the claimant requested the refund of the difference between the DTT rate of 15% applied to US mutual funds and the Italian reduced rate of 12.5%, provided by article 9(2) of Law no. 77 of 1983 and applicable to Italian open-ended funds. The basis for the refund claims was once again the fact that certain provisions of the Italy-US DTT were incompatible with the standard provided for under the EU free movement of capital.

This judgement, which is the first in favor of non-EU entities based on non-discrimination principles, confirmed that the tax treatment was discriminatory and thus also contrary to EU law, discouraging investment funds established in a non-EU country from investing in companies established in the EU, and investors in the EU from acquiring shares in non-EU investment funds.

More recently in early November, the First-Degree Tax Court of Rome issued the decisions number 11354 and 11355 linked to private equity structures, whereby they also considered that the EU fund exemption on dividends and capital gains, formally introduced from 1 January 2021, should be applied retrospectively. 

The above decisions by the Italian courts in recent months demonstrate a sustained clear discrimination against non-resident investment funds.  

All these recent decisions come in line with the investigative activity launched by the EU with the Italian Tax authorities, which resulted in the amendments made by the 2021 Budget Law, equalizing the tax treatment of dividends and capital gains earned by foreign investment funds.

While the law implemented in 2021 was seen as a step in the right direction, the amendment is not fully aligned in keeping with EU principles. Indeed, as said law only applies to investment funds established in EU/EEA-states and not to third-country investment funds, it arguably continues to violate the free movement of capital which also applies to payments between EU Member States and third countries. We can expect to see investment funds resident in other countries, like UK for example, challenging the current position by the ITA.

In the light of the foregoing, we recommend (1) continuing filing WHT reclaims in Italy and (2) to initiate court proceedings. Currently WHT reclaims are subject to a tacit rejection if no answer of the tax authorities is issued within 90 days after the filing of said reclaim. Taking into consideration that the Italian tax authorities do not reply to the WHT reclaims, the sole way forward to obtain a refund is an appeal before the Court. Therefore, we believe the next logical steps are launching the court proceedings with the Italian court.

It should be noted that in case of success, an annual interest of 2% should normally also be granted by the Italian tax authorities.

A team of tax specialist and project managers can assist you with filing these WHT reclaims.