Italy: Update on withholding tax on dividends paid to investment funds and related refund opportunities

Taxpayers may wish to consider continuing to file withholding tax refund claims in Italy and initiating related court proceedings.

Update on withholding tax on dividends paid to investment funds

Several positive decisions with respect to withholding tax on dividends paid to investment funds were rendered across the different court levels in Italy in 2022.

The Italian provincial tax court of Pescara on 7 February 2022 held that a Luxembourg UCITS (Undertakings for Collective Investment in Transferable Securities) in the form of a SICAV (Société d'investissement à Capital Variable) was entitled to a full refund of the withholding tax imposed on dividends distributed by Italian companies, finding that the Italian withholding tax was incompatible with the free movement of capital under EU law. Read TaxNewsFlash

Another Luxembourg SICAV UCITS subsequently received a similar decision, and the Italian tax authority launched an appeal of both decisions which will be heard before year end.

The Italian Supreme Court on 7 July 2022 held that a German investment fund was entitled to a refund of withholding tax on dividends distributed by Italian companies under the tax rules that applied at the time the dividends were received in 2003. The court found that the German fund was comparable to Italian funds since they meet the same objective conditions, and any differing treatment constituted a restriction on the movement of capital.

Similarly, the Italian Supreme Court on 6 July 2022 issued a decision confirming that the Italian tax treatment of dividends paid to investors in the United States was discriminatory and in breach of EU law. Read TaxNewsFlash

More recently, the First-Degree Tax Court of Rome in early November issued two decisions (numbers 11354 and 11355) holding that the EU fund exemption on dividends and capital gains, introduced 1 January 2021, applied retroactively. 

KPMG observation

The above decisions by the Italian courts are consistent with the investigative activity launched by the EU with the Italian tax authority that 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 that law was viewed as a step in the right direction, it arguably is not fully aligned with EU principles since it only applies to investment funds established in EU/EEA-states and not to third-country investment funds. Thus, investment funds resident in other countries, like the United Kingdom, may challenge the law and the current position of the Italian tax authority.

Taxpayers may wish to consider continuing to file withholding tax refund claims in Italy and initiating related court proceedings. Successful claims normally include a 2% annual interest rate payment.

Read a December 2022 report prepared by the KPMG member firm in Luxembourg


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