July 15, 2022
Italian Court of Cassation holds domestic regime is applicable on distributions to nonresident mutual funds
By judgments No. 21454, 21475, 21480, 21481 and 21482 (referred to jointly as "the case"),1 the Italian Court of Cassation (CC) affirmed that the local tax rate2 applicable to resident mutual funds was applicable also to United States (US) mutual funds that in fiscal years between 2007 and 2010 received dividend distributions from Italian-listed securities.
The US mutual funds, to which dividends had been paid with application of the conventional withholding tax of 15%, had filed for reimbursement contending that the application of the conventional withholding tax of 15% instead of the local tax rate of 12.5% applicable ratione temporis to Italian open-end investment funds constituted a restriction in violation of the principle of free movement of capital under Article 63 of the Treaty on the Functioning of the European Union (TFEU).
The case examined by the CC concerns refund claims filed with the Italian tax authorities (ITA) by a series of US mutual funds that received in fiscal years 2007, 2008, 2009 and 2010 dividend distributions from Italian-listed securities that applied the 15% withholding tax (WHT), pursuant to article 10 of Italy (IT)-US Double Tax Treaty (DTT), while the applicant funds held that the dividend should have benefited from the reduced 12.5% WHT provided ratione temporis by article 9(2) of Law no. 77 of 1983 to Italian open-ended funds.
The applicant funds made a claim for a refund of the difference between the 15% WHT and the 12.5% rate by asserting that the dividend WHT withheld at the 15% rate was unlawful and in breach of the principle of free movement of capital provided by the TFEU.3
After a negative outcome from the appellate tax court, the US funds appealed before the CC asking for the annulment of the appellate judgments contending that the appellate judges had misinterpreted provisions under article 10 of IT-US DTT in light of the principle of free movement of capital.
The CC's judgment
Applicability of local tax provisions and non-discrimination principle
In overturning the decisions of the appellate judges, the CC stated, in summary, that:
Judgments No. 21454, 21475, 21480, 21481 and 21482 are the first positive CC decision in favor of non-EU entities based on non-discrimination principles and that allow for non-EU entities to benefit from TFEU principles and they are precedential case laws to be used in order to:
In this last regard, taxpayers should consider that:
For additional information with respect to this Alert, please contact the following:
Studio Legale Tributario, Milan
1 These cases were published on 6 July 2022.
2 Italian substitute tax of 12.5%, that would have been applied ratione temporis to Italian investment funds on the annual increase in net asset value (NAV) pursuant to article 9(2) of Law no. 77 of 1 983.
3 Art. 63 (formerly 56) of TFEU.
4 In this regard, please note that the relevant statute of limitations is 48 months since the dividend WHT has been levied i.e., all or part of 2018 may still be covered if filing during 2022.
5 Funds established according to Directive 2009/65/EC (s.c. UCITS Directive).