Executive summary

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).

Detailed discussion

The case

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:

• The fact that the funds are resident in a non-EU country does not preclude a priori the relevance of Art. 63 of the TFEU on the free movement of capital as "the difference in tax treatment of dividends between resident investment funds and nonresident investment funds is capable of dissuading, on the one hand, investment funds established in a third country from taking holdings in companies established in a Member State and, on the other hand, investors resident in that Member State from the acquisition of units in nonresident investment funds."
• The circumstance that in the case at hand the discrimination would have arisen from the application of a treaty provision does not preclude the full application of the principle of free movement of capital pursuant to Art. 63 of TFEU.
• Consequently, if the DTT provisions conflict with TFEU provisions (such as the principle of free movement of capital), DTT clauses have to be interpreted in light of TFEU that prevails.

Implications

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:

• Make a dividend WHT refund claim based upon non-discrimination principles where a higher internal dividend WHT has been applied.
• Manage pending dividend WHT refund claims by following up with the ITA to request the refund.
• Consider grounds for possible appeals against either the silent or explicit denial of the refund.
• Apply for additional refunds to be claimed where just DTT claims have been filed.⁴

In this last regard, taxpayers should consider that:

• As of 1 July 2011 Italian investment funds are no longer subject to taxation on income from their investments, as taxation is levied exclusively on the investor when it receives the dividend so that a refund of the full WHT amount for both EU and non-EU entities may be claimed.
• Starting from 1 January 2021, any distribution of profits and/or capital gain derived by qualifying EU or European Economic Area (EEA) foreign UCIs⁵ from shareholdings (or financial instruments equated with shares for Italian tax purposes) in Italian tax resident companies would be subject to neither Dividend WHT nor Capital Gain Tax (CGT). In order to benefit from such favorable tax treatment, foreign UCIs should be established either: (i) in accordance with Directive 2009/65/EC (s.c. UCITS Directive) or (ii) in an EU Member State or EEA Member State allowing for an adequate exchange of information for tax purposes, and whose manager is subject to regulatory supervision in the country where it is established pursuant to Directive 2011/61/EU (s.c. AIFM Directive). Based on the judgments at stake, non-EU (or EEA) supervised mutual funds also may apply for the refund of the full Dividend WHT amount imposed.

For additional information with respect to this Alert, please contact the following:

Studio Legale Tributario, Milan

• Giuseppe Marco Ragusa, FSO Italy Tax and Legal Leader | marco.ragusa@it.ey.com
• Paolo Zucca, FSO Global Compliance and Reporting - Wealth Asset Management | paolo.zucca.@it.ey.com
• Antonfortunato Corneli, FSO International Tax and Transaction Services — Transfer Pricing | antonfortunato.corneli@it.ey.com
• Giancarlo Tardio, FSO International Tax and Transaction Services | giancarlo.tardio@it.ey.com
• Gabriella Cammarota, FSO Indirect Tax - Wealth Asset Management | gabriella.cammarota@it.ey.com
• Alberto Giorgi, Business Tax Advisory - Tax Policy and Controversy | alberto.giorgi@it.ey.com

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ENDNOTES

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).