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September 9, 2022
2022-1354

Italian Court of Cassation holds EU regime on dividend distributions is also applicable to pension funds not qualifying as EU/EEA

  • The Italian Court of Cassation held that the withholding tax rate difference between qualifying European Union (EU) or European Economic Area (EEA) and non-EU/EEA pension funds violated the principle of free movement of capital under Article 63 of the Treaty on the Functioning of the European Union (TFEU).
  • Based on the decision, foreign pension funds not qualifying as EU or EEA are eligible for the same tax treatment as EU or EEA funds.
  • Impacted nonresident pension funds should consider the appropriate steps for filing for refund of the additional tax withheld or asserting claims already filed at the court level.

Executive summary

By judgment No. 25963 (referred to as "the case"),1 the Italian Court of Cassation (CC) affirmed that the lower dividend withholding tax rate of 11%2 applicable to foreign qualifying EU or EEA pension funds was also applicable to a United States (US) pension fund3 that in fiscal years 2008 and 2009 received dividend distributions from Italian-listed securities.

The US pension fund, to which dividends had been paid with application of either the full internal dividend withholding tax (i.e., 27%)4 or the conventional withholding tax of 15%, had filed for reimbursement contending that the application of either the full internal dividend withholding tax of 27% or the conventional withholding tax of 15% instead of the lower dividend withholding tax of 11% available to qualifying EU or EEA pension funds constituted a restriction in violation of the principle of free movement of capital under Article 63 of the TFEU.

In more detail, the CC stated that the 11% dividend withholding tax provided by article 27 para 3 of local Presidential Decree No. 600/1973 may represent an unlawful restriction to the free movement of capital principle where it does not provide for the reduced 11% withholding tax rate also in favor of US pension funds.

Detailed discussion

The case

The case examined by the CC concerns refund claims filed with the Italian tax authorities (ITA) by a US pension fund that received in fiscal years 2008 and 2009 dividend distributions from Italian-listed securities that applied either the full internal dividend withholding tax of 27%, pursuant to article 27 para 3 of local Presidential Decree No. 600/1973 or the 15% withholding tax (WHT), pursuant to article 10 of Italy (IT)-US Double Tax Treaty (DTT), while the applicant US pension fund held that the dividend should have benefited from the reduced 11% WHT also provided by the same article 27 para 3 of local Presidential Decree No. 600/1973.

The applicant US pension fund made a claim for a refund of the difference between the 27% or 15% WHT and the 11% rate by asserting that the dividend WHT withheld at the 27% or 15% rate was unlawful and in breach of the principle of free movement of capital provided by the TFEU.5

After a negative outcome from the appellate tax court, the US pension fund appealed before the CC contending that the appellate judges did not provide an interpretation of local provisions under article 27 para 3 of local Presidential Decree No. 600/1973 in line with the principle of free movement of capital.

The CC ruled in favor of the appeal filed by the US pension fund and annulled the appellate judgments by also providing a final judgment on the merits of the cause (i.e., by not remitting the judgment to the appealed second degree tax court in order to state about the merit of the refund).

The CC's judgment

Applicability of local tax provisions and the 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.
  • The 11% dividend withholding tax provided by article 27 para 3 of local Presidential Decree No. 600/1973 may represent an unlawful restriction to the free movement of capital principle where it does not provide for the reduced 11% withholding tax rate also in favor of US pension funds.
  • The fact that Italian pension funds are taxed according to an ETT system6 while on the other hand US pension funds are taxed according to an EET system7 may not ground a restriction to the free movement of capital principle.

Implications

Judgment No. 25963 is the first positive CC decision in favor of non-EU pension funds based on non-discrimination principles and that allows for non-EU entities to benefit from TFEU principles and it is precedential case law to be used in order to:

  • Make a dividend WHT refund claim based upon non-discrimination principles where a higher local 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.8

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CONTACTS

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

Studio Legale Tributario, Milan

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ENDNOTES

  1. This case was published on 2 September 2022.
  2. Dividend withholding tax of 11% that would have been applied to dividend paid out to foreign pension funds qualifying EU or European Economic Area (EEA).
  3. A retirement trust for the case at hand.
  4. Dividend withholding tax of 27% that would have been applied to dividend paid out to foreign pension funds not qualifying EU or European Economic Area (EEA).
  5. Art. 63 (formerly 56) of TFEU.
  6. Exempt contributions, Taxed investment income and capital gains of the pension institution, Taxed benefits.
  7. Exempt contributions, Exempt investment income and capital gains of the pension institution, Taxed benefits.
  8. 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.
 

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