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Executive summary

By judgment No. 28595 (referred to as "the case"),¹ the Italian Court of Cassation (CC) affirmed that closed-ended funds and open-ended funds that pursue the same activity of acquiring and subsequently reselling real estates used for commercial purposes are in a comparable situation and that it does not justify a difference in the rate of mortgage registration tax and in land registry fees for the acquisition of such real estate properties.

The CC concluded that the local favorable tax provision provided for Italian closed-ended real estate funds - allowing for a 50% reduction in the rate of mortgage registration tax and in land registry fees for the acquisition of real estate by or on behalf of the funds – looks at avoiding that the large number of transactions these funds usually "purse" (i.e., purchase and resale) result in too heavy taxation, rather than at differentiating the taxation according to the typology of the transactions performed or the legal form of the funds carrying out these transactions.

Because of the above, the CC ruled that Article 35(10-ter) of Decree-Law No 223/2006 is contrary to Article 63 of the Treaty of the Functioning of the European Union (TFEU) where it provides for the reduction in mortgage registration tax and in land registry fees solely to closed-ended real estate funds, to the exclusion of open-ended real estate funds, provided that those two categories of fund are in objectively comparable situations.

Detailed discussion

The case

The case examined by the CC concerns a refund claim filed with the Italian tax authorities (ITA) by a German mutual fund portfolio management company (Manco) with headquarters in Germany and a branch in Italy that managed, inter alia, two open-ended real estate investment funds established under German law (Funds); in 2006 the Manco acquired, on behalf of the Funds, two building complexes used for commercial purposes which were located in Italy.

When registering the acquisition of those complexes, the Manco had to pay the ITA mortgage registration tax and land registry fees in full rates² (i.e., 1.6% and 0.4% respectively, relevant at the time in which the transaction took place).

At a later stage, the Manco became aware that Decree-Law No. 223/2006 (Decree Law³) providing for the reduction by half of the mortgage registration tax and land registry fees in respect of real estate acquisitions by or on behalf of closed-ended resident real estate funds, the latter governed by Article 37 of Legislative Decree No. 58/1998,⁴ had entered into force prior to the acquisitions thus made.

Taking the position that nonresident open-ended investment funds (like the two German open-ended real estate investment funds managed by Manco) also were entitled to that reduction, Manco requested the ITA to refund half of the sums paid by way of those taxes and fees in respect of the two building complexes which it had acquired on behalf of the Funds.

In the absence of a reply from the ITA, Manco appealed against those two implied rejections (s.c. "silenzio rifiuto") before the competent first degree tax court that rejected the appeals finding that, by Decree-Law No. 223/2006, the Italian legislature had intended to restrict the benefit of the reduction in the mortgage registration tax and in land registry fees solely to the category of closed-ended investment funds.

Manco appealed against such judgments before the competent second degree tax court that dismissed the appeals, reasoning, in essence, that because of the considerable differences between closed-ended investment funds, recognized and operating in Italy, and open-ended investment funds, recognized and operating in Germany, it was not appropriate to find that there had been an infringement of, inter alia, EU law on the basis of a difference in treatment, given that different situations could be subject to different tax regimes.

As Manco was of the view that the appellate court had erred, it brought an appeal on a point of law before the third degree tax court (i.e., Supreme Court of Cassation - CC) that referred the judgment to the Court of Justice of the European Union (CJEU) for a preliminary ruling asking if the restriction of the benefit of the reduction in mortgage registration tax and in land registry fees to closed-ended investment funds only, to the exclusion of open-ended investment funds, was in breach of the free movement of capital and freedom of establishment principles.

By judgments issued in joined cases C-478/19 and C-479/19, the CJEU reasoned that according to settled case law,⁵ the measures prohibited by Article 63(1) TFEU, as restrictions on the movement of capital, include those that are such as to discourage nonresidents from making investments in a Member State or to discourage that Member State's residents from doing so in other States.

The CJEU observed that:

• If the objective of Decree-Law No. 223/2006 is to prevent a fund from being penalized by being taxed twice, that is on the purchase of immovable property and its subsequent resale, it must be found then that such a taxation may affect both open-ended and closed-ended funds. Accordingly, these categories of funds are in objectively comparable situations.
• Furthermore, in the instant case, the need to prevent property speculation cannot be considered an overriding reason in the public interest capable of justifying a restriction on the free movement of capital, since the application of a tax advantage solely to closed-ended funds, to the exclusion of open-ended funds, does not appear suitable for attaining the objective pursued; furthermore in order for a restriction on the free movement of capital to be justified by the need to limit systemic risks on the real estate market, the national legislation conferring a tax advantage solely on closed-ended real estate funds must be suitable for securing the attainment of the objective relied upon and must not go beyond what is necessary to attain it, the latter circumstance that the CJEU addressed the CC to ascertain.

Basing on all the above considerations, the CJEU concluded that Article 63 TFEU must be interpreted as precluding legislation of a Member State which restricts the benefit of the reduction in mortgage registration tax and in land registry fees solely to closed-ended real estate funds, to the exclusion of open-ended real estate funds, provided that those two categories of fund are in objectively comparable situations, unless such a difference in treatment is justified by the objective of limiting systemic risks on the real estate market.

The CC's judgment

Applicability of local tax provisions and non-discrimination principle

In overturning the decisions of the appellate judges, the CC homologated to the principles stated out by the CJEU in joined cases C-478/19 and C-479/19 and stated, in summary, that a closed-ended fund and an open-ended funds that pursue the same activity of acquiring and subsequently reselling real estates used for commercial purposes appear to be in a comparable situation and that it does not justify a difference in the rate of mortgage registration tax and in land registry fees for the acquisition of such real estate properties.

In particular, the CC observed that the local favorable tax provision – allowing for a 50% reduction in the rate of mortgage registration tax and in land registry fees for the acquisition of real estate by or on behalf of closed-ended funds – looks at avoiding the risk that the number of transaction the funds purse may lead to double taxation, rather than at differentiating the taxation according to the typology of the transactions performed.

Based on the above, the CC ruled that Article 35(10-ter) of Decree-Law No 223/2006 is contrary to that Article 63 TFEU where it provides for the reduction in mortgage registration tax and in land registry fees solely to closed-ended real estate funds, to the exclusion of open-ended real estate funds, provided that those two categories of fund are in objectively comparable situations.

Implications

Judgment No. 28595 is the first positive CC decision in favor of nonresident open-ended mutual funds that invest in Italian located real estates used for commercial purposes and it may open up the possibility for filing claims applications for the refund of the higher mortgage registration tax and land registry fees imposed.

In particular, as in the matter of registration taxes, Article 77 of Presidential Decree No. 131/1986 provides that the refund of the tax, in the event of undue payment, must be requested by the taxpayer under penalty of forfeiture within three years from the day of payment, by the end of 2022 there may still be time for applicants to claim higher mortgage registration tax and land registry fees imposed in late 2019.

Considering all the above, nonresident open-ended mutual funds may:

• Make a refund claim based upon non-discrimination principles where higher local mortgage registration tax and land registry fees have been applied.
• Manage pending mortgage registration tax and land registry fees 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.

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CONTACTS

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

Studio Legale Tributario, Milan

• Giuseppe Marco Ragusa, FSO Italy Tax and Law 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, FSO Tax Policy and Controversy | alberto.giorgi@it.ey.com

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ENDNOTES

1. This case was published on 3 October 2022.
2. Legislative Decree No. 347/1990 approving the consolidated text of the provisions on mortgage registration tax and land registry fees, in the version applicable to the disputes in the main proceedings, provided, first, that the formalities of registration, registration of mortgages, renewal and annotation in the land register were subject to a registration tax (s.c. "imposta ipotecaria" mortgage registration tax). The tax base is constituted by the value of the transferred or contributed real estate and the rate was set at 1.6%. Also land registry fee (s.c. "imposta catastale") is governed by Legislative Decree No. 347/1990, and is applied to transfers, namely the change of name of the proprietor of the estate in land or of other real rights concerning a property registered in the land registry. That fee, which was applied at the rate of 0.4%, is proportional to the value of that property.
3. By Article 35(10-ter) thereof.
4. Legislative Decree No. 58/1998, Consolidated text of the legislative provisions on financial intermediation, in the version applicable to the disputes in the main proceedings, provided, in Article 1 thereof entitled 'Definitions', as follows: "1. In this legislative decree, the following definitions shall apply: … (k) "open-ended fund" means a mutual investment fund whose participants have the right to request, at any time, the redemption of the shares according to the rules of operation of the fund; (l) "closed-ended fund" means a mutual investment fund in which the right to redemption of shares is granted to participants only at predetermined deadlines..." Under Article 36 of that legislative decree, entitled 'Mutual investment funds': '1. The mutual investment fund is managed by the portfolio management company which created it or by another portfolio management company. The latter manages both the funds which it itself has created and the funds created by other companies. … 3. Participation in the mutual investment fund is governed by the fund regulations. The Banca d'Italia [(Bank of Italy)], after consulting the Consob [(i.e. National Commission for Companies and the Stock Exchange, Italy)], sets the general criteria applicable to the drafting of the fund regulations as well as the minimum content of the latter, in addition to the provisions of Article 39. … 6. Each mutual investment fund, or each sub-fund of the same fund, constitutes an independent asset, separate for all legal purposes from the assets of the portfolio management company and that of each participant, as well as from any other assets managed by the same company." In accordance with Article 37 of the same Legislative Decree No 58/1998: "The Minister for the Economy and Finance shall determine, by means of a regulation adopted after consultation with the Bank of Italy and the Consob, the general criteria to be met by mutual investment funds concerning: (a) the purpose of the investment; (b) the categories of investors for whom the offering of shares is intended; (c) the terms of participation in open-ended and closed-ended funds, in particular the frequency of issue and redemption of shares, the minimum subscription threshold if applicable and the procedures to be followed; (d) the minimum and maximum duration, if applicable; (d-bis) the terms and conditions applicable to acquisitions or contributions of property, both at the time of creation of the fund and afterwards, for funds which invest exclusively or principally in real estate, in property rights and in shares in real estate companies. … 2-bis. The regulation referred to in the first paragraph shall also set out the matters in respect of which the participants in closed-ended funds are to meet in assembly in order to adopt decisions binding on the portfolio management company. The meeting shall decide in all cases on the replacement of the portfolio management company, the request for admission to listing when no provision has been made therefor and on changes to management policies." According to Article 39 of Legislative Decree No 58/1998, entitled 'Fund regulations': "1. For each mutual investment fund, fund regulations shall define its characteristics, govern its operation, designate the promoter company, the manager when it is not the promoter company, and the depositary bank, fix the distribution of tasks between the latter and regulate the existing relations between them and the participants. … 2. The fund regulations shall provide, in particular, for: (a) the name and duration of the fund; (b) the terms of participation in the fund, the terms and conditions of the issuance and termination of certificates, and of the subscription and redemption of shares, and also the terms of liquidation of the fund; (c) the bodies competent for the choice of investments and the criteria for allocating those investments; (d) the type of property, financial instruments and other securities in which it is possible to invest the assets of the fund; …"
5. See judgments of 2 June 2016, Pensioenfonds Metaal en Techniek, C-252/14, EU:C:2016:402, paragraph 27 and the case-law cited, and of 30 January 2020, Köln-Aktienfonds Deka, C-156/17, EU:C:2020:51, paragraph 49 and the case-law cited.