October 19, 2022 Italian Court holds that lower mortgage registration tax and land registry fees applicable to resident close-ended investment funds are applicable to nonresident open-ended funds investing in Italian real estate used for commercial purposes
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:
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:
_________________________________________ CONTACTS For additional information with respect to this Alert, please contact the following: Studio Legale Tributario, Milan
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