Ashurst pave the way for two Italian Supreme Court decisions

On 16 February 2022 the Italian Supreme Court published decisions Nos. 5145 and 5152 (the "Decisions") that respectively acknowledge the right of certain Spanish investment funds, SICAVs and Spanish pension funds (the "Funds"), to recover Italian withholding taxes on Italian dividends received by such Funds.

The investment funds and SICAVs were subject to a 1% corporate income tax rate in Spain, while the pension funds were subject to a 0% corporate income tax rate. All Funds were resident in Spain for corporate income tax purposes and obtained from the Spanish tax authorities certification of their tax residence and inability to recover foreign taxes on dividends collected. This documentation was key for the successful outcome of the judgments at the second instance court and of the Decisions now.

The Decisions originated from requests for refund initiated by Ashurst on behalf of the management companies of the Funds aimed at obtaining the reimbursement of the Italian withholding taxes levied on dividend distributions made on Italian shares for the portion of such withholding taxes exceeding the effective taxation that would normally apply to Italian resident companies and similar entities, i.e. 1.2%.

The reduced 1.2%¹  withholding tax was introduced in Italy following the Infringement Procedure No. 2004/4350 carried out by the European Commission against the Republic of Italy, where the former higher taxation of Italian dividends received by EU (non-Italian) companies compared to Italian companies was declared in contrast with the EU free movement of capital principle.

The Italian Tax Office challenged the Funds' right of refund before the tax courts of first and second tier on the ground that such reduced withholding tax was unavailable to entities, such as the Funds, which were not actually subject to it although liable to corporate income tax in Spain.

The Decisions stated that a foreign entity receiving Italian-source dividend distributions is entitled to the 1.2% reduced withholding tax if it is: (i) resident for tax purposes in a EU Member State or in a EEA State, irrespective of its corporate form; and (ii) liable to corporate income tax in its EU / EEA State of residence, meaning that it falls within the scope of corporate income tax in such jurisdiction, even if at a 0% rate.

The Decisions did not limit the 1.2% reduced withholding tax to a specific corporation type, so include, among others, entities constituted in the form of funds (investment, pensions, etc.) or SICAVs. According to the interpretation of the Supreme Court, the extension of the 1.2% reduced withholding tax also to EU / EEA "liable to tax" entities irrespective of their legal type or actual payment of taxes is justified by reason of preventing any discrimination to the free movement of capital.

Moreover, the Court stated that the 1.2% reduced withholding tax cannot be excluded as a result of double tax treaty provisions (which generally allow for a reduction of the withholding tax at source to 15%). The lower treaty withholding tax is only aimed at fixing a maximum cap to the taxation at source, but cannot prevail over the reduced domestic rate if the latter is more favourable.

The Decisions are aligned with another Supreme Court precedent on Spanish pension funds (decision No. 1967 published on 29 January 2020) still on cases originated by Ashurst and consolidate the principles already expressed in such precedent.

Further case law on refunds

A very recent judgment of the Tax Court of First Tier in Pescara²  concluded in favour of a Luxembourg SICAV's right to obtain the refund of the whole Italian withholding tax on dividends. The claim this time, still relying on the free movement of capital principle, focused on the discrimination between Italian investment funds and other EU investment funds (including SICAV).

According to the tax court, any EU or EEA investment fund or similar entity which is subject to regulatory supervision (reference goes to UCITS³  and to alternative investment fund being managed by an AIFM under AIFMD⁴ ) should be subject to the same tax treatment as Italian investment funds. Such Italian funds are entitled to benefit from tax exemption on income (including dividends) provided that they are subject to regulatory supervision (in accordance with UCITS or AIFMD) and comply with regulatory constraints. Such domestic regime led the court to conclude that Italian withholdings on dividends were not compatible with EU principles and, if levied, should have been refunded in favour of the claimant (a Luxembourg SICAV qualified as UCITS).

It is worth clarifying that, in response of an infringement procedure commenced against Italy (EU Pilot 8105/15/TAXU), an exemption in favour of EU and EEA UCITS and AIFs has been introduced as of 1 January 2021.

Despite the fact that the law provision setting out the new exemption excludes dividends paid before 1 January 2021, the court applied the same no withholding tax treatment for dividends paid before 1 January 2021.

Preliminary comments

The Decisions confirm the consolidating approach of the Italian Supreme Court to sustain refund claims in relation to Italian withholding taxes when the claimant is an EU or EEA entity liable to tax, although at a 0% or 1% rate. The appropriate tax documentation obtained from the tax authorities of the country of domicile of the funds would strengthen the effectiveness of the refund claimed under this line of argumentation.

At the same time, the latest first degree decision encourages non-Italian investment funds and SICAVs to claim refund for the withholding taxes suffered on Italian dividends whether or not they are liable to corporate income tax, as long as they are regulated entities or their manager is regulated (in compliance with either UCITS or AIFMD).

Under one or both lines of argumentations, EU or EEA claimants should consider filing a request for refund to Centro Operativo di Pescara for dividends collected in the past 48-month period to retain the opportunity for a future refund and avoid their right to refund expiring.

We are not aware of any central guideline of the Italian tax authorities promoting spontaneous refunds, which makes the filing of a request for refund necessary in order to preserve the relevant entitlement.

Refund claims accrue interest, which may prove to be a rewarding compensation for those taxpayers that were charged with undue taxes and have been patient enough to actively manage their positions.

1 The reduces withholding tax was originally equal to 1.65% and subsequently decreased to 1.375% and then to 1.2% to match the effective tax charge applicable from time to time to Italian companies and similar entities on dividends collected from Italian shares.

2 See Decision No. 49 of 7 February 2022.

3 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (recast).

4 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.