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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
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
Paolo Zucca, FSO Global Compliance and Reporting - Wealth Asset Management
Antonfortunato Corneli, FSO International Tax and Transaction Services – Transfer Pricing
Giancarlo Tardio, FSO International Tax and Transaction Services
Gabriella Cammarota, FSO Indirect Tax - Wealth Asset Management
Alberto Giorgi, Business Tax Advisory - Tax Policy and Controversy
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.