Italy Budget Law 2021: A new Withholding tax exemption on dividends and capital gains for EU/EEA investment funds?

Background

Withholding tax (“WHT”) on dividend income payments in Italy was, and still is, a recurrent discussion topic in the asset management sector.

The acceptance and repayment of a tax reclaim in Italy, even on the basis of the relevant tax treaty, is a challenging and lengthy process.  To this day, reclaims based  on the European Court of Justice’s jurisprudence (EU/ECJ reclaims) concerning the principle of non-discrimination and the free movement of capital and payments as defined in Article 63 of the Treaty on the Functioning of the EU (TFEU) have so far been regularly rejected or disregarded by the Italian Tax Authorities.

The 2021 Italian Budget Law¹ (the ‘Law’)published on 30 December 2020, and its new provisions appear to have been introduced by the Italian Legislator in order to prevent the continuance of what appears to be a clear infringement of Article 63 of the TFEU.

Timeline

The new measures should be effective with respect to distributions of profits and capital gains realized as from 1 January 2021.

Key points

The Law provides a very favorable set of provisions for foreign undertakings for collective investment (“UCIs”) in Italian resident companies, with a view to repealing a tax framework that is most likely discriminatory in the context of EU law.

The Law provides that distribution of profits and/or capital gains derived by qualifying foreign UCIs from shareholdings (or financial instruments equated with shares for Italian tax purposes) in Italian tax resident companies would not be subject to Dividend WHT nor tax on capital gains (“CGT”).

In particular, the Law extended the tax exemption regime to Italian dividends paid to mutual funds (UCITS, or AIFs whose manager is subject to regulatory supervision in the country of establishment pursuant to Directive No. 2011/61/EU) established in EU Member States which signed adequate exchange of information. Pursuant to the Law, WHT exemption will thus be available on dividends and capital gains for qualifying UCIs of the European Union/European Economic Area (Article 110), as follows:

         i. Exemption from the 26% WHT on Italian source dividends

       ii.  Exemption from the 26% substitute CGT arising from the disposal of Italian shares, either listed or not, representing a substantial participation.

The new measure will expand the dividend and capital gain exemptions currently provided for Italian UCIs to EU/EEA UCIs, thus avoiding the risk of possible infringement procedures by the European Commission pursuant to the EU non-discrimination principles.

Practical considerations

The possibility for foreign UCIs to benefit from relief at source in Italian dividends is a significant evolution from the current practice in Italy, as far as dividend WHT is concerned.

This evolution means that, in principle, UCITS and other UCIs would be eligible to benefit from relief at source in Italian dividends under certain conditions.

The first step to be undertaken by a fund would be to liaise with its custodian and/or tax advisers and to understand how this eligibility to a relief at source in Italy will be managed.

The identification of the documentation requirements is still under discussion, since the Law does not provide clear guidelines as regards the supporting documentation required to grant this exemption.

Lastly, it may be possible to use these new provisions within pending and forthcoming tax litigation proceedings regarding financial years earlier than 2021, arguing that such provision has been introduced by the Italian Legislator in order to prevent an infringement procedure by the EU Commission and that, according to the EU non-discrimination principle, such provisions should be granted also to dividend WHT or CGT levied on Italian listed payouts starting from 1 July 2011.

EY Luxembourg can be contacted for additional information and will further connect with EY Italy on the above development.

[1]Law No. 178 issued on 30 December 2020