Blacklist dividends: double test for exemption and relevance of withholding taxes

by Davide Attilio Rossetti, Gabriele Angelini

In its response to tax ruling no. 191/2025, the Italian Tax Authority clarified that, for the purposes of applying art. 89, par. 3, of the Italian Tax Code (dividend exemption), the tax level test provided in art. 47-bis of the ITC – aimed at identifying countries with preferential tax regimes – must be passed both when the profits are generated by the investee company and when they are distributed to the investor. Furthermore, if the test is not passed, withholding taxes applied to foreign dividends are also considered for the purposes of full tax exemption.

The case
In the case at hand, an Italian holding company holds a majority shareholding in a foreign company operating in the tourism sector, which, in 2025, intends to sell a business complex, realising a significant capital gain, which will result in a profit that will be distributed to shareholders as dividends.

With regard to the conditions for benefiting from the dividend exemption pursuant to art. 89, par. 3 of the ITC, the company points out that, pursuant to art. 47-bis par. 1 of of the ITC, a country is considered to have a privileged tax regime when the effective tax rate (“ETR”) of the investee company is less than 50% of of the virtual tax rate (VTR) that would apply if it were resident in Italy.

If the test is not passed, the dividends distributed will be fully taxable in Italy, unless it can be shown that, since the beginning of the holding period of the shareholdings, there has been no effect of localising the income in the low-tax country (the “second exemption”).

Therefore, the company asks to the Italian Tax Authority (“ITA”) for clarification on the possibility to:

  • include foreign withholding taxes in the ETR calculation for exemption purposes;
  • demonstrate, for each holding period, alternatively: (i) that the ETR test has been passed, or (ii) that there is adequate overall taxation.

The answer
Referring to Circular No. 35/E/2016, the ITA confirms that preferential tax regime status should be verified both when the Italian shareholder receives the profits and also when they are generated. 

Thus, the tax test for the purpose of ethe application of art. 89, par. 3 of the ITC must be passed at both points in time, effectively imposing a “double green light” requirement on the taxpayer.

In the case in question, the ETR test relating to the period in which the profits were generated was not passed, as the ETR of the investee company was less than 50% of the domestic VTR. As a result, the profits should be fully taxed in Italy unless the taxpayer can demonstrate that the shareholding did not lead to income localisation in a low-tax country, as provided under art. 47-bis, par. 2, ITC.

On this point, the temporal assessment of the exemption relating to the verification of the overall effective taxation does not appear consistent with the clarifications provided in the past. The Explanatory Report to Italian Legislative Decree No. 142/2018, referred to in response No. 254/2019, specified that this verification should only concern the years in which the profits were generated in countries with preferential tax regimes and not the entire period of ownership up to the time of distribution.

In conclusion, the relevance of this response lies in the fact that, unlike previous ITA clarifications focused on transitional issues between different legal regimes, this case applies a consistent “full regime” approach, requiring the same tax level test both during profit generation and at the time of dividend distribution.