Refund of surplus tax withheld on dividends paid to non-EU companies

With Judgment No. 509/2024, the First Instance Tax Court of Pescara (competent for refund claims by foreign entities - ‘Tax Court’), granted an American company the right to a refund for the difference between the withholding tax on dividends paid to non-EU companies, pursuant to the Italy-USA Double Taxation Convention (5%), and the reduced withholding tax rate applied to companies resident in another EU Member State (1.2%). The Court determined that this different tax treatment constituted a violation of the principle of the free movement of capital, under Article 63 TFEU.

The Case

An American company received dividends from its Italian subsidiary, subject to the 5% withholding tax in accordance with the provisions of the Italy-USA Double Taxation Convention. The American company challenged the application of this withholding tax rate, arguing that it was entitled to the more favourable rate of 1.2%, provided by Article 27, paragraph 3-ter of Italian Presidential Decree No. 600/1973. This rate is applicable to dividends received from only EU companies. In this case, the American company argued that the application of a higher rate to non-EU companies violated Article 63 of the TFEU.

The Italian Revenue Agency opposed the claim, asserting that the treatment of residents and non-residents was not comparable, and therefore did not constitute a breach of EU law.

The Decision

The Tax Court ruled in favour of the American company, acknowledging its right to a refund for the withholding tax paid in excess. In its decision, the Court referred to a recent ruling by the Italian Supreme Court in a similar case, which confirmed the application of the 1.2% withholding tax rate even for dividends paid to non-EU companies, in accordance with the principle of the free movement of capital.

The Court of Justice of the European Union has established that restrictions on the movement of capital prohibited by Article 63, include those which are such as to discourage non-residents from making investments in a Member State or to discourage that Member State’s residents from doing so in other States.

Furthermore, the Tax Court concluded that the exceptions provided under Article 65 TFEU did not apply in this case. As a result, the Court found that the unequal tax treatment of the American company violated both the principle of non-discrimination and the freedom of movement of capital.

This ruling has significant implications for the taxation of dividends distributed by Italy to non-EU companies, such as those based in the USA or in the UK. Following the Court's interpretation of EU law, it is likely that similar cases will follow, resulting in a broader alignment with the fundamental principles of non-discrimination and the free movement of capital within the EU.