Withholding tax paid to non-EU investment fund: EU law breach

by Francesco Nicolosi

The Italian Supreme Court recently issued a number of rulings (Cass. Civ. Section V, n. 21454-21475-21479-21480-21481-21482 filed on 6 July 2022 and Cass. Civ. Section V, n. 21598 filed on 7 July 2022) regarding the withholding taxes applied on outbound dividends paid to non-resident investment funds (EU and non-EU). The application of such withholding taxes, according to the Italian Supreme Court, represent an infringement of the free movement of capital principle laid down under art 63 EU Treaty of functioning. Indeed, such income, if received by an investment fund governed by Italian law, would have been exempt or subject to a lower tax rate.

In particular, the Italian Supreme Court ascertains the existence of an infringement:

  • For the EU investment funds until 2021 (as from 2021 the withholding tax on dividends paid to EU investment funds was abolished by the legislator);
  • For non-EU investment funds which are still subject to taxation in Italy on Italian-sourced dividends.

The conclusions drawn as for the non-EU funds are of particular interest.

Indeed, as for non-EU funds, the Supreme Court states that the principle of equal treatment laid down under Art. 63 TFEU applies also as for taxpayers resident in third countries, provided that they grant an adequate exchange of information with Italy, like the US.

Accordingly, making reference to the relevant jurisprudence of the Court of Justice of the EU on the discriminatory tax treatment of dividend withholding tax suffered by foreign investment funds resident outside the EU, the Italian Supreme Court Judges upheld the claimants positions confirming that the difference of tax treatment between the claimants – subject to a final withholding tax of 15% – and a comparable Italian investment funds – only subject to taxation of 12,5% on the net income accrued – constituted an unjustified infringement of Art. 63 of the TFEU and, as requested by the claimants, ordered the refund of the withholding tax suffered equal to the difference between the rate of 15% and the rate of 12,5%.

In summary - notwithstanding the fact that the dividend withholding tax for qualified EU investment funds was abolished as from 1 January 2021 - the regime applied to qualified non-EU investment funds is still contrary to EU law, as confirmed by the principle of law expressed by the Italian Supreme Court with the judgments at hand.