Investment funds not authorized to carry out regulated activities, but which are managed by intermediaries subject to regulatory supervision, have to be considered as “institutional investors” and - if established in countries allowing an adequate exchange of information - can enjoy the exemption from the Italian withholding tax provided for by article 26, paragraph 5-bis, of Presidential Decree 600/1973 on interest deriving from medium and long-term loans granted to Italian companies. These conclusions are reached by the Italian Revenue Agency in Ruling 125 dated 24 February 2021 regarding the exemption from the Italian 26% WHT (granted by article 26, paragraph 5-bis of Presidential Decree 600/73) on “outgoing interests” which are paid to investment funds resident in the United Kingdom.
According to the law mentioned, the outgoing WHT does not apply to interests deriving from medium and long-term loans (i.e. over 18 months) granted to Italian companies, commercial entities and individual entrepreneurs, as well as permanent establishments in Italy of non-resident companies, by: a) credit institutions established in EU Member States; b) insurance companies established and authorized pursuant to regulations issued by EU Member States c) foreign institutional investors subject to the regulatory supervision in the foreign countries in which they are established.
The Italian Tax Authority refers to its circular 23 / E of 2002, confirming that “foreign institutional investor” means an entity that, regardless of the legal status and tax treatment to which the related income is subjected in the country in which it is established, makes and manages investments on its own or on behalf of third parties. This definition also includes entities “without tax liability” such as mutual investment funds, SICAVs, pension funds, asset management companies, specifically included among the “qualified” investors referred to in article 1, paragraph 1, letter h), of the decree of the Minister of the Treasury of 24 May 1999 n. 228, as they are subject to forms of regulatory supervision in the foreign countries in which they are established, as long as such states and territories allow for an adequate exchange of information (white list countries, ministerial decree of 4 September 1996 and subsequent updates). It should be noted that even after Brexit, the United Kingdom is still considered as a “cooperative” country for exchange of information purposes.
The Italian Revenue Agency clarifies that the fund under analysis complies with the requirements as it is established in a country that allows an adequate exchange of information and, although not directly authorized to carry out any regulated activity based on the UK financial services and market act 2000 (Fsma), is managed by a subject authorized by the Financial Conduct Authority (FCA). As confirmed by the Circulars n.2 dated 15 February 2012 and n. 19 dated 4 June 2013, supervision must be alternatively verified with reference to either the investor or the management company, in the light of the prudential supervision model adopted in the country where the undertaking is established.
Finally, it should be noted that the Revenue Agency confirms that article 26, paragraph 5-bis, of Presidential Decree 600/73 does not provide for the “beneficial owner” condition, but rather applies only to subjects [i.e. institutional investors] having the requirements indicated by the law. Therefore, it is not possible to apply the exemption regime to the beneficiaries of the interest payments [i.e. the fund’s investors or members] that are not “also” the direct recipients.
We make reference to the last WTS Global Financial Services Info Letter to confirm the final approval of the 2021 Italian Budget Law, providing for a new set of rules applicable to foreign UCIs. Such UCIs are no longer subject to Italian WHT (26%) on either dividends or on capital gains derived from Italian shareholdings (or comparable instruments).
As said, the discrimination compared to Italian funds is only abolished for EU funds. Consequently, non-EU funds are still at a disadvantage.
The new rules are applicable with respect to distributions of profits and capital gains realized from 1 January 2021. However, the principles of entrusting and effectiveness should justify the retroactive implementation of the new provision.
In the light of the above, the right of taxpayers to apply for refund of Italian WHT levied in breach of EU principles (i.e. exclusion of non-EU funds and the non-retroactive effect) can be still exercised, if the statute of limitations has not expired yet.
If you wish to discuss these topics, please contact: SBNP, Milano / WTS R&A, Milano
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