On 6 and 7 July 2022, the Italian Supreme Court ruled in multiple cases that Italian WHT levied on Italian dividends distributed to non-Italian investment funds is incompatible with EU law.
The important decisions give fresh impetus to WHT reclaims in Italy. It is thus advisable for non-Italian investment funds with Italian-sourced dividends to (re)consider further steps in connection with filing WHT reclaims in Italy.
Facts of the Supreme Court cases
The cases concern a German open-end investment fund and six US investment funds which suffered WHT on Italian dividends in the year 2003 (German fund) and in the years 2007-2010 (US funds). The standard Italian WHT rate was 27% during this time. However, all seven funds benefited from a reduced WHT rate of 15% under their Double Tax Treaty (DTT). On the other hand, Italian dividends paid to Italian investment funds were not subject to WHT. Instead, Italian investment funds were subject to a taxation of 12.5% on their net income (measured based on their annual NAV increase), which could be reduced to 5% or 0% under certain conditions.
Decisions of the Supreme Court
Regarding the German open-end investment fund, the Italian Supreme Court holds that the German investment fund is comparable to an Italian investment fund, both from a legal and a regulatory perspective. The Supreme Court highlights that the German investment fund fulfils the criterion of multiple investors, even though the German fund was fully owned by a German insurance company. This is because the insurance company in any case represents a plurality of interests.
Having established the comparability of the German fund with an Italian fund, the court holds that levying WHT on dividends in the case of a German fund was only due to the German fund not being resident in Italy and thus constituted an infringement of the free movement of capital under Art. 63 of the Treaty on the Functioning of the European Union (TFEU). The German fund has been granted a full refund of the WHT incurred.
With regard to the US investment funds, the Italian Supreme Court as a preliminary remark highlights that the Italian dividend taxation has already been scrutinised by the EU Commission, with a special remark to dividends received by investment funds. The EU Commission’s assessment led to the abolition of dividend WHT for EU qualified investment funds with effect from 1 January 2021. The fact that the Italian legislator changed the dividend taxation thus strengthened the claimant’s position.
Further, the Supreme Court confirms that the free movement of capital is also applicable to non-EU fund entities, and thus the Italian dividend taxation constitutes an infringement of the free movement of capital with respect to the US-domiciled investment funds, too. The US investment funds are thus granted a refund of the difference between the 12.5% statutory taxation for Italian investment funds and the DTT rate of 15% previously applied to the US investment funds.
Context
The recent decisions of the Italian Supreme Court mark the provisional ending of a long discussion regarding the (in)compatibility with EU law of Italian WHT on dividends paid to foreign investment funds. This discussion can be divided into three periods.
- The first period concerns tax years until and including 2010. Italian investment funds were not subject to WHT on Italian dividends, instead they were taxed at 12.5% on –effectively - their annual NAV increase, which under certain conditions could be reduced to 5% or 0%. Non-Italian investment funds incurred 26% WHT on Italian dividends, which could be reduced to the (usual) rate for portfolio holdings of 15%, if a DTT was applicable.
- The second period concerns tax years from 2011 until and including 2020. Italian investment funds were fully tax exempt - thus did not incur any tax on Italian dividends - while non-Italian investment funds were subject to 20-26% WHT on Italian dividends, respectively 15% as usual under a DTT.
- The third period concerns tax years starting from 1 January 2021. Italian investment funds continue to be tax exempt. The tax exemption is extended to EU/EEA-resident UCITS as well as EU/EEA-resident AIFs, if comparable to an Italian investment fund. Based on national tax law, investment funds from third countries are still in any case subject to WHT on Italian dividends.
Although the recent decisions of the Italian Supreme Court and their facts only concern the first period (before 2011), the decisions are expected to strengthen the position of WHT reclaims also in the subsequent periods, especially for the second period (2011- 2020).
Furthermore, the decision of the Supreme Court is in line with a decision of the Pescara Court of First Instance dated 7 February 2022, in which the court granted a refund of WHT incurred on Italian dividends in the years 2014 to 2016 to a Luxembourg SICAV (UCITS). The decision of the Pescara Court is interesting, because the same court had previously rejected WHT refund claims of foreign investment funds, which led to the above-mentioned decisions of the Italian Supreme Court. Moreover, it is remarkable that the decision of the Pescara Court concerns the taxation of investment funds after 2011, and thus strengthens the positions of claimants in the second period as described above.
Finally, the recent Supreme Court decisions - especially the one relating to the German investment fund - must be observed within the context of a recent tax ruling of the Italian Revenue Agency dated 30 March 2022. In this ruling, the Italian Revenue Agency for the first time states its position on the comparability of foreign investment funds with Italian investment funds under Italian tax law applicable in the third period (from 1 January 2022), especially with regard to the criteria “autonomy” and “plurality of investors”.
The tax ruling of March 2022 indicates that tax courts and tax authorities seem to have a mutual understanding of what is regarded a plurality of interest (fund investors). They seem to take a substance-over-form view: this criterion can be fulfilled by single investor funds if the single investor represents a plurality of interests.
The way forward/recommendation by WTS Global
Generally speaking, the Supreme Court decisions are very good news for investment funds (UCITS and AIFs and comparable non-EU fund vehicles) as the decisions strengthen their filing position, irrespective of whether it is an existing reclaim or a future filing of a WHT reclaim.
For EU investment funds (UCITS and AIFs) as well as non-EU investment funds (if comparable to UCITS) that incurred WHT on Italian dividends in the last 48 months, it is advisable to pick up the process now and file WHT reclaims in order to safeguard the rights to a refund against the statute of limitations.
For investment funds that filed WHT reclaims (and refreshment letters) in the past, WTS Global recommends that further steps such as court proceedings should be considered on a case-by-case basis.
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