Edited by Claudio Valz, Luca la Pietra, Guglielmo Ginevra
With a recent judgment, the Tax Court of First Instance of Pescara ruled that withholding tax applied on Italian-source dividends distributed to a US corporation, to the extent that they exceed the reduced rate of 1.2%, are contrary to the principle of free movement of capital established by art. 63 of the Treaty on the Functioning of the European Union (TFEU) and must be reimbursed accordingly.
The ruling, among the first on the matter with specific reference to non-EU corporations, is significant for all US corporations – as well as for all other non-EU corporations resident in countries that guarantee an adequate exchange of information with Italy – which have suffered withholding tax on dividends at the full rate of 26% or at a reduced rate based on bilateral treaties to avoid double taxation.
The facts of the case
The case originated from a request submitted to the Italian Tax Authorities by a US corporation regarding the request for reimbursement of withholding taxes incurred in excess of 1.2% in relation to dividends received in 2018 by a subsidiary owned by 35%.
It should be noted that the applicant corporation had already benefited from the 5% rate reduction on the dividend withholding tax pursuant to art. 10, paragraph 2, letter a), of the Convention against double taxation in force between Italy and the United States amount on which it paid taxes due pursuant to US tax legislation without being able to deduct the withholding tax incurred.
The request for reimbursement of the withholding taxes incurred was therefore based exclusively on European Union law, in particular on the violation of the principle of free movement of capital established by art. 63 TFEU to the extent that Italian law provides that dividends received by an Italian resident corporation distributed by another Italian resident corporation are exempt from taxation for 95% of the amount of the dividend received, with an effective tax rate of 1.2%, while in the case of distribution of dividends in favor of a non-EU corporate shareholder, it is subject to a withholding tax with a rate of 26% (or the reduced withholding applicable pursuant to bilateral treaties to avoid double taxation), thus discriminating against the US corporation compared to Italian corporations.
In the absence of an answer from the Italian Tax Authorities on the refund request submitted, the US corporation filed an appeal against the silent refusal with the competent Italian Tax Court of First Istance which issued the judgment under analysis.
The ruling issued in favor of the US corporation
In the judgment under analysis, the judges recognized the applicability to the case of the principles already expressed on the matter by the Italian Supreme Court which sanctioned the different but equally discriminatory taxation regime applicable to dividend payments paid to investment funds resident in the United States and ruled that the principle of non-discrimination under art. 63 TFEU applies – as established by the same community provision – also to taxpayers resident in third countries, such as the United States of America.
The judges point out in this context that the Italian legislation examined – following censure by the Court of Justice – had already been amended by introducing in favor of corporations resident in the European Union or in a State adhering to the Agreement on the European Economic Area (“EEA”) the application of the withholding tax on dividends at a reduced rate of 1.2% in order to guarantee the same tax treatment applied to Italian corporations.
On the basis of the above premises, the judges therefore recognized that the US corporation was entitled to the same tax treatment recognized to EU and EEA corporations, thus ordering the reimbursement of the withholding tax for the difference between the withholding tax suffered on the basis of the Convention against double taxation between Italy and the United States and the rate of 1.2% that would have been applied in the circumstance in which the corporation had been resident in the EU and EEA.
Actions to consider
The judgment, among the first on the matter with specific reference to non-EU corporations, is of interest to all US corporation – as well as to all other non-EU corporations resident in countries that guarantee an adequate exchange of information with Italy – which have suffered withholding taxes on dividends at the full rate of 26% or at a reduced rate on the basis of bilateral treaties to avoid double taxation.
The principle expressed by the ruling is in accordance with CJEU on the matter as well as with the latest judgements of the Italian Supreme Court on the matter.
Given all of the above, therefore, both US corporations and non-EU corporations resident in other countries that guarantee an adequate exchange of information with Italy should consider the opportunity to submit refund requests for periods not yet statute-barred (dividends paid from March 2021 onwards) in order to safeguard their right to reimbursement of the discriminatory withholding tax suffered and in cases where refund requests have already been submitted, evaluate the opportunity to initiate litigation to request the judicial authority to recognize the same.
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