Withholding Tax on dividends and Luxembourg Sicav: the disparity of treatment has been acknowledged by Italian provincial tax court
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Luxembourg Investment Company with variable capital (“Sicav”), included in the broader category of undertakings for collective investment in transferable securities (“UCITS”), subject to prudential supervision system in their state of residence, are entitled to benefit from the withholding tax exemption on dividends distributed by Italian companies, as they are assimilated for tax purposes to UCITS resident in Italy, both set up and regulated in accordance with Directive 2009/65/CE.
As a result, non-resident UCITS that received dividends from Italian resident companies and were subject to the domestic Italian withholding tax at 26% rate (as of 2014) may be entitled to request a refund of the withholding taxes applied with retroactive effect, according to the deadline provided by the tax law.
The Provincial Tax Court of Pescara concluded this with decision no. 49 of 7 February 2022, which decided in favour of the Luxembourg Sicav and confirmed the legitimacy of the request of the refund of the withholding taxes (“WHT”) suffered by the Luxembourg entity at the time of dividends distribution from Italian companies. A different treatment in fact would result a discriminatory measure, differentiating the tax treatment instead applicable to a resident UCTIS.
Domestic legislation means UCTIS are exempt from corporate income tax (IRES), on condition that they are subject to regulatory supervision (see art. 73, paragraph 5 quinquies of Presidential Decree n. 917/1986). Consequently, they benefit from exemption from WHT upon receipt of dividends. Luxembourg Sicavs do not differ from Italian UCITS from a corporate and substantial point of view, as they are open ended investment funds subject to prudential supervision by their own State. However, they did not enjoy the same exemption
regime and were subject to 26% WHT.
Very recently, such differentiation in WHT treatment has been removed in the Italian Legislation. Following the investigation launched at EU level (EU Pilot8105/15/T AXU) to solicit Italy to spontaneously review the relevant rules, a new provision extended also to non-resident UCITS, the exemption of dividends from Italian sources, under certain conditions (see art. 1, paragraph 631/633 of Law n. 178/2020).
The Provincial Tax Court of Pescara held that the disparity of treatment should also be removed for the years prior to the introduction of the above legislation, with retroactive effect, noting that the discrimination was in contrast with the freedom of movement of capital, provided by art. 63 of the EU Treaty, and with the freedom of establishment pursuant to art. 49 of the EU Treaty. It was reiterated that the application of WHT to dividends received by non-resident UCITS resulted a restriction of the free movement of capital, with the consequence that non-residents were discouraged from making investments in Italy.
This principle, although applied to UCITS set up in the European Union, can also be extended to other foreign entities resident in countries outside the European Union. The European Court of Justice has, in fact, repeatedly established that the free movement of capital is one of the fundamental freedoms not limited to subjects resident in the European Union (most recently, see C480/19).
Therefore, non-resident UCTIS are entitled to request the reimbursement of withholding taxes applied on dividends distributed by Italian companies, in the 48-months period preceding the filing of the refund request to the competent tax authorities. In the event of a tacit or express denial, it will be possible to initiate the tax litigation to obtain a judicial declaration confirming the legitimacy of the request of the WHT refund.
