On 30 December 2020, the Italian Parliament approved its 2021 Budget Law (Law No. 178 of 2020). Following its approval and consequent publication in the Official Gazette No.322 of 30 December, the law brings changes to Italy’s withholding tax regime that will positively affect EU and EEA investment funds, which hold Italian shares.
Italian investment funds are not subject to tax, provided they themselves or their management companies, are subject to prudential supervision. Conversely, under Italy’s previous tax measures, foreign investment funds have been subject to withholding tax at a rate of 26% on dividends received from Italian issuers.
In the context of EU law, this disparate treatment of comparable funds is considered discriminatory and violates the principle of the Free Movement of Capital, which is mandated by Article 63 of the Treaty on the Functioning of the European Union (TFEU).
Italy’s 2021 Budget Law primarily focusses on providing stimulus and support, particularly to the southern regions of Italy. In addition, it includes provisions for new tax reliefs that will allow for expanded withholding tax reclaims for eligible funds, which should undoubtedly encourage investment by European investment funds in Italian issuers.
In particular, Article 1 (paragraphs 631 to 633) of the new Budget Law completely exempts certain foreign funds from tax on Italian source dividends. For dividends distributed from 1 January 2021, these qualifying foreign funds will continue to be subject to withholding tax, however, they are entitled to a refund of the full withholding tax. Until now, the primary reclaim option available to these funds was based on the double taxation treaty, entered into between Italy and the country of residence of the fund (if available).
In order to be eligible for the exemption, a fund must be a foreign collective investment vehicle (CIV) established in an EU/EEA Member State and it must satisfy one of the following:
The favourable tax measures encompassed in the Budget Law for 2021 provide qualifying funds with new procedural opportunities to eliminate the main tax hurdle that may have hindered investment in the Italian market until now.
The new law ensures that Italy no longer discriminates between comparable domestic and foreign EU/EEA investment funds, thereby bringing Italy’s tax law closer in line with the EU principle of the Free Flow of Capital. By extending the dividend withholding tax exemption currently enjoyed by Italian funds to EU/EEA funds, Italy joins the trend of EU-states bringing their domestic law in line with EU principles, to avoid facing infringement proceedings of the European Court of Justice.
This new legislation also impacts refund applications submitted in relation to dividend taxes withheld before 1 January 2021, which consequently should have a stronger case for success, especially in the litigation phase, as Italian legislation implicitly acknowledges its breach of EU law.
While the new law is certainly a welcome step in the right direction, the amendment is not fully in keeping with EU principles. As it currently only applies to funds established in EU/EEA-states and not third-country funds, it arguably continues to discriminate between otherwise comparable funds established within and outside of the EU/EEA.
Since Article 63 of the TFEU that protects the Free Movement of Capital is intended to extend to third states, the exclusion of non-EU/EEA funds from the exemption remains a problematic matter of Italy’s new law.
For EU/EEA investment funds that are UCITS or funds with a manager subject to regulatory supervision under the AIFM Directive, WTax secures full refunds under this new exemption, on behalf of its clients.
In addition, WTax also specialises in pursuing retrospective applications on behalf of comparable investment funds (including third-state funds), for claims of the full withholding tax, withheld prior to 1 January 2021.
Italy’s new tax law represents a positive development for EU/EEA investment funds in general, and is hopefully an indication that other states will continue to follow suit, in bringing their domestic laws in line with EU non-discrimination principles. WTax’s dedicated research team monitors these developments closely as they progress across Europe and is poised to help its clients reap the benefits that they allow for.
Please get in touch with WTax’s regional specialists to find out more about how we can improve your Italian investment performance.