Italian Tax Court Judgement Regarding Luxembourg SICAV Spells Good News for Global Investors with Italian Investments

The Provincial Tax Court of Pescara issued a judgement on 7 February 2022 (Decision No. 49). The judgement established that a Luxembourg SICAV (Société d’investissement à Capital Variable) in accordance with the Directive 2009/65/EC of the European Parliament (“UCITS Directive”) is eligible for a full refund of Italian withholding taxes levied on dividends. The judgement’s determining factor is that the Luxembourg SICAV is deemed comparable to an Italian investment fund.

This is a significant favourable ruling for foreign investment funds with Italian investments. The ruling is also consistent with the legal precedent established by the Court of Justice of the European Union (CJEU) upholding the free movement of capital.

Facts and Circumstances Leading to the Appeal

The most recent case follows a claim made by a Luxembourg SICAV qualifying as a UCITS (Undertakings for the Collective Investment in Transferable Securities). A claim was made against the Italian Tax Authorities in December 2017 seeking the full reimbursement of withholding tax levied on dividends the claimant received from Italian listed companies in the years 2014, 2015, and 2016.

The Luxembourg SICAV did not have access to the Double Tax Treaty signed between Italy and Luxembourg and was therefore not entitled to a reduced rate of withholding tax on this basis.

It is noteworthy to the case that Italian investment funds are not subject to tax, on condition that the funds themselves or their management companies are subject to forms of prudential supervision. In contrast, prior to the recent amendments to Italian legislation, foreign investment funds suffered withholding tax at a rate of 26% on dividends received from Italian issuers.

The claim was founded on the infringement of Articles 49, 54, and 63 of the Treaty on the Functioning of the European Union (TFEU). The court found that discrimination took place as withholding tax was levied on Italian listed company dividends distributed to foreign investment funds by Italian issuers while comparable Italian investment funds were exempt from withholding tax.

Following the Italian Tax Authority’s failure to submit a response to the refund claim (which tacitly constituted a rejection of the claim), the claimant appealed this decision to the Provincial Tax Court of Pescara.

The Provincial Tax Court of Pescara Confirms that the Discriminatory Treatment Conflicts with the Principle of the Free Movement of Capital

By virtue of the fact that the Luxembourg SICAV falls within the scope of Directive 2009/65/EC of the European Parliament and is subject to the prudential supervision by the Luxembourg authority Commission de Surveillance du Secteur Financier (CSSF), the Judges acknowledged that the foreign investment fund is objectively comparable to Italian investment funds since both are subject to prudential supervision by their local authorities. It is worth mentioning that a “capillary and stringent” system of supervision, as adopted in Italy, cannot be superimposed on, nor can it be used as a factor to determine comparability with the systems of supervision adopted in other EU/EEA Member States.

The judgement also makes express reference to the Aberdeen and Santander cases, heard by the CJEU, that assessed discriminatory treatment based on tax residency. The Judges verified that the exclusion of the Luxembourg SICAV from the exemption available to Italian funds derived from the fact that the foreign investment fund was not tax-resident in Italy. This discriminatory treatment evidenced the existence of conflict between the Italian legislation and Articles 49 and 63 of the TFEU.

In addition to the above, the Provincial Tax Court of Pescara emphasised that the Italian legislator itself recognised the objective disparity in the tax treatment of foreign investment funds. This was acknowledged through the Court’s amendment of Italian legislation effective from 1 January 2021 that extended the exemption from Italian withholding tax on dividends distributed to qualifying investment funds of EU/EEA Member States.

The Judges of the Provincial Tax Court of Pescara thereby confirmed the Luxembourg SICAV’s entitlement to a refund of the withholding tax incurred.

Impact of the Judgement on Withholding Tax Claims from Italy

The outcome of this court case is significant as it demonstrates formal acknowledgement by the Italian Tax Courts of the discriminatory treatment of foreign investment funds on dividends received from Italian issuers.

Although this judgement relates to a foreign investment fund domiciled in the EU, more specifically a Luxembourg SICAV (an investment fund of corporate-form), the principle of comparability to Italian investment funds applied by the judges may create a precedent for pending and future cases brought forward by other foreign investment funds (including non-EU domiciled funds, and those of contractual-form).

The Next Steps to Safeguard Italian Withholding Tax Claims

Foreign investment funds are strongly encouraged to file claims in Italy and appeal any rejections to remain within the statute of limitations. WTax specialises in retrospective applications on behalf of global investment funds, for reclaims of the withholding tax suffered.

It is crucial that EU/EEA foreign investment funds, that incurred withholding tax prior to the legislation change in 2021, file their reclaims on the basis of discrimination to secure entitlement to refunds within the relevant statutes.

Please get in touch with WTax’s regional specialists to find out more about how we can improve your Italian investment performance through optimal withholding tax recovery.

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