Starting on 1 January 2021, dividends and capital gains earned by qualifying EU/EEA based investment funds (EU/EEA Funds) are exempt from income tax in Italy.

The new provision, contained in the 2021 Budget Law, eliminates discrimination against EU/EAA Funds, compared with Italian investment funds (which do not suffer any Italian tax on dividends and capital gains on equity instruments).

The law provides for these new measures to apply only to dividends distributed and capital gains realized on or after 1 January 2021.

Open issues 

Mutual funds established in third countries (including, now, the UK) are outside the scope of the new provision (non-EU Funds). These are, therefore, still subject to the previous discriminatory tax treatment even if they are established in a country ensuring an adequate exchange of information for tax purposes and the fund manager is subject to regulatory supervision.

The new provision applies only to future dividends and gains. However, since the law removes discrimination under EU law, it should also apply to past dividends and capital gains. Years ago, the discriminatory domestic participation exemption regime was statutorily extended to EU/EEA companies. In that case too, the law was not retroactive, and the ECJ found that to be contrary to European law (case C-540/07). This conclusion was confirmed by the Italian Revenue Agency in circular letter No 32/E/2011.


From a practical perspective, the new provision has significant impact for EU/EAA foreign funds investing in Italy. Indeed, if investing directly is a feasible option from a business standpoint, the use of intermediate holding companies may not be necessary.

The otherwise increasing risk of tax challenges based on an alleged abuse of the EU Directives and/or the double-taxation conventions may, henceforth, be eliminated.

In addition, the new provision may impact :

  • the numerous pending litigations involving the use and abuse of an intermediate holding company to channel investments in Italian equities;
  • the possibility for EU/EEA funds to file a tax refund for the withholding taxes levied in Italy on the basis of the past provisions;
  • the possibility for non-EU investment funds whose asset management company is subject to regulatory supervision to claim equal treatment by invoking a restriction on the movement of capital.

As already mentioned, UK funds will not benefit from the new regime. UK funds may, however, consider filing a tax refund for the withholding taxes levied in Italy until 31 December 2020.    

The limited scope of the new provision is likely to be challenged. Stay tuned.