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Italian Supreme Court sets aside discriminatory tax framework for non-EU pension funds based on free movement of capital

A recent Italian Supreme Court decision could have far-reaching consequences for Italian tax provisions on cross-border dividend payments, in particular to non-EU investment funds. The decision No. 25963 of 2 September 2022 concerned the tax treatment of dividends paid by Italian-resident companies to pension funds (PFs) established in the US. But its importance goes beyond the immediate facts of the case, given that the Supreme Court set aside a domestic provision on the ground that it was contrary to the free movement of capital under Art. 63 TFEU – the only fundamental freedom applicable to persons established in a third state.

Factual background and decision

In 2008 and 2009, a PF established in the US received Italian-source dividends, which were subject to Italian withholding tax at the domestic 27% rate or the reduced 15% rate under Art. 10(2) of the double tax convention between Italy and the US (DTC). But the US PF argued that the correct withholding tax rate would have been 11% - the rate applicable to Italian-source dividends paid to PFs established in an EU or EEA country that guarantees an adequate exchange of information (this provision was introduced in Italy 2009 as a result of an EU Commission infringement procedure). The US PF argued this on the basis that the difference in treatment constituted a restriction on the free movement of capital that is prohibited under Article 63 TFEU.

The Supreme Court agreed that the US PF was entitled to a refund of the Italian withholding taxes exceeding 11% of the amount of the dividends. The Court considered that there was a restriction on the free movement of capital because the dividends paid to the US PF were subject to a more burdensome tax regime than dividends paid to Italian PFs (which at that time were subject to an 11% substitute tax on their annual net result) and PFs established in the EU or EEA countries. And this difference in treatment could not be justified because the US PF and Italian PFs were in a comparable position and the DTC provides for an adequate exchange of information between the US and Italy (meaning that the need for effective fiscal supervision could not be used as a justification for the restriction).

Potential future impact of the decision 

Going forward, the decision is likely to be more important in relation to other Italian tax provisions relating to cross-border dividend payments than those concerning PFs. This is because, since 2014, Italian PFs have been subject to a 20% substitute tax on their annual net result, with the consequence that only a withholding at above that rate (an unlikely scenario when a DTC is in place) could constitute a breach of Article 63.

The decision indicates, for example, that the Italian tax regime for dividends paid to investment funds may still infringe free movement of capital. In 2021, the Italian government had introduced an exemption from withholding tax for EU/EEA UCITS and AIFs (thus aligning their treatment with Italian funds). But (i) dividend payments to third country funds remain subject to withholding tax even where the relevant funds are subject to prudential supervision and established in jurisdictions allowing adequate exchange of information, and (ii) dividends paid to EU/EEA UCITS and AIFs before 2021 were subject to withholding tax, irrespective of the fact that the regime constituted a restriction to the free movement of capital. In light of the decision, this treatment may well constitute a breach of Article 63 and funds should consider whether they could claim a refund of the dividend withholding tax in accordance with the Italian statute of limitations.

The decision could also more generally have consequences for the Italian tax treatment of outbound dividends paid to companies resident in third states (which are currently subject to a higher tax burden than Italian and EU/EEA resident companies), and it may limit the Italian Tax Authority’s ability to challenge conduit structures for abuse of law. Where Italian-source dividend payments to a third country should, pursuant to Article 63, have been subject to the same tax treatment as dividend payments to an EU/EEA country in any event, routing such dividends though an EU/EEA country does not result in any more favourable tax treatment and the relevant structure could hardly be said to be abusive. In any case, in light of the well-renowned Danish cases, it is still prudent for non-EU investment funds to seek adequate presence in the EU rather than expect to rely on the direct application of fundamental freedoms and, in case, claim a refund of the dividend withholding tax in accordance with the Italian statute of limitations.


bonellierede, pension funds, free movement of capital, dividends, withholding tax, italian tax, investment funds