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Italian court of first instance recognizes reduced 1.2% dividend withholding tax for US corporations
- Based on the EU free-movement-of capital principle, the court of first instance of Pescara, Italy, held that a US corporation had the right to a dividend withholding tax refund for the difference between 5% tax withheld under the Italy-US treaty and 1.2% effective tax rate applied in similar circumstances to Italian and EU shareholders under domestic law.
- While practical implications potentially stemming from the decision need to be carefully evaluated on a case-by-case basis, US companies that have been charged 5% (or higher) dividend taxation under the Italy-US treaty could consider starting a refund procedure not later than 48 months from the application of withholding tax. This would also apply for companies residing in countries outside the EU that have full exchange-of-information agreements with Italy.
Executive summary
A September 2024 decision (n. 509/2024) by the court of first instance of Pescara (the Court) was recently made public. In this decision, the Court stated that, based on the European Union (EU) principle of free movement of capital (which also applies to non-EU scenarios), a United States (US) company that was subject in 2018 to 5% dividend withholding tax (WHT) under the Italy-US Double Taxation Treaty (DTT) had to be treated as an Italian or EU recipient and thus had to be subject to maximum 1.2% WHT.
The decision builds on previous cases decided by the Italian Supreme Court regarding US mutual funds and pension funds, as well on principles expressed by the EU Court of Justice (EUCJ), concluding that a non-EU parent should be subject to the same dividend tax treatment that is applied to Italian and EU residents (i.e., 1.2% effective taxation).1
On this basis, the Court concluded that the US company had the right to a refund of the difference between 5% WHT and 1.2%.
Detailed discussion
In decision n. 509/2024, the Italian tax court of first instance of Pescara ruled on the Italian administration's silent refusal to grant a refund to a US corporation for the difference between 5% dividend WHT — applied based on the Italy-US DTT — and 1.2% WHT — normally granted to Italian and EU/European Economic Area (EEA) recipients.
The claimant argued that, based on Art. 63 of the Treaty of Functioning of the EU (TFEU) concerning the free movement of capital, a non-EU shareholder cannot be treated more unfavorably than an Italian or EU/EEA shareholder under comparable circumstances.
The Court upheld the US company's position. The Court clarified that the mere fact that the recipient of the dividend is a tax resident of a "third State" (e.g., US) does not per se mean that the provisions of Art. 63 of the TFEU are not relevant because the article clearly states that "all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited."
In conclusion the Court highlighted that the Italian Supreme Court had concluded, in a similar scenario concerning investment funds (case 21481 of 6 July 2022), that different treatment was not justified (unless the fund was in a "black-list" country).2
Lastly, the Court observed that it is irrelevant whether the discrimination arises from applying a DTT provision, because bilateral treaties should always be interpreted under the principles of the EU law.
Implications
The Court issuing the WHT decision is a "court of first instance," i.e., trial court. Thus, it will be interesting to see how a court of second instance and potentially the Supreme Court will rule. Ultimately, it will be also interesting to see whether the law concerning dividend WHT for non-EU recipients will undergo changes because of this position.
Nonetheless, given the importance of this decision and the reference made by the judges to underlying principles stated by the Italian Supreme Court and the EUCJ, US companies that have been charged 5% (or higher) Italian WHT on dividends paid by Italian entities should consider whether to commence a refund procedure, provided that the tax payment was not made more than 48 months before the start of the process.
Other non-EU companies residing in jurisdictions with which Italy has signed an adequate exchange-of-information agreement should consider conducting a similar analysis.
For additional information concerning this Alert, please contact:
Studio Legale Tributario, International Tax and Transaction Services
- Marco Magenta
- Savino Tato
- Daniele Ascoli
- Simone De Giovanni
- Davide De Santis
Studio Legale Tributario, Financial Services Office
- Paolo Zucca
- Giuseppe Marco Ragusa
- Antonfortunato Corneli
- Giancarlo Tardio
- Gabriella Cammarota
- Alberto Giorgi
- Alberto Fuccio
Studio Legale Tributario, Tax Controversy
- Maria Antonietta Biscozzi
- Pasquale Cormio
- Enrico Ceriana
- Andrea Daglio
- Gianluca Zanella
- Micaela Antonella Prencipe
Ernst & Young LLP (United Kingdom), Italian Tax Desk, London
- Domenico Borzumato
Ernst & Young LLP (United States), Italian Tax Desk, New York
- Emiliano Zanotti
- Federico Susini
- Giulio Monzani
- Giulia Randazzo
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.