What happened?
Dividends paid by Italian companies to non-EU tax resident corporations are subject to a withholding tax (WHT) of 26%. If a tax treaty is applicable, the WHT may be lowered. According to the majority of tax treaties concluded by Italy, the lowered WHT ranges from 5% to 15%. Distributions of dividends from Italian-resident companies to Italian-resident corporate shareholders are subject to an effective taxation of 1.2%, while distributions to non-EU tax resident corporations are subject to higher taxation (WHT ranging from 5% to 26%). Such higher taxation may qualify as a restriction prohibited by the free movement of capital.
This type of restriction previously has been reviewed by the European Court of Justice (ECJ) in relation to the WHT treatment applied to dividend distributions made to EU corporations. This led the Italian Government to introduce in 2009 a reduced WHT of 1.2% for dividends paid to EU corporations subject to Corporate Income Tax (‘Euro ritenuta’). Although there are no specific cases regarding Italy, the ECJ already has ruled on similar cases that higher WHT applied to dividends paid to non-EU resident taxpayers is in breach of the free movement of capital.
Why is this relevant
An opportunity may exist for taxpayers to file a refund claim for WHT higher than 1.2% incurred on dividends. Although the length of the process may vary depending on the outcome of the refund request and the Court’s approach, it may represent an opportunity for tax savings without the risk of incurring penalties or sanctions.