Withholding Tax (WHT) on Outbound Dividends to Non-EU Countries

What you need to know

• With Decision No. 93/2026, the second-instance Tax Court of Abruzzo held that non-EU/EEA shareholders resident in white-list jurisdictions may benefit from the 1.20% withholding tax (WHT) rate on dividends distributed by Italian resident companies
• The Court based its reasoning on the free movement of capital under Article 63 of the Treaty on the Functioning of the European Union (TFEU)
• The decision supports a favorable interpretation extending certain tax benefits to qualifying non-EU investors

What you need to do

• Review dividend distributions to non-EU/EEA white-list shareholders to identify cases where a WHT rate higher than 1.20% was applied
• Consider filing tax refund claims within the 48-month statute of limitations from the date the WHT was levied
• Ensure that eligibility conditions are met (e.g., beneficial ownership and availability of administrative cooperation and exchange of information with the relevant third country)
• Prepare to support refund claims in potential litigation, noting the 10-year statute of limitations to challenge a denial (including silent denial)

Introduction

Based on the domestic and Tax Treaty provision in force, dividend distributions from an Italian tax resident company to a non-EU/EEA white-list shareholders are subject to a 26% WHT rate, which can be reduced based on the applicable Double Tax Treaty provision. In both cases, the domestic or treaty rates remain higher than the reduced 1.2% WHT applicable where the beneficiary is resident in Italy, an EU Member State, or an EEA white-list State.

Non-EU/EEA white-list shareholders are exploring the possibility to claim the application of the 1.2% withholding tax (WHT), by invoking Article 63 of the TFEU, in order to avoid the risk of economic double taxation on outbound dividend flows. However, tax refund claims are firmly rejected by the Italian Tax Authority on the basis of a strict and literal interpretation of the domestic and international law provision on the subject matter.

Although this topic has been highly scrutinized by the domestic Tax Court at any level with respect to outbound dividend distribution to investment funds, recent decisions of the second-instance Tax Court of Abruzzo qualifies as leading cases for holding and enlighten the illegitimacy of the Italian Tax Authority position.

Background On The Italian Tax Authority Position

The Italian Tax Authority typically rejects tax refund claims on the following grounds:

• the legal situation of a non-resident recipient of dividends is not objectively comparable to that of a resident taxpayer. In particular, the Italian Tax Authority argues that comparability must be assessed not only based on the applicable WHT rate but also comparing the overall mechanism of taxation of the taxpayer's incomes and calculation of the taxable base for direct tax purposes (i.e. the overall taxpayer’s ability to pay taxes in its State of residence);
• a restriction on the free movement of capital, within the meaning of Article 63 TFEU, can be established only where the foreign dividend recipient is effectively subject to corporate income taxation in its State of residence in respect of the dividends received;
• if a difference in the overall tax treatment is deemed to exist, the following overriding Reasons in the Public Interest would make it acceptable under Article 65 TFEU: the internal consistency of the national tax system, the prevention of tax evasion and avoidance, the aim of facilitating tax controls and inspections and the stable allocation of taxing powers between Member States;
• Direct taxation does not fall within the exclusive competence of the European Union but remains, in principle, within the competence of the Member States. On that basis, the Italian Tax Authority claims that the relevant Double Taxation Convention governs the allocation of taxing rights between the contracting States and, as an expression of national fiscal sovereignty, prevails over EU law provisions.

Latest Case Law

Confirming the first-instance decision, the Tax Court of Abruzzo held that non-EU/EEA white-list corporate shareholders may validly claim application of the 1.20% withholding tax rate on dividends distributed by Italian resident companies, provided that: (i) they qualify as beneficial owners of the income; and (ii) administrative cooperation and information exchange mechanisms exist with the third country concerned.

The Court’s reasoning may be summarised as follows:

• Article 89 of Presidential Decree No. 917/1986 (Italian Consolidated Income Tax Act – “TUIR”) provides for a partial exemption applicable to domestic dividend distributions, resulting in an effective taxation of 1.20%. This regime is intended to mitigate economic double taxation of dividend income;
• While economic double taxation is prevented in the case of domestic dividend distributions, the same protection does not apply to outbound dividend distributions, except for dividends paid to companies resident in EU or EEA Member States, for which a reduced withholding tax rate of 1.20% applies pursuant to Article 27(3-ter) of Presidential Decree No. 600/1973. Said provision was the result of an infringement proceedings against Italy concerning the unequal tax treatment of domestic and outbound distributions, in breach of the free movement of capital set forth by Article 63 TFEU;
• The free movement of capital under Article 63 TFEU is not confined to intra-EU situations but extends to capital movements between Member States and third countries. Accordingly, companies resident in non-EU jurisdictions fall, in principle, within its scope of protection;
• In order to avoid restrictions on the free movement of capital, the source State must grant equal treatment to non-EU resident shareholding companies as compared to resident ones. Where such equivalence is denied, the relevant domestic tax provisions give rise to a restriction prohibited under Article 63 TFEU;
• Such a restriction cannot be justified by invoking overriding reasons in the public interest. In particular, it is not permissible to rely on the alleged need to preserve the coherence or consistency of the tax system by emphasising the different tax treatment applicable to ultimate shareholders in the case of purely domestic distributions, as compared to outbound distributions to non-EU jurisdictions. Furthermore, the objective of safeguarding domestic tax revenues, or preventing a reduction in national fiscal income, does not in itself constitute an overriding reason in the public interest capable of justifying a restriction on a fundamental freedom guaranteed by the TFEU;
• Double Taxation Convention, when signed after the entry into force of the Treaty of Rome governs, shall comply with EU law and principles, as the Member States commit to eliminate the treaty provision in contrast with the EU legislation;
• Dividend distributions to non-EU tax-resident shareholders are, in the absence of specific exemptions, exposed to the same risk of economic double taxation as dividends distributed domestically: taxation occurs first at the level of the distributing company and subsequently at the level of the shareholder;
• Where the differential tax treatment concerns the same category of income - namely dividends - and is unrelated to personal or family circumstances, resident and non-EU-resident taxpayers must be regarded as being in objectively comparable situations for the purposes of assessing compliance with Article 63 TFEU;
• Where effective mechanisms for administrative cooperation and exchange of information exist between Italy and the relevant third country the exclusion of non-EU resident companies from the 1.20% withholding tax regime qualifies as a restriction on the free movement of capital, in breach of Article 63 TFEU and the fundamental principles of EU law.

Operational Aspects

The Decision referred above offers further legal basis for the tax refund claims filed by holding companies, qualifying as beneficial owners of outbound dividends flows and being tax resident of non-EU/EEA white-list countries having administrative cooperation and information exchange mechanisms in place.

For corporate structures having holdings in non-EU/EEA white-list countries, the Decision could results in significant tax savings on outbound dividend flows from Italy, in all cases a tax refund claim is timely filed at administrative level.

In this respect, it is worth reminding the 48 months statute of limitations period, running from the moment when the withholding tax was levied, whereas the statute of limitations for defending the right to the refund in court is 10-year from the deed of denial/silent-denial opposed to the tax refund claim.

Other author: Bianca Bagnoli, Senior Associate