Prospective changes to the Italian tax regime of foreign collective investments funds

We offer below a brief update on certain potential changes to the Italian taxation of dividends paid under Italian shares or assimilated equity instruments and capital gains realised from the disposal of such shares or instruments by foreign collective investment undertakings, as provided for in the current draft of the Italian Budget Law for 2021 (the "Draft Budget Law").

Dividends received by the Funds (as defined below)

The Draft Budget Law currently under discussion in Parliament provides for an exemption from the Italian withholding tax on dividends paid to non-Italian beneficiaries, in relation to those dividends paid in favour of investment funds complying with EU Directive 2009/65/EC (the "UCITS Directive") and to alternative investment funds managed by fund managers authorised pursuant to EU Directive 2011/61/EU (the "AIFM Directive"), if such investment funds (cumulatively referred to as the "Funds") are established in a EU or EEA Member States allowing for an adequate exchange of information with the Italian tax authorities.

The aim of this proposal is to eliminate a discrimination in the tax treatment of the Funds compared to Italian investment funds, considering that the latter are generally: (i) exempt from corporate income tax; and (ii) not subject to the mentioned withholding tax on dividends received under Italian shares.

The draft provision under discussion is aimed at preventing the opening of infringement proceedings against Italy and bring the Italian domestic rules into line with the EU free movement of capital principle, as interpreted by the European Court of Justice¹. 

One could note that the restriction of the exemption to EU or EEA funds may be criticised as not entirely complying with the EU free movement of capital principle, which prevents any discrimination against investment funds established in a non-EU Member State from investing in companies established in the EU². 

Even though there are good reasons to believe that the relevant provision in the Draft Budget Law would be adopted, such proposal remains subject to parliamentary debate. Should the Draft Budget Law be confirmed in its current terms, the new tax exemption would enter into force as of 1 January 2021. The current proposal excludes any retroactive effect. 

Capital gains realised by the Funds from the disposal of Italian substantial participations

Article 109 of the Draft Budget Law provides for an exemption from the 26% substitute tax otherwise applicable on capital gains realised by the Funds from the disposal of substantial participations in Italian companies (as already mentioned in relation to dividends, in order to benefit from such exemption the Funds should be complying with the UCITS Directive or, alternatively, should be managed by a fund manager in accordance with the AIFM Directive and should be established in a EU or EEA Member State allowing for an adequate exchange of information with the Italian tax authorities).

The exemption would complement the existing exemption available on capital gains realised from the disposal of non-substantial participations, making the capital gains realised by Funds non-taxable upon the occurrence of the relevant circumstances. 

Requests of refund opportunities

It is debated whether the withholding taxes paid before the entry into force of the law could be requested for refund on the ground that the Italian 26% withholding tax on dividend distributions was contrary to EU principles. In this respect, the law proposal explicitly states that no retroactive effect is contemplated. 

Nonetheless, one should consider that the inconsistency of the Italian law with EU principles would allow the taxpayers to claim for refund the unduly paid taxes. Although the matter is not straightforward, under a certain interpretation of the law which has been accepted in the past by the Italian Revenue Agency in similar circumstances, taxpayers may submit a request of refund within 48 months from the date in which the withholding tax was applied, according to the Article 38 of the Italian Presidential Decree No. 602 of 29 September 1973.

Initiating now the recovery procedure by filing a request of refund with the tax authorities would prevent pending claims from expiring and allow taxpayers to be in a position to decide whether to further pursue the recovery of the claim in future. 

Impact of the new law (if implemented) on private equity structures

The law proposal does not contemplate the exemption in relation to indirect holding structures when the participation is held by the Fund through one of its vehicles.

Although the exemption would apply to private equity funds meeting the requirements above, such exemption should not apply to corporate entities operating in PE fund structures when such companies are beneficially entitled to receive the dividend distribution. 

If you have any queries on any of the matters dealt with in this article, please contact Michele Milanese.

1. See judgment of the European Court of Justice in Case C-480/16 and in Case C-156/17.
2. See judgment of the European Court of Justice in Joint Cases from C-338/11 to C-347/11 and in Case C-190/12.