The Italian Supreme Court published decisions n. 5145/5152 that respectively acknowledge the right of certain Spanish investment funds, SICAVs and Spanish pension funds, to recover Italian withholding taxes on Italian dividends received by such Funds.
The investment funds and SICAVs were subject to a 1% corporate income tax rate in Spain, while the pension funds were subject to a 0% corporate income tax rate. All Funds were resident in Spain for corporate income tax purposes and obtained from the Spanish tax authorities certification of their tax residence and inability to recover foreign taxes on dividends collected. This documentation was key for the successful outcome of the judgments at the second instance court and of the Decisions now.
The Decisions originated from requests for refund initiated by Ashurst on behalf of the management companies of the Funds aimed at obtaining the reimbursement of the Italian withholding taxes levied on dividend distributions made on Italian shares for the portion of such withholding taxes exceeding the effective taxation that would normally apply to Italian resident companies and similar entities, i.e. 1.2%. The reduced 1.2%1 withholding tax was introduced in Italy following the Infringement Procedure No. 2004/4350 carried out by the European Commission against the Republic of Italy, where the former higher taxation of Italian dividends received by EU (non-Italian) companies compared to Italian companies was declared in contrast with the EU free movement of capital principle.
The Italian Tax office challenged the Funds’ right of refund before the tax courts of first and second-tier on the ground that such reduced withholding tax was unavailable to entities, such as the Funds, which were not actually subject to it although liable to corporate income tax in Spain.
The Decisions stated that a foreign entity receiving Italian-source dividend distributions is entitled to the 1.2% reduced withholding tax if it is: (i) resident for tax purposes in a EU Member State or in an EEA State, irrespective of its corporate form; and (ii) liable to corporate income tax in its EU / EEA State of residence, meaning that it falls within the scope of corporate income tax in such jurisdiction, even if at a 0% rate.
The Ashurst´s cross-border team involved in this matter was formed by a Spanish team comprising partner and head of tax for EMEA & US Eduardo Gracia and Tax counsel and head of Tax Litigation Carmen Profitós, together with Milan office partner and head of the Italian Tax team Michele Milanese.