Withholding tax exemption on dividends and capital gains for non-resident investment funds

The 2021 Italian Budget Law marks a significant turning point in the taxation of:

1. non-Italian undertakings for collective investments (so-called UCITS) compliant with EU Directive 2009/65/EC (the so called UCITS Directive) and
2. investment funds not compliant with the mentioned directive having a manager subject to regulatory supervision in the foreign country of establishment in accordance with Directive 2011/61/EU (so called AIFMD Directive),

established in the EU and EEA States that allow for an adequate exchange of information.

So far, differently from Italy based UCITS which are exempt from income tax in Italy, non-Italian UCITS were subject to Italian taxation on Italian source dividends distributions and on Italian source capital gains related to qualifying shareholdings.

With 2021 Budget Law the Italian legislator aligns the tax treatment applicable to the above categories of non-Italian UCITS with Italian UCITS, thus remedying the evident discrimination implemented against the former.

More in detail, the Budget Law specifically provides that the above mentioned non-Italian UCITS will no longer suffer the withholding tax otherwise applicable on dividends received (starting from the entry into force of the Budget Law itself), nor will be taxable on capital gains realized in relation to Italian qualifying shareholdings (after the entry into force of the 2021 Budget Law).

The legislative amendment at hand follows the consolidated approach adopted by the European Court of Justice on discriminatory tax treatment, according to which the application of tax regimes which are more burdensome for EU investment funds resident in a State other than that of the source of income represents a violation of the principle of free movement of capital regulated by art. 63 of the Treaty on the Functioning of the European Union (see Cases C-480/16, Fidelity Funds and C-156/17, Ka Deka).

Although the Italian legislator’s efforts are extremely welcome, at least two issues remain open: the first relating to the possible discrimination of funds resident in third countries and the second relating to income earned before the entry into force of Budget Law by non-Italian UCITS that can now benefit from a full tax exemption.

Hogan Lovells Financial Services and Tax teams are available for any clarification and advice.

Authored by Jeffrey Greenbaum, Serena Pietrosanti, Claudia Colomba, Maria Cristina Conte, and Elisabetta Zeppieri