Certain Italian withholding tax on dividends paid to non-EU corporations may be eligible for a refund

In brief

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.

Actions to consider

Taxpayers should consider undertaking a factual analysis to ascertain the right to application of a 1.2% WHT with regard to its specific circumstances. This includes assessing the proper level of the non-EU corporation’s economic substance (i.e., it must not be an artificial arrangement), as well as how the tax treaty relief applies.

Penalties

Should the Italian distributing company directly apply the 1.2% WHT, both the Italian distributing company as well as the non-EU tax resident corporation may be exposed to audit risk. In that case, penalties equal to 110% of the omitted withholding tax (in the worst-case scenario, 26% less 1.2%), plus late payment interest would apply. Criminal penalties also would apply.

One potential alternative for taxpayers would be to pay the entire WHT and submit a refund request. Although the process may be lengthy, the taxpayers would not be subject to penalty (or interest) risk. 

Timing

The refund request must be submitted by the non-EU tax resident corporation within a 48-month period from the date on which the WHT was paid.