Law No. 244 of December 24, 2007 (the financial bill for 2008) changed the withholding tax levied on dividends distribution in order to allow EU/EEA (limited to Norway and Iceland) corporate recipients to be subject to the same tax treatment of Italian ones.
Namely, pursuant to the changes made by the financial bill for 2008, the Italian withholding tax on dividends distributions to foreign corporate recipients is now levied as follows:
- 0% in case the recipient falls within the scope of the parent-subsidiary directive
- 1.375% in case the recipient is a EU/EEA (limited to Norway and Iceland) resident. As mentioned, such a withholding tax puts on the same footing both EU/EEA (limited to Norway and Iceland) recipients and Italian ones. In fact, Italian recipients are taxed on 5% of the dividends received at 27.5% corporate income tax rate (5% x 27.5% = 1.375%)
- 27% in all other cases, subject to tax treaty reduction
According to the financial bill for 2008, the reduced 1.375% withholding tax is applicable to profits accrued starting from the fiscal year following the one running as at December 31, 2007 (2008 as far as calendar year companies are concerned). With respect to profits accrued until 2007, only the 0% or 27% – subject to tax treaty reduction – regimes apply.
The circular letter No. 32/E of July 8, 2011
The circular letter No. 32/E of July 8, 2011 acknowledges that – following the decision of the European Court of Justice, Comm. vs. Italy, No. C-540/07 of November 19, 2009 – the application of the reduced withholding tax should be extended to profits accrued before 2008. Namely, for profits accrued before 2008 the withholding tax should be levied at 1.65% (being 5% x 33% corporate income tax applicable in the concerned years).
The circular letter also contains a number of indications as to when the reduced withholding tax should be granted (or the pending tax litigations should be given up). In particular, according to the Italian tax authorities:
- the reduced withholding tax should apply only to dividends distributed starting from January 1st, 2004
- the refund of the higher dividend withholding tax should be claimed, upon penalty of forfeiture, within 48 months from the date of payment of the dividends
- the actual or potential discriminatory tax treatment or the existence of the actual or potential restriction should be evaluated keeping into consideration the tax treatment of the foreign recipients in the home State
- in order to claim the reduced dividend withholding tax, the EU/EEA (limited to Norway and Iceland) recipients should be liable to tax in the home State, no matter whether the tax is actually paid. The liability to tax can be proved by relying on the residence certificate released by the local tax authorities
- no reduced dividend withholding tax can be claimed in case the recipient can credit it either according to domestic or international treaty provisions
- no reduced dividend withholding tax can be claimed in case the recipient is a conduit company or the transaction is abusive. Pure passive holding companies cannot claim the reduced dividend withholding tax
- it is for the taxpayer to prove that all the conditions to claim the reduced withholding tax are met
Short term actions
The Italian tax authorities have finally recognized that the reduced withholding tax rates apply also to profits accrued before 2008. Accordingly, taxpayers should consider to claim refund of the higher withholding taxes as soon as possible keeping into consideration the 48 months statute of limitation.