An infringement procedure initiated by the European Commission against Italy on 22 January 2007 and a ruling of the European Court of Justice (ECJ) of 14 December 2006 suggest that Italian tax levied on dividends paid to non-Italian shareholders is illegal and must therefore be reimbursed.

Depending on the country of residence of the non-Italian shareholder, dividends distributed by Italian companies to non-Italian shareholders may be taxed up to 27 per cent of the dividend value. No such tax is levied on dividends paid to Italian resident shareholders.

The discriminatory dividend taxation may give rise to reimbursement claims by non-Italian companies or funds residing in EU or European Economic Area/European Free Trade Association (EEA/EFTA) Member States in respect of participations owned in Italian companies during the past four years.

Dividend Taxation under Current Italian Law

Under Italian tax law, dividends paid by an Italian company to non-Italian companies are subject to a 27 per cent withholding tax. Depending on the recipient’s country of residence and the applicable double-taxation treaty, the withholding tax rate may be reduced, for example—generally depending on the size of shareholding—to 5 per cent or 15 per cent in the cases of the UK and France, 10 per cent or 15 per cent in the case of Germany, and 15 per cent in the case of Luxembourg.

Instead, dividends paid to Italian resident companies or to Italian permanent establishments of non-resident companies, are not subject to any withholding tax.

The different tax treatment does not normally arise in the event that the non-resident shareholder has owned no less than 20 per cent of share capital of the Italian company for at least one year and is not a mere investment vehicle of a non-EU company because in such case an exemption provided pursuant to the EU "Parent-Subsidiary" Directive applies.

Consequently, under current Italian tax law, non-Italian companies which cannot benefit from the Parent-Subsidiary Directive (in particular those owning shareholdings below the qualifying threshold) suffer a dividend tax that does not apply to Italian resident companies.

The discriminatory dividend taxation raises serious doubts as to its compliance with fundamental principles under the EC Treaty and the EEA Agreement.

European Commission Infringement Procedure against Italy

On 22 January 2007, the European Commission announced it will refer Italy (together with Belgium, Spain, the Netherlands and Portugal) to the European Court of Justice for its discriminatory taxation of dividend payments to foreign companies (outbound dividends).

The Commission determined that the Italian rules are contrary to the EC Treaty and the EEA Agreement (to the extent dividend payments to shareholders residing in EEA Member States are involved) as they tax dividends paid to companies of other Member States more heavily than dividends paid to Italian companies, thereby restricting both the free movement of capital (article 56 of the EC Treaty) and the freedom of establishment (article 43 of the EC Treaty).

The infringement procedure follows a formal request the European Commission had sent to Italy on 25 July 2006 pursuant to article 226 of the EC Treaty to amend its tax legislation concerning outbound dividend payments to companies to which Italy had preferred not to reply.

Decision of the European Court of Justice of 14 December 2006

The infringement procedure initiated by the European Commission was preceded by a recent decision of the ECJ on a French withholding tax on dividends paid by a French subsidiary to its Dutch parent company (C-170/05, the Denkavit case). According to the French tax law, the same withholding tax would not have applied if the parent company had been residing in France.

On 14 December 2006, the ECJ ruled that the French tax law was discriminatory and violated article 43 of the EC Treaty (freedom of establishment). The court argued that "in refusing to extend to non-resident parent companies the more advantageous national tax treatment accorded to resident parent companies, the national legislation […] amounts to a discriminatory measure which is incompatible with the Treaty".

The Case for Filing Reimbursement Requests

The opening of the infringement procedure against Italy before the ECJ and the recent ECJ decision in the Denkavit case strongly suggest that the current Italian taxation of outbound dividends is illegal and provides good grounds for non-Italian companies or funds residing in EU or EEA/EFTA Member States to claim from the Italian tax authorities the reimbursement of dividend tax withheld in Italy.

A reimbursement claim may also arise for those non-EU or EEA/EFTA companies that own their shareholdings in Italian companies through branches or subsidiaries located in an EU or EEA/EFTA Member State.

We therefore highly recommend any such companies or funds check their current and past shareholdings in Italian companies and assess if they have suffered a discriminatory dividend taxation. Although the ECJ ruling in the Denkavit case suggests that a "discriminatory" taxation does not occur where the tax withheld results in a tax credit in the shareholder’s country of residence, the filing of a reimbursement claim is not necessarily precluded. In fact, unlike the ECJ in the Denkavit case, the European Commission has so far considered irrelevant the possibility of an offsetting tax credit when assessing a discriminating outbound dividend taxation and based its conclusion on a decision of the EFTA Court in the Fokus Bank case, where the court explicitly ruled that it was not relevant whether a tax credit was given in the state of residence.

Reimbursement requests can cover taxes withheld on dividends paid during the past 48 months by Italian companies to their non-Italian shareholders.

Reimbursement Request Procedure

The reimbursement request must be filed with the competent office of the Agenzia delle Entrate (Revenue Agency), which is the operating center located in Pescara, Italy.

If a negative response is issued within 90 days, the taxpayer must file a claim with the competent tax court of Pescara within 60 days from the date of issuance of such response.

If no response is given within 90 days (which is the normal occurrence), such silence may be construed as tacit denial and, again, the taxpayer may file a claim with the competent tax court of Pescara. In such case, the statute of limitations for filing the judicial claim is ten years.