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Italian Tax Court rules dividend withholding tax on non-EU pension funds is in breach of EU's free movement of capital principle

Italy’s Provincial Tax Court of Pescara (1st ITC) is in charge of issuing first instance decisions on withholding tax reclaims based on the free movement of capital stated in Article 63 of the Treaty on the Functioning of the European Union (TFEU).

The free movement of capital is one of the four fundamental freedoms forming the basis of the internal EU market. It applies, with some limits, to transactions between an EU Member State and a non-EU Member State such as the United States (US). It has been used in a series of rulings of the European Court of Justice (ECJ), notably involving mutual funds or pension funds, to challenge rules appearing to discriminate against foreign investors as compared to similar domestic investors with respect to the taxation of dividends.1

As recently reported in the Italian press,2 the 1st ITC, in a series of decisions issued in 20153 and 2016,4 has consistently ruled that US pension funds were comparable to Italian pension funds and that the excess Italian dividend withholding taxes imposed on US pension funds, at either the domestic rate of 27% or the reduced treaty rate of 15%, were discriminatory and in breach of the free movement of capital.

Italian pension funds (private pension funds) are indeed subject to a special tax regime under which dividends and capital gains are subject to a standard 20% substitute tax on net income (the rate was 11% until 31 December 2013 and 11.5% for the period 1 January – 31 December 2014), with the possibility to deduct technical reserves for tax purposes.

To align with the free movement of capital, Italy has notably amended its domestic tax rules to provide, as of 29 July 2009, for an 11% withholding tax rate on Italian source dividends paid to EU/European Economic Area (EEA) based pension funds.

However, this reduced rate was not extended to non-EU/EEA based pension funds, such as US pension funds. Their situation was finally addressed in the first instance, in the referenced decisions of the 1st ITC.

The US claimants in all four decisions challenged the infringement of Article 63 TFEU on the free movement of capital and stressed that such principle should also apply to non-EU member states when comparability can be established. They all claimed a refund of the excess withholding tax they incurred in the past, up to 11%.

The 1st ITC upheld their position and granted the refund of the tax differential suffered on the dividends received in the prior years. The court underlined in its decision that the different tax treatment applied to Italian source dividends received by nonresidents (including those residents in non-EU countries such as the US pension fund, that performs activities which are entirely equivalent to those performed by Italian funds) is a breach of EU regulations on the free movement of capital, since the investments carried out by a nonresident fund have effectively been penalized in comparison with the same investments made by an Italian entity.

These decisions reinforce the basis for nonresident pension funds to file withholding tax reclaims in Italy on the basis of the free movement of capital.

In this regard, even if the decisions are appealed by the Italian Tax Authorities before the Regional Tax Court of Pescara (2nd ITC), the consistency of the arguments upheld by the 1st ITC shall be relevant in light of the possible decisions to be taken by the 2nd ITC (pending proceedings – judgments still to be issued).

Pending further court developments, notably at the appellate level, the local Tax Office of Pescara responsible for processing this type of reclaim may still be reluctant to reconsider its position on this matter and accelerate its processing of the pending concerned reclaims.


1. Notably CJEU, 14 December 2006, C-170/05, Denkavit International and Denkavit France; CJEU, 8 November 2007, C-379/05, Amurta; CJEU, 18 June 2009, C-303/07, Aberdeen Property Fininvest Alpha Oy; CJEU, 10 May 2012, C-338/11 to C347-11 FIM Santander; CJEU 25 October 2012, C-387/11, Commission vs Belgium; CJEU 8 November 2012, C-342/10, Commission v Finland; CJEU 19 November 2009, C-540/07, Commission vs Italy; CJEU 10 April 2014, C-190/12, Emerging Markets Series of DFA Investment Trust Company vs Dyrektor Izby Skarbowej w Bydgoszczy.

2. Il Sole24Ore, Stop all’aliquota maggiorata sui fondi pensione extra-Ue, 20 February 2017, page 22.

3. Provincial Tax Court of Pescara, no. 204 published on 16 April 2015.

4. Provincial Tax Court of Pescara, no. 291, 292 and 293, published on 27 April 2016.

EYG no. 00939-171Gbl

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