Italy introduces exemption from dividend withholding tax for EU collective and alternative investment funds.

In the 2021 Italian Budget Plan of November 16, the Italian government proposes to abandon withholding tax on profit distributions to regulated collective investment funds (UCITS/AIF) within the EU/EEA.  The exemption will apply to profit distributions made on or after the date on which the law enters into force. This is expected to be on or after January 1st, 2021.

With this proposal, the Italian government appears to be bringing its taxation of dividends to foreign investment funds in line with the European Court of Justice’s judgment in the 2012 Santander case. However, it remains questionable whether the ‘limitation’ of the exemption to EU/EEA resident investment funds is in line with EU (case) law. The free movement of capital in the EU treaty (which has forced the introduction of this exemption) can also be invoked by claimants in non-EU member states. And the ECJ has already ruled on several occasions that granting tax benefits to EU investors, but not to comparable non-EU investors can be a violation of the free movement of capital.

It is also questionable whether making the exemption dependent on being regulated under the EU UCITS or AIF directives is in line with EU (case) law. In its judgment in the 2014 Emerging Markets case (m.no. 66 and 67), the ECJ has already ruled such a condition to be a violation of the free movement of capital.