Italian Supreme Court rules that US pension fund is entitled to same lower dividend withholding tax rate as Italian pension funds.

Case facts

In 2008 and 2009, a US pension fund received dividend income from investments in Italian publicly listed companies. An Italian dividend withholding tax was applied and remitted to the Italian tax authorities at a rate of 27% and 15% (reduced rate under the US – Italy tax treaty) respectively.

Under article 27, third paragraph, of the Italian Presidential Decree no. 600/1973, pension funds resident in the EU or EEA are entitled to a reduced rate of dividend withholding tax of 11%.

The US pension fund applied for a refund of Italian withholding tax, equal to the difference between the higher rate of 27% or 15% applied to its income, and the lower rate of 11% applicable to EU and EEA resident pension fund. As a legal basis for this application, the US pension fund argued that being subjected to a higher rate of withholding tax than EU or EEA resident withholding tax is a violation of the free movement of capital, as laid down in article 63 of the EU Treaty. The free movement of capital prohibits not only restrictions on capital movements between EU member states, but also between an EU member state and a non-member state such as, in this case, the US.

Decision from the Italian tax authorities and tax court

After a rejection from the Italian tax authorities and from the Italian appellate tax court, the US pension fund appealed before the Court of Cassation (Corte de Cassazione, the Italian highest court).

Decision form the Italian Court of Cassation

By contrast, the Italian Court of Cassation agreed with the US pension fund, and, with reference to the decision from the European Court of Justice in the case known as the College Pension Plan case, ruled that:

1. The fact that the claimant is a non-EU resident does not preclude the application of the free movement of capital
2. The refusal to apply the reduced 11% withholding tax rate to non-EU pension funds may constitute a prohibited restriction of the free movement of capital
3. The fact that the Italian pension system is based on an exempt-taxed-taxed system (“ETT system” meaning that contributions are deductible, return on investment is taxable and pension benefits – once paid – are taxable) and the US pension system is based on an exempt-exempt-taxed system (“EET system” meaning that contributions are deductible, return on investment is exempt, and pension benefits – once paid – are taxable) does not mean that US pension funds are not objectively comparable to Italian pension funds, and therefore cannot justify the restriction. According to the court, this is illustrated by the fact that most EU member states have an EET system, and that the co-existence of the two systems makes it clear it does not justify a different tax treatment.

The original decision of the Italian Court of Cassation can be found via this link: https://www.osservatorio-wealth.it/wp-content/uploads/2022/09/CASS.-CIV-ORD-N.-25963_22.pdf