Italy: Withholding tax on dividends distributed to pension funds; possible refund opportunities

Italy: Withholding tax on dividends

The Italian tax authority issued a ruling to address the tax treatment of dividends distributed to pension funds participating in an “Authorized Contractual Scheme” (ACS).


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The ruling may provide an opportunity for withholding tax agents to seek a refund of the difference between the 26% rate of withholding tax levied domestically and an income tax treaty rate (such as the 15% withholding tax rate under the income tax treaty between Italy and the UK).

Ruling on withholding tax for dividend distributions

The Italian tax authority (Agenzia delle Entrate) issued Ruling no. 156 (28 May 2020) regarding the withholding tax applicable to dividends distributed by Italian entities to an ACS whose investors are UK pension funds. In requesting the ruling, a taxpayer asked the Italian tax authority whether:

  • Article 27(3) of Presidential Decree no.600/1973—which provides for an 11% withholding tax rate (instead of 26%) on dividends paid by Italian entities to pension funds set up in EU or EEA countries—could be applied to the ACS until the United Kingdom’s exit from the EU
  • Article 10(2) of the UK-Italy income tax treaty—which provides for a 15% rate of withholding tax (instead of 26%)—could be applied to the participating pension funds even after the United Kingdom’s exit from the EU

In the ruling, the Italian tax authority replied that on the basis of the withdrawal agreement between the UK and the EU (signed on 18 October 2019 and ratified on 30 January 2020), the UK will no longer be part of the customs and fiscal territory of the EU at the end of the transition period (31 December 2020). Therefore, if the UK and the EU do not sign an agreement before 31 December 2020, the UK will be considered a “third state” in its relationship with all the EU Member States.

Further, the tax authority continued to explain that in any event, the ACS cannot benefit from the 11% rate for pension funds or from the 15% rate of withholding tax under the UK-Italy income tax treaty. Rather, only the participating pension funds (and not the ACS itself) can benefit from this reduced treaty rate.

An ACS is a form of collective investment fund (similar to a communion of properties), held and managed on behalf of a plurality of investors who are co-owners of the assets. Therefore, an ACS does not qualify as a pension fund. It does not have a legal personality and, therefore, is not subject to tax and is fiscally transparent. The ACS in this ruling is managed by an asset management company that in turn manages the pooled assets of nine Midlands-based local government pension funds. The management company acts as the operator of the ACS collective investment vehicle.

Distinction for pension funds

Article 27(3) of Presidential Decree no. 600/1973 provides for an 11% withholding tax rate (instead of 26%) on dividends paid by Italian entities to pension funds established in EU or EEA countries. Therefore, based on the text of article 27(3), this relief provision does not refer to the ultimate beneficiaries of dividends (which in the ruling would be the pension funds participating in the ACS) but to the first recipient of the payment (the ACS). However, the ACS is not eligible for the 11% rate because it does not qualify as a pension fund. Therefore, Italian companies must apply the 26% rate of withholding tax on dividends paid to the ACS.

Similarly, ACS cannot directly benefit from the reduced rate of 15% established in the UK-Italy income tax treaty because the ACS cannot be considered a “resident person.” However, pension funds participating in the ACS may ask for the application of the reduced treaty rate if they satisfy all requirements under the treaty.

The Italian tax authority considers participating pension funds to be eligible for the tax treaty conditions because these funds are partnership partners (as interpreted by the commentary on Article 1 of the OECD Model Treaty). Therefore, pension funds may benefit from the treaty-reduced withholding tax rate if: (1) the income arising from the collective investments is allocated to each participant in proportion to the shares it owns, as if that participant had received the income directly, regardless of distribution; and (2) they are liable to income tax, even if exempt from having to pay such tax.

KPMG observation

Tax professionals have observed that this principle can be applied not only to pension funds but also to all entities that qualify for treaty benefits (e.g., certain types of investment funds).

In addition, the Italian tax authority specified that withholding tax agents are not obliged to apply the treaty rate (generally 15%)—meaning that, in many instances, foreign entities may have suffered (and will suffer in the future) the 26% rate of withholding tax on dividends distributed by Italian companies instead of the reduced income tax treaty rate, even if the entities have fulfilled the treaty requirements. Under these circumstances, withholding tax agents may want to consider filing a refund claim for the difference between the 26% domestic rate levied and the treaty rate.

Read a June 2020 report [PDF 156 KB] prepared by the KPMG member firm in Italy

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