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New proposed rules on dividends and capital gains for funds investing into Italy

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Valentina Barbanti

PSL Counsel


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24 November 2020

The amendment is included in a first draft of the Italian Budget Law for 2021 to be discussed by the Italian Parliament during the next month.

Based on a first draft of the Italian Budget Law for 2021 the Italian government is proposing an amendment to Article 27 of Italian Presidential Decree No. 600 of 29 September 1973 in order to provide that Italian-source dividends paid to collective investment funds compliant with Directive 2009/65/EC (“UCITS”) or alternative investment funds managed by managers subject to supervision under Directive 2011/61/EU (“AIFs”), incorporated in an EU Member State or in a State belonging to the European Economic Area (“EEA”) that allows an adequate exchange of information with Italy, are exempt from Italian withholding tax. A similar exemption regime will be provided, according with the draft Budget Law for 2021, also to capital gains realised by these entities from so called “qualified participations” in Italian companies.

The draft Budget Law will be discussed by the Italian Parliament during the next month. Accordingly, it cannot be completely excluded that the relevant provisions may be modified or cancelled. Once approved by the Parliament, the provision will become effective following publication of the law in the Italian Official Gazette.


According to Article 27, paragraph 3, of Italian Presidential Decree No. 600 of 29 September 1973, dividends distributed by Italian companies to their foreign shareholders are taxable upon distribution by way of a withholding tax (“WHT”) at a 26% statutory rate(1). 

Under domestic tax law, a number of reliefs is currently provided in order to reduce the tax burden suffered by foreign investors on outbound dividends. In this sense, the WHT may be reduced to 11%, if dividends are distributed to pension funds incorporated in EU Member States or in States belonging to the EEA and exchanging information with the Italian tax authorities. Also, the WHT rate may be further decreased to 1.2% if the dividends are paid to companies resident and subject to corporate income tax in another EU or EEA country that allows an adequate exchange of information with Italy. Finally, if all the requirements provided for by EU Parent-Subsidiary Directive are met, no WHT is levied on the outbound flow of dividends. Alternatively, the provisions of bilateral treaties against double taxation entered into by Italy may apply, providing a reduced rate of WHT (in most cases 15%) to the extent the recipients are entitled to the relevant benefits.

However, as at today, no specific exemptions are provided on dividends paid to foreign collective investment schemes that, as a consequence, are generally subject to the WHT at the 26% statutory rate (also considering the difficulties that, in certain circumstances, may emerge in the application of the provisions of double taxation treaties to this type of entities).

This has led many authors to claim evident discrepancies with the tax treatment of dividends distributed to domestic collective investment funds which, on the contrary, benefit from a full exemption from any taxation at source. This different tax treatment, which has been considered as a discrimination of the EU undertakings for collective investment, has raised serious doubts of the compatibility of the domestic provisions with EU law in the recent past.

Proposed amendments – Dividends

According with the proposed amendments to Article 27 of Italian Presidential Decree No. 600 of 29 September 1973, dividends paid by Italian resident companies to EU- or EEA-based UCITS or AIFs would be exempt from Italian WHT.

Proposed amendments - Capital gains

A similar exemption regime would be also provided for capital gains realised by the same entities in relation to so called “qualified participations”(2) in Italian companies that are currently subject to a substitutive tax at the 26% statutory rate (capital gains on non-qualified participations are currently exempt from Italian tax if realised by white-listed non-Italian resident shareholders).


Assuming the above changes will be implemented, we expect a significant impact on, inter alia, investment funds structures (e.g. private equity funds etc.) which, currently, rely on EU-based corporate sub-holdings as vehicles to hold Italian participations and which could benefit from an alternative structuring setting for these purposes.

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