With judgement no. 25698 of 1 September 2022, the Italian Supreme Court made important clarifications concerning the income tax treatment of foreign dividends perceived by Italian resident individuals.
As a matter of fact, the Italian Supreme Court has ruled the possibility for an Italian resident individual to benefit from the foreign tax credit granted on the basis of a Double Tax Treaty and in relation to the income perceived from a foreign entity, even if such income is taxed in Italy by way of a withholding tax or a substitute tax.
In particular, according to the Italian judges, as far as foreign dividends are concerned, a credit for taxes paid abroad must be granted insofar as the wording of the Tax Treaty states that no deduction shall be granted if the income is subject (in Italy) to a final withholding tax by request of the recipient. Indeed, pursuant to the Italian law, the withholding tax applies to dividends on a mandatory basis and not by virtue of a request of the taxpayer.
In light of the clarifications at hand and considered that the same wording as that mentioned above has been adopted in the majority of the Treaties concluded between Italy and third Countries, it will be in principle possible for many Italian resident taxpayers to benefit from a credit for taxes paid abroad in relation to foreign dividends.
The case under consideration
The judgment under consideration involved an Italian resident taxpayer who owned a shareholding in an US partnership (considered as opaque for Italian income tax purposes) and who had, inter alia, offset the Italian substitute tax due on the income deriving from the US partnership with the taxes paid abroad on such income.
The Italian Revenue Agency had considered as unlawful the above compensation made by the taxpayer.
Italian tax law provisions
According to Italian tax law, income perceived by Italian resident individuals from non-qualifying shareholdings (and, as of 2018, also from qualifying shareholdings) is subject to a 26% withholding tax applied by the Italian intermediary who intervenes in the collection of the income or, in the lack of an Italian intermediary, a 26% substitute tax liquidated in the tax return of the taxpayer.
Pursuant to article 165 of the Italian Income Tax Code (“TUIR”), a tax credit for taxes paid abroad is granted to the Italian resident taxpayer, to the extent that the income taxed abroad flows into the overall taxable base of the taxpayer. Such a condition is not fulfilled in case a withholding tax or a substitute tax applies.
It follows that under domestic law, a foreign tax credit is not granted to the individuals who perceive income from the participation in foreign companies. The only relief granted to the taxpayer in this scenario is the possibility for the latter to deduct from the taxable base on which the withholding tax is applied, the income taxes paid abroad (however, in the interpretation of Italian tax Authorities, such a relief is only available if an Italian intermediary intervenes in the collection of the income).
Double tax treaty provisions
Article 23 of the Double Tax Treaty Convention in force between Italy and the United States, in line with the most part of Treaties stipulated by Italy with other Countries, states that Italy shall allow the deduction from the taxes due in Italy of the levy on income paid to the United States. However, article 23 continues stating that no deduction shall be granted if the item of income is subjected in Italy to a final withholding tax by request of the recipient of the said income in accordance with Italian law.
As clarified by the Italian Supreme Court in the judgement no. 25698 of 1 September 2022, from the wording of the above Tax Treaty provision, it can be a contrario derived that the tax credit cannot be granted by Italy only if the withholding tax or substitute tax applies as a result of a request of the taxpayer and not when the levying of a withholding tax or substitute tax is compulsory ex lege.
In light of the above, it follows that if a Treaty exists between Italy and the source Country of the dividends, and that the provisions of the Treaty are likewise those included in the Convention between Italy and the United States, the Italian resident individual will be able to benefit from the foreign tax credit for taxes paid abroad pursuant to the Convention.
On the contrary, Italian taxpayers will not in any case be able to benefit from the credit for foreign taxes on dividends if the wording adopted by the Treaty applicable is designed as in one of the following two ways:
- no deduction shall be granted if the item of income is subjected in Italy to a final withholding tax, also by request of the recipient of the said income, or alternatively
- no deduction shall be granted if the item of income is subjected in Italy to a final withholding tax, whether at the request of the recipient or otherwise.
Hierarchy of sources in the Italian tax law
On the basis of article 75 of Presidential Decree no. 600 of 1973, conventional provisions prevail over domestic provisions if more favorable. However, according to article 169 of TUIR, the provisions of TUIR apply as an exception to conventional provisions, if more favorable for the taxpayer.
That said, as far as the judgement no. 25698 of 1 September 2022 is concerned, it can be implicitly understood that the judges applied the abovementioned article 75 of Presidential Decree no. 600 of 1973 with the result that the foreign tax credit, although not applicable according to Italian tax law, has been granted on the basis of the Tax Treaty between Italy and the United States.
Documentation to be provided for benefitting from the tax credit
Judges have clarified that, in order to benefit from the foreign tax credit at issue, the taxpayer has to prove the payment of foreign taxes through the following documentation:
- tax return filed in the foreign Country (if required by the law of the foreign Country) and
- a certification released by the foreign Tax Authority that gives proof of the payment of the taxes or, alternatively, a certification released by the subject which has distributed the income, together with a receipt of payment of taxes paid abroad by the same subject or the evidence that, on the basis of the foreign law, the same subject is obliged to such payment.
Edited by Lodovico Bolis
 Granted on the basis of the Treaty in force between Italy and the source Country of the dividends considered.
 Please note that a different regime applies if the participated entity is established in a low-tax jurisdiction referred to in article 47-bis of the Italian Income Tax Code (“TUIR”).
 As already mentioned, the wording of the majority of the Treaties entered into between Italy and third Countries is the same as that adopted in the Treaty between Italy and the United States, with the result that it will be in principle possible for many Italian resident taxpayers to benefit from a credit for taxes paid abroad in relation to foreign dividends.
 This is the case, inter alia, of the Treaties and Agreements stipulated between Italy and the following Countries: Cyprus, Malta, Saudi Arabia, Singapore and the Principality of Monaco.