Foreign tax credit to Italian resident shareholders in foreign companies

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Italian tax resident individuals holding non-qualified stakes in companies resident outside of Italy can receive dividends during the tax year, which are taxed at a flat rate of 26%.

Such profits are reported in Box RM12 – Section V gross of foreign taxes incurred in the source country (if the profit is received through a financial intermediary not resident in Italy) or net of foreign taxes (where the dividend is collected through an Italian bank).

26% substitute tax prevents the Italian shareholder from deducting the foreign tax credit because capital income is not included in the total income of the taxpayer, who cannot opt for ordinary taxation either: this issue ends up with an international double taxation as the taxpayer is affected by foreign tax (15% by Tax Treaty) and Italian tax (26% by internal rule).

In this context, sentence no. 25698 of September 1, 2022 of the Supreme Court, in recognizing the speciality of the Double Tax Treaty with respect to domestic legislation, has stated the following law principle:

For foreign source capital incomes, directly received by the taxpayer, by a natural person, by a holder of an unqualified shareholding in a partnership under international law (in this case, US), if being subject to a withholding tax (…) – takes place notat the request of the recipient of the income” but on a mandatory basis, since the taxpayer cannot opt for ordinary taxation, the income tax paid in a foreign country (in the case, United States of America) must be considered deductible “.

As this principle cannot be found in all Treaties, it is necessary to carefully analyze the wording of each Treaty, specifically art. 23, paragraph 2. For example, the Italy / Cyprus and Italy / Saudi Arabia Conventions do not entail any possibility of deducting foreign tax from the Italian substitute tax.

Foreign dividends subject to international double taxation can be found in:

  • foreign asset management held by individuals resident in Italy;
  • share plans of multinational companies signed by the employees of the Italian subsidiaries;
  • foreign equity investments.

The law principle in Sentence no. 25698 does not itself imply the timeliness of foreign tax refund in relation to previous years (from 2018 to 2021) but still leaves a chance to the taxpayer to submit a specific appeal for reimbursement to the competent Revenue Agency as there is no space in the tax return reserved to this type of credit.

Because Italian intermediaries which apply 26% withholding are not able to find out the amount of the gross dividend decided, as well as the amount of foreign taxes definitively paid in the source country, the taxpayer will have to proceed on his own.

This being premised, our Firm is available to carry out the following professional activities:

  • analysis of the Treaty against double taxation
  • estimate of the foreign tax paid on foreign dividends
  • calculation of the amount potentially object of reimbursement
  • preparation of the appeal for reimbursement
  • follow up with the Revenue Agency
  • finalization of the reimbursement phase

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