With the important decision no. 25698 of September 1, 2022, the Supreme Court recognized the right of Italian resident individuals receiving foreign dividends to deduct the taxes levied by the source state from the 26% final withholding tax due in Italy.
An individual resident in Italy who receives a dividend from a foreign source is first subject to tax in the foreign state where the company distributing the dividend is resident (state of source) and then is also taxed in Italy (state of residence).
In the source state the dividend is generally subject to a withholding tax up to 15% (i.e. the maximum rate usually allowed by double tax treaties).
In Italy, the bank involved in the receipt of the dividend levies a 26% final withholding tax on the net amount of the dividend.
In essence, assuming a dividend of 100, 15 will be the withholding tax applied by the source state and 22.1 (85 * 26%) the Italian final withholding tax, resulting in a total tax burden of 37.10% of the dividend (15 + 22.1 = 37.1).
Most of Italy's double tax treaties still contain the old wording according to which no foreign tax credit is granted to the taxpayer who chooses to subject his foreign source income to a final withholding tax instead of ordinary taxation (with progressive individual income tax rates).
However, in the current tax system, dividends cannot be subject to income taxes at progressive rates and therefore they are always subject to the 26% withholding tax.
For this reason, for some time authors have been calling for the granting of the foreign tax credit on dividends distributed by companies resident in states with which Italy entered into tax treaties that exclude the foreign tax credit only in the case the final withholding tax is opted by the taxpayer.
With this decision, the Supreme Court has finally recognized this principle, relying – among other things – precisely on the fact that some more recent tax treaties signed by Italy provide for a different wording that excludes in any case the foreign tax credit on dividends.
It now remains to be ascertained how the principles ruled by the Supreme Court will apply in practice to future dividend distributions. Indeed, the tax return does not allow to deduct foreign taxes in case the income (the dividend) is not included in the total income subject to individual income tax.
As far as the past is concerned, however, for withholding taxes paid in the last 48 months, it is certainly advisable to file an application for refund to claim the refund of the difference between what was levied in Italy (22.1) and what should have been levied after full deduction of the foreign tax (26-15=11).
The amount to be asked for refund will be even higher for dividends collected without the intervention of a resident intermediary: in this case, according to the Revenue Agency, the 26% withholding tax had to be levied on the gross amount of the dividend instead of on the net amount.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
