In 2005 Italy implemented the EU Interest and Royalties Directive with Legislative Decree No. 143/2005 restricting its scope of application to interest and royalty payments accrued (i.e. having become payable) on or after 1 January 2004 with the aim to prevent fraud and tax evasion by intentionally delaying payments.

The European Commission regarded the restriction disproportionate and filed at the beginning of January 2007 a formal request to the Italian Government to implement the Directive correctly.

Italy complied with the request of the Commission by amending on 7 February 2007 the wording "interest and royalty payments accrued on or after 1 January 2004" into "interest and royalty payments having become payable on or after 1 January 2004" in Legislative Decree No. 142/2005.

Discriminatory Rules for "Outbound Dividends"

Italy did not undertake any actions in respect to the discriminatory taxation identified by the European Commission on "outbound dividends". Thus the Commission referred the case to the ECJ for judgement. Based on art. 27 of the Presidential Decree no. 600/1973, dividends paid to a non-resident company are subject to a withholding tax of 27% (for dividends paid to savings shareholders, the rate is reduced to 12.5%), whereas the one paid to resident companies to a withholding tax of only 1.65%. The unequal tax treatment is only eliminated when "outbound dividends" are subject to the Parent-Subsidiary Directive or if the Double Tax Treaty applicable grants a tax credit equal to the withholding tax levied.

Implications for Investors

Withholding tax unduly levied on interest and royalties shall be reimbursed by the Italian entity to the non-resident in cash; the entity will reclaim the withholding tax from the Italian tax authorities through the "compensation system" (i.e. the Italian entity will compensate any tax debits with the withholding tax credit).

If Italy has to abolish its discriminatory rules regarding withholding tax levied on "outbound dividends" then this will have a consequence for all "outbound dividends" received by European investment funds and European pension funds.

PWC

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