Foreign dividend taxation is one of the most complex topics in the Italian tax landscape, particularly regarding the double taxation that continues to affect Italian investors. Recent judicial interventions, culminating in rulings by the Italian Court of Cassation and the Tax Justice Courts (Corti di Giustizia Tributaria, CGT), have opened new opportunities for investors experiencing double taxation on foreign dividends. However, despite favorable court rulings, the scenario remains uncertain due to potential countermeasures being considered by the Italian Revenue Agency.
Introduction to Foreign Dividend Taxation
Foreign dividends are a form of income derived from shares in non-resident companies—those with legal and tax residence in a country different from the investor’s. These dividends represent a portion of the profits generated by the company and distributed to shareholders.
For tax purposes, dividends are classified as capital income, and in Italy, they are subject to specific taxation rules. These rules vary depending on:
- The nature of the recipient (individual or corporate investor)
- The country of residence of the paying company
- The existence of international double taxation treaties between Italy and the dividend’s country of origin
The growing interest in foreign dividends, driven by globalization in financial markets, has created a need to clarify the key tax aspects for Italian residents receiving these payments. Avoiding double taxation—i.e., paying taxes both in the country of the dividend and in Italy—is one of the main challenges. This article provides a detailed overview of the applicable national and international rules and highlights practical issues investors may face.
Foreign Dividends Received by Individuals: Current Legal Framework
Under Italian tax law, foreign dividends received by individuals are classified as capital income. Article 44 of the Italian Income Tax Code (TUIR) includes “profits derived from participation in the capital or assets of companies subject to corporate income tax (IRES)” among capital income. This applies to both Italian and foreign dividends.
When the recipient is an individual, there are two main scenarios:
- Individual engaged in a business activity: Foreign dividends are considered part of business income and taxed accordingly.
- Private individual: Foreign dividends are treated as capital income, subject to the taxation regime applicable to this income type.
Taxation of Foreign Dividends for Private Individuals
Italian tax law stipulates that dividends received by private individuals, whether qualified or non-qualified shares, are subject to a 26% withholding tax. This is regulated under Articles 44 and 45 of the TUIR.
Qualified Participation: Definition and Tax Implications
A participation is considered qualified if the shareholder holds:
- More than 25% of voting rights, or
- More than 25% of the share capital
From a taxation perspective, however, there is no significant difference between qualified and non-qualified participation regarding foreign dividends for Italian resident individuals. Both are taxed at 26%.
Foreign Dividends and Double Taxation: Withholding Tax and International Treaties
When a foreign company distributes dividends to an Italian tax resident, a withholding tax may apply in the source country. This is common worldwide, and rates vary depending on local laws and the existence of bilateral double taxation treaties (DTTs).
These treaties typically establish that dividends paid to foreign residents can be taxed in the investor’s country of residence, with a withholding tax usually capped at 15%. Without a treaty, the withholding can be significantly higher—for example:
- Denmark: 27%
- France: 25%
- Germany: 26.375%
- Switzerland: 35%
Bilateral treaties with Italy often reduce or exempt foreign withholding tax to prevent double taxation. If double taxation still occurs, Italian residents can claim a tax credit for foreign taxes paid.
Tax Base for Foreign Dividends
Determining the tax base for foreign dividends is crucial. Article 59 of the TUIR provides different rules depending on whether an Italian tax intermediary is involved.
- With Italian intermediary (Withholding Tax at Source): Article 27 of DPR 600/73 stipulates a 26% withholding tax on the “net dividend,” i.e., after foreign taxes, avoiding double taxation.
- Without Italian intermediary (Substitute Tax): The taxpayer declares the dividend and pays a 26% substitute tax. In this case, the net dividend concept may not automatically apply, potentially increasing the taxable base.
Circular 9/E of 2015 clarified that foreign dividends without an intermediary should be treated like those with an intermediary, allowing taxpayers to apply the tax credit for foreign taxes already paid.
Even with the “net dividend” system, some degree of double taxation may still occur.
Recent Jurisprudence: Court of Cassation and CGT Decisions
Recent Court of Cassation rulings (No. 25698/2022 and No. 10204/2024) represent a turning point in addressing double taxation on foreign dividends. These rulings allow taxpayers to claim tax credits in Italy for foreign taxes paid.
For instance, in cases involving US dividends, the Court clarified that if the taxpayer cannot choose a different taxation regime (as per Article 18 TUIR), the foreign tax paid is fully deductible. This principle was confirmed by subsequent Tax Justice Court (CGT) rulings in Verona (No. 423/2023) and Siena (No. 68/2024).
Complexity of the Refund Procedure
Although claiming a foreign tax credit is a right under treaties and case law, the refund procedure is cumbersome. Italian investors must first navigate the foreign country’s bureaucracy and then request recognition of the credit from the Italian Revenue Agency. This complex process often discourages taxpayers, leaving billions in foreign tax collections.
Potential Countermeasures by the Italian Revenue Agency
Despite favorable jurisprudence, Italy may modify bilateral treaties to limit or eliminate tax credit rights, protecting national tax revenue from foreign dividends.
Conclusion
Given recent court rulings and potential countermeasures, Italian investors receiving foreign dividends should be fully informed of their rights. Jurisprudence has opened a path to mitigate double taxation, but the regulatory landscape could change.
Consulting an international tax lawyer is highly recommended to navigate complex procedures, avoid double taxation, and prevent future audits by the Italian Revenue Agency.
