Taxation on international dividends can be a complex web of regulations and treaties, often leaving taxpayers scratching their heads. However, a recent landmark decision by the Italian Supreme Court has shed light on an important aspect of this intricate system: the granting of foreign tax credits on dividends subject to domestic withholding tax. In this blog post, we’ll delve into the nuances of this ruling, its implications for Italian residents, and the practical steps individuals can take to navigate international dividend taxation more effectively. Note: this article does not apply to US citizens.
Understanding the Taxation Process
Before we dive into the specifics of the Supreme Court’s decision, let’s first understand the basic taxation process for international dividends. When an Italian resident receives a dividend from a foreign company, they are subject to taxation in both the country where the company is based (the source state) and in Italy (their country of residence). This means that dividends can be subject to multiple layers of taxation, potentially resulting in a hefty tax burden for the recipient.
The Role of the Italian Withholding Tax Scheme
One of the key components of international dividend taxation is withholding tax scheme in Italy. In the source state, the foreign company distributing the dividend typically withholds a certain percentage of the dividend amount as tax. This withholding tax rate can vary but is often capped at a maximum rate, as specified in double tax treaties between countries. In Italy, on the other hand, there is a final withholding tax of 26% applied to the net amount of the dividend received. (Instead of going into your regular Italian income tax brackets)
The Total Tax Burden
When we consider both the withholding tax applied by the source state and the final withholding tax applied in Italy, the total tax burden on dividends can be substantial. For instance, if the source state applies a 15% withholding tax, and Italy applies a 26% final withholding tax, the total tax burden on the dividend would be 37.10%.
Historical Perspective on Double Tax Treaties
In the past, Italy’s double tax treaties did not always grant a foreign tax credit to taxpayers who opted for the final withholding tax instead of ordinary taxation. This meant that individuals who chose the final withholding tax option could end up paying higher taxes on their foreign dividends, without the benefit of a tax credit to offset the foreign taxes paid.
The Supreme Court’s Decision
However, with the recent decision of the Italian Supreme Court (decision no. 25698 of September 1, 2022), a significant shift has occurred in the landscape of international dividend taxation. The Supreme Court recognized the need to grant the foreign tax credit on dividends, due to the existence of treaties with newer wording that excludes the credit, and the lack of option for Italian resident to elect normal income taxation scheme for foreign dividend payment. This decision marks a significant step towards ensuring fairer taxation for Italian residents receiving foreign dividends.
Practical Implications for Taxpayers
Now that we’ve explored the background and context of the Supreme Court’s decision, let’s discuss its practical implications for taxpayers. Firstly, it’s essential to understand how this decision will apply to future dividend distributions. While the exact implementation may still be uncertain, individuals should stay informed and seek professional advice to navigate any changes effectively.
Furthermore, individuals who have paid withholding taxes on dividends in the past may be eligible for refunds. By filing an application for refund, taxpayers can claim back the difference between the withholding tax paid in Italy and what should have been paid after deducting the foreign tax. This presents an opportunity for individuals to recoup overpaid taxes and optimize their tax liabilities.
Impact on Dividends Collected Without a Resident Intermediary
It’s worth noting that dividends collected without the intervention of a resident intermediary may have higher refund amounts. According to the Revenue Agency, the withholding tax should have been applied to the gross amount of the dividend instead of the net amount. Therefore, individuals in this situation should carefully review their tax filings and consider seeking refunds for any overpaid taxes.
Summary
The Italian Supreme Court’s decision to grant the foreign tax credit on dividends represents a significant development in the realm of international dividend taxation. This decision not only promotes fairness and equity but also provides taxpayers with opportunities to optimize their tax liabilities and seek refunds for overpaid taxes. Moving forward, individuals should stay informed about any changes in tax regulations and seek professional advice to navigate the complexities of international dividend taxation effectively.
And of course..
The information provided is for general understanding only. It’s highly recommended to consult with a tax professional who can analyze your specific situation and advise you on the best option for maximizing your tax benefits when dealing with foreign taxes.
