New tax reliefs in Italian 2021 budget law boost investments of European investment funds into Italian companies

The draft version of the 2021 Italian budget law ('the draft 2021 BL') includes provisions providing for new tax reliefs that should significantly facilitate the investment of European investment funds into Italian companies.

In particular, under the draft 2021 BL, non-Italian undertakings for collective investments compliant with the UCITS IV Directive (EU Directive 2009/65/EC) and undertakings for collective investments not compliant with UCITS IV having a manager subject to regulatory supervision in the foreign country of establishment in accordance with AIFMD (EU Directive 2011/61/EU) established in EU or EEA states that allow for exchange of information are entitled to:

• a full dividend withholding tax exemption on Italian source dividends; and
• a full capital gains tax exemption on the disposal of Italian shares. The draft 2021 BL expands the scope of application of Italian capital gains tax exemptions. 

The draft 2021 BL does not include any provision dealing with withholding tax treatment of intra-group interest. However, intra-group loans granted by an EU investment fund to an Italian subsidiary should already benefit from a full withholding tax exemption on interest, in accordance with domestic Italian tax laws (Ruling 76/E of 12 August 2019), if certain conditions are met.

The new provision is intended to align the tax treatment applicable to Italian investment funds (which are fully exempt from income tax) with the tax treatment applicable to EU investment funds.

The new piece of legislation is in line with the approach adopted by the European Court of Justice on case law dealing with tax regime applicable to dividends collected by investment funds, such as Aberdeen Property Fininvest Alpha Oy (Case C-303/07), Santander Asset Management SGIIC SA (Joined Cases C‑338/11 to C‑347/11), EC v. Kingdom of Belgium (Case C-387/11), Emerging Markets Series of DFA Investment Trust Company (Case C-190/12), Fidelity Funds, Fidelity Investment Funds, Fidelity Institutional Funds (Case C-480/16) and Köln-Aktienfonds Deka (Case C-156/17).

The tax treatment of EU investment funds has also been recently addressed by an infringement procedure opened by the European Commission (EC) (see the October infringements package: key decisions). The EC has requested that France amends its legislation on the taxation of capital gains made by foreign investment funds to avoid any discrimination between French and foreign investment funds (Article 49 of TFEU on the right of establishment and Article 63 of TFEU on the free movement of capital), as such discrimination dissuades foreign investment funds from investing in French companies.

The new measure – if approved in its current version – should apply to dividends paid and capital gains realised as of 1 January 2021.