Italian dividends, stop tax discrimination for foreign entities (cross-border guide)

Context

Foreign entities pursuing purposes similar to those of Italian foundations or non-commercial entities cannot be subject to a more burdensome tax treatment on Italian source dividends for the sole reason that they are constituted according to a different legal system. Comparability must be assessed on the basis of the function actually performed and not on the legal form adopted. The legal form cannot become an obstacle to the free movement of capital. This is the principle affirmed by the Court of Cassation with judgment no. 16281/2026, intended to affect the tax treatment of foreign entities investing in Italy. For the judges of legitimacy, the tax authorities cannot reserve a less favourable regime for a foreign entity only because it is organised according to rules different from those provided for by Italian law. Specifically, the dispute arose from the request for reimbursement of the higher withholdings applied to dividends distributed by Italian companies to a foreign charity.

Operational details

The Financial Administration had denied the reimbursement arguing that the subject was not similar to an Italian foundation, enhancing the different legal structure and the different tax regime in force in the State of residence. A thesis also shared by the judges of merit. However, the Supreme Court of Cassation, recalling the principles of free movement of capital and non-discrimination enshrined in the Treaty on the Functioning of the European Union, stated that the comparability judgment cannot be built on the legal status of the entity. What matters is the function actually performed. If a foreign entity pursues charitable and general interest purposes similar to those of a foundation or an Italian non-commercial entity, it is entitled to be assessed according to the same tax criteria.

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Key points

The tax treatment reserved to the entity in the country of residence is also irrelevant. The possible tax exemption recognized abroad does not in fact legitimize a more burdensome taxation in Italy, because such a difference in treatment would end up discouraging cross-border investments and violating the principle of non-discrimination. The decision thus goes beyond a merely formal reading of the tax rules and confirms a substantial approach, in which the purposes pursued by the entity prevail over the legal scheme used. This is for all intents and purposes a principle intended to be reflected not only on trusts, but also on foundations and other foreign entities that hold shares in Italian companies, strengthening the guarantees offered by European Union law to international institutional investors.

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