The tax section of the Italian Court of Cassation has sanctioned in the very recent sentence of 1. September 2022 n. 25698/2022 how the right to a tax credit is effectively given for what is withheld by the foreign State in the context of the distribution of dividends to natural persons resident in Italy, holders of non-qualified shareholdings (and from 2018 onwards also for qualified ones) .
The sentence in question deals with a case concerning the payment of dividends by a US company to its shareholder resident in Italy recognizing the credit for taxes paid abroad on distributed dividends. By analogy, the principle also affects the relationship between Switzerland and Italy, and better in the case of the distribution of dividends from Swiss sources to an individual residing in Italy, where the Preventive Tax withheld in the amount of 35% by the AFC is recoverable in the Italian declaration only at a rate of 20%.
Previously, the Italian tax authority did not recognize its individual taxpayers the tax credit on the part of the conventional withholding tax that remained definitively in Switzerland, i.e. 15%. This is due to the fact that the taxation of dividends is subject, under Italian domestic law, to a substitute tax of 26%, exempting the recipient from the obligation to declare the dividend collected. In fact, Italian internal legislation provides that the tax credit for foreign taxes withheld definitively is allowed only where the income in question is the subject of a declaration by the taxpayer.
The Cassation has therefore established the principle according to which the conventional norms have a higher rank than the internal norms. Therefore, when the obligation to eliminate legal double taxation is foreseen in the Conventions to eliminate double taxation (the vast majority), the granting of the tax credit for foreign taxes, even where the relative income is subject to a substitute tax, must be recognized by the Italian tax administration.
With the sentence mentioned at the entrance of the Tax Section of the Court of Cassation, therefore finally a perfect alignment was achieved between (Italian) domestic law and the provisions of the related Convention against double taxation, thus allowing Italian taxpayers who are shareholders of Swiss companies to receive dividends due to them without any more conflicts with the higher law intended to exclude double taxation.
While waiting for the Agenzia delle Entrate to issue a special circular which implements the final judgment and makes the application of the principle established in the aforementioned sentence even simpler, the Arifida Team remains available for any need.
