The Enforcement of the Italy-US Agreement According to the Italian Supreme Court

The Supreme Court in Italy (“Corte di Cassazione” in Rome) rarely deals with Double taxation Agreements; however, last September, two important judgements were issued concerning the Italy-US Convention and which may influence the interpretation of many other Double taxation Conventions.

1. According to the Judgement 25698/2022, for capital income from foreign sources, directly received by the taxpayer as a natural person and holder of a non-qualified holding in a partnership under international law (in the case, US), if the taxation by means of withholding tax or by substitute tax takes place not “by the request of the recipient of the said income” but compulsorily, since the taxpayer cannot request ordinary taxation, the income tax paid in a foreign country (in this case, US) must be considered deductible in Italy (art. 23 par. 3 third period aforesaid Convention).

This is because the consistent interpretation of the phrase “by the request of the recipient”, which appears in the text of various international agreements (including in the text of the Italy-US Convention), confirms that when Italy intended to deny the tax credit – not only in cases where the element of income is subject to substitute tax, or withholding tax at source takes place at the request of the taxpayer, but also in cases where it is mandatory under Italian law – it expressly provided for it.

2. According to the Judgement 25963/2022, internal legislation (i. e. Art. 26 par. 3 of Presidential Decree 600/73), in providing for the application of a withholding tax of 11% instead of the ordinary rate of 27% only on profits paid to EU pension funds or those belonging to the European Economic Area (EEA), constitutes an undue restriction on the free movement of capital – under Art. 63 TFUE – insofar as it does not extend this tax treatment also to pension funds resident in the US.

The Supreme Court accepted the taxpayer’s reasons by establishing the illegality of the internal legislation with respect to the principle of free movement of capital in the absence of any suitable cause to justify this disparity. First of all, there would be no danger for the tax controls by the Italian Tax Administration, since by virtue of Article 26 of the Italy-US Double Taxation Convention, there is a reciprocal obligation to exchange information between the administrative authorities. Furthermore, contrary to what was asserted by the judgement of the previous instances, the difference in tax regimes (ETT-type vs EET) does not give rise to a difference in treatment, since an EET-type tax scheme is also provided for by EU Member States to which the 11% withholding tax is applied under Italian law.

By G. Balbi