The draft 2021 Budget Law - still subject to further analysis and to be discussed by the Italian Parliament over the next month - includes new favourable tax provisions applicable to EU and EEA foreign investment funds (other than real estate funds) for Italian-sourced dividends and capital gains.

Based on the Italian tax provisions currently in force, dividends distributed by an Italian resident company to a foreign investment fund are in principle subject to a final withholding tax of 26%. Similarly, capital gains realized by a foreign investment fund upon the disposal of a "qualifying equity interest" 1 in an Italian resident company are currently subject to tax in Italy with a 26% substitute tax. Both dividend withholding tax and capital gain tax could be reduced (up to nihil) according to the applicable provisions of double tax treaties, provided that the foreign investment fund is entitled to claim the treaty protection.

On the basis of the proposed provisions contained in the draft 2021 Budget Law, qualifying foreign investment funds will be entitled to:

  • full exemption from dividend withholding tax on distribution of profits from Italian resident companies;
  • capital gain tax exemption on the disposal of Italian qualifying equity interests.

In order to benefit from the proposed favorable tax treatment, foreign investment funds should be established either (i) in accordance with Directive 2009/65/EC (UCITS Directive); or (ii) in an EU Member State or in an EEA Member State allowing for an adequate exchange of information for tax purposes, and whose manager is subject to regulatory supervision in the country where it is established pursuant to Directive 2011/61/EU (AIFM Directive).

In summary, if approved, the new law provisions will extend the dividend and capital gain exemptions currently provided for Italian funds to the above qualifying EU/EEA funds, including AIFs, thus avoiding the risk of possible infringement procedures by the European Commission pursuant to the EU non-discrimination principles.

If the draft 2021 Budget Law is approved in the current version, the new exemptions for EU/EEA qualifying funds should be applicable to dividends paid and qualified capital gains realized as from the entry into force of the same 2021 Budget Law (likely 1 January 2021).


1 Shares constitute a "qualifying interest" if they attribute to the holder a percentage of voting rights higher than 20% (or 2% in case of listed companies) or represent a percentage of share capital higher than 25% (or 5% in case of listed companies).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.