Mutual funds give investors an opportunity to participate in diversified investment holdings and access to professional managent on the face of a relatively small investment.
The Italian tax treatment of domestic mutual funds is designed to provide portfolio investors with the same tax treatment they would receive if they owned directly the same investments that are held by the fund.
Under Italian law, when an Italian resident individual investor invest in portfolio stocks or bonds she is subject to tax at a preferential rate of 12.5% on the dividends or interest received or gain realized from her investments.
If the investment is carried out through an Italian mutual fund the tax rate of 12.5% is charged upon the fund. The tax is computed on the increase of the net asset value of the fund at the end of the tax year. No tax applies to the investor upon distribution of the income from the fund or redemption of fund shares.
If the investment is carried out through a foreign fund that is established and managed in accordance with the EU rules and regulations ("EU regulated fund"), the 12.5% tax is applied to the Italian investor at the time of the receipt of the income from the fund through distribution or redemption (or sale) of fund shares.
If the investment is carried out through a foreign unregulated offshore fund, the income from the fund is included in the investor's income tax return when received (through distribution of fund profits or redemption or sale of fund shares) and subject to tax as ordinary income at the investor's marginal rate.
In case of investments in foreign stock and bonds, usually the dividends, interest or gains are subject to withholding tax in the foreign country at source, but the foreign withholding tax rate is reduced or eliminated under the tax treaty in effect between the foreign country and Italy as the investor's country of residence. The Italian resident investor is then subject to tax on the net amount received at the flat rate of 12.5% with no credit for the foreign withholding tax.
The same treaty benefits should apply whenever the same investments are held through a fund. However, the application of treaty benefits in that case may be controversial whenever the investor, by carrying out the investment through the fund, is able to defer the tax on the profit of the fund in her own country of residence or change the character of the income and benefit from the preferential rate that would otherwise not be applicable if she held the investment directly.
As a result, the application of the treaty benefits in case of investment through collective investment funds depends to a great extent upon the way in which the fund and its investors are taxed in the country of organization of the fund or the investors' country of residence.
In the brief overview of Italian tax treatment of Italian mutual funds and Italian mutual funds investors that we attach herewith (Italian Taxation of CIV and Treaty Benefits.pdf) we would like to offer a background for a possible further discussions of the issue from the perspective on Italian law.