On March 4, 2009 the EU Court of First Instance issued a judgment in Italy v. Commission (T-424/04), in which it ruled that Italy’s favorable tax treatment for special investment funds violates state aid rule of the EC Treaty.
Article 12 of Law Decree 269 of 2003 (converted into Law n. 326 of November 24, 2003) provides that collective investments funds which invest primarily in shares of small and mid-capitalized companies are subject to tax at the rate of 5 instead of 12.5 per cent. The reduced tax applies on the increase of the fund’s net asset value at the end of each tax year.
For the favorable tax treatment to apply, the following requirements must be met:
– the regulation of the fund must provide that at least two thirds of the fund’s assets are invested in shares of small and mid-cap companies regularly traded in EU securities market;
– the fair market value of the qualified shares owned by the fund must be equal to at least two thirds of the value of fund’s asset for more than one sixth of non consecutive days in each calendar year.
Small and mid-cap companies are defined as companies whose market value computed on the basis of the average share price on the last day of each quarter has not exceeded 800 million euro.
The European Commission on September 6, 2005 ruled that such favorable tax treatment violated the state aid provisions of article 87 of the EC Treaty and ordered the Italian government to collect the balance of the tax (7.5 percent) from the funds. The Italian government appealed the decision of the European Commission and the EU Court of First Instance rule in favor of the Commission and rejected the appeal.
The Italian government now can appeal the judgment to the Eurpean Court of Justice or accept the decision of the First Instance Court.
The small and mid-cap investment funds are not really common in the market; however, in the present situation the market capitalization of many companies has dropped as a result of the crisis, and such type of special investments funds could become more popular due to the favorable tax treatment now in question.
A similar judgment was issued on the same issues on the same date in the case Associazione italiana del risparmio gestito and Fineco Asset Management v. Commission (T-445/05).
Foreign investors resident or organized in qualifying jurisdictions are entitled to a refund equal to the tax charged upon the fund. If a higher tax is eventually collected from the fund, they would be entitled to a higher refund from the fund.