Introduction

The taxation of outbound dividends has been the subject of intense litigation in Italy and across Europe, particularly where non-E.U. entities are treated less favorably than similarly situated EU-based or domestic recipients operating in similar circumstances. Recent rulings by Italian courts following the European Court of Justice (ECJ) confirm that withholding tax on dividends paid to foreign companies, pension funds, and investment funds cannot exceed the effective tax rate applied to comparable domestic recipients. This principle, grounded in Article 63 TFEU on the free movement of capital, has become a cornerstone for refund claims and future litigation.

Italian Legal Framework

The taxation of outbound dividends in Italy rests on a mix of domestic law, EU directives, and bilateral tax treaties:

  • Domestic law: Under Legislative Decree No. 239/1996 and Presidential Decree No. 600/1973, outbound dividends are generally subject to a 27% withholding tax, unless reduced by a tax treaty or EU law (Parent-Subsidiary Directive).
  • Domestic corporate recipients: Article 89 of the TUIR provides the participation exemption regime, whereby 95% of dividends received by Italian companies are exempt, and the remaining 5% is taxed at 24%, yielding the 1.2% effective rate. This 1.2% has become the benchmark in equal-treatment litigation.
  • EU Parent–Subsidiary Directive (2011/96/EU): It eliminates withholding taxes on qualifying dividends paid to eligible EU parent companies, subject to minimum shareholding and holding period, and anti-abuse rules.
  • Tax treaties: For non-EU shareholders, Italy’s treaties often reduce withholding tax to 5% on qualifying corporate shareholdings.
  • Pension funds and investment funds: EU/EEA funds often enjoy exemptions or reductions, while non-EU funds have historically faced higher withholding — a disparity now challenged under Article 63 TFEU.

This framework sets the stage for understanding why courts have intervened to correct discriminatory tax treatment.

This framework sets the stage for understanding why courts have intervened to correct discriminatory tax treatment.

Italian Tax Court of Pescara

A recent decision of the Tax Court of Pescara (n. 509/2024 issued on September 19, 2024) highlighted this principle. In this case, the taxpayer, a US corporate shareholder of an Italian company, suffered a 5% dividend withholding tax under the Italy–U.S. tax treaty and claimed a refund on the grounds that Italian corporate shareholders are effectively taxed at only 1.2%. The court agreed, ruling that the withholding tax applicable to foreign corporate shareholders cannot exceed the 1.2% benchmark applied to Italian companies under the participation exemption regime. This case follows the reasoning of the ECJ in recognizing that higher taxation of outbound dividends constitutes a restriction on the free movement of capital in violation of the EC Treaty.

Italian Supreme Court on Dividends to Foreign Pension Funds

On September 2, 2022, the Italian Supreme Court issued its ruling n. 25963 in which it had applied the same principle to dividends paid to a U.S. pension fund. While the treaty rate was 15%, EU/EEA pension funds would have faced an effective tax burden of 11%. The Court held that the U.S. pension fund was entitled to a refund of the 4% excess, reaffirming that outbound dividends cannot be taxed more heavily than comparable domestic or EU/EEA recipients. The ruling extended the reach of Article 63 TFEU to non-EU pension funds in comparable situations, confirming its broad protective scope.

Italian Supreme Court on Dividends to Foreign Investment Funds

On July 6 2022, the Italian Supreme Court (decisions No. 21454, 21475, 21479, 21480, 21484, 21482/2022) ruled that a withholding tax on dividends paid by Italian resident companies to investment funds established in non-EU/EEA countries, charged at a higher rate that the withholding tax that would apply to a dividend paid to similarly situated Italian investment funds resulted in a in a discriminatory treatment that represented an infringement of the EU principle of free movement of capital.

The US funds receiving dividends were subject to a 15% withholding tax under the double taxation treaty between Italy and the US. In the same period, Italian investment funds were subject to a 12.5% tax on their operating results and were not subject to withholding tax on dividends.

European Court of Justice: Credit Suisse (C‑601/23)

The ECJ ruling issued on December 19, 2024, in the case C‑601/23 concerned dividends paid by a company established in the Basque region of Spain to Credit Suisse, a Swiss resident. Spain applied a withholding tax which, for domestic recipients, was only an advance payment of corporate income tax and refundable if no underlying corporate tax was due (e.g., due to tax losses). For non-resident recipients, however, the withholding tax was final, with no refund mechanism. Credit Suisse, having losses in Switzerland, could not recover the tax. The ECJ held that this difference in treatment constituted a restriction on the free movement of capital under Article 63 TFEU. The Court emphasized that such discrimination is prohibited regardless of whether the recipient is in the EU or a third country, and its ruling is binding on all EU Member States’ tax courts.

European Court of Justice: Foreign Investment Funds (C‑602/23)

The ECJ ruling issued on April 30, 2025, in the case C‑602/22 dealt with a matter involving dividends paid by an Austrian company to an American investment fund (Franklin Templeton) on which a 25% withholding tax was applied in Austria. Franklin claimed the refund of the withholding tax on the ground that, in a similar situation, the Austrian withholding tax on dividends paid to EU-based investment funds that do not receive a foreign tax credit in their home country is refundable under Austrian law.

Practical Implications

These decisions establish a robust and coherent line of authority:

  • Corporate shareholders in treaty countries may claim refunds if their effective tax exceeds Italy’s 1.2% benchmark;
  • Foreign pension funds taxed at higher treaty rates may seek parity with EU/EEA pension funds;
  • Investment funds outside the EU can claim equal treatment with Italian funds.

Given the binding nature of ECJ rulings, similar claims are likely to succeed across the EU. Taxpayers should review their withholding tax positions and consider refund opportunities, keeping procedural time limits in mind.

Conclusion

The evolving case law shows a clear trajectory: the free movement of capital requires equal treatment of outbound dividends, regardless of whether the recipient is in the EU or beyond. The combined effect of Article 63 TFEU, the Parent–Subsidiary Directive, and bilateral treaties has created a strong legal framework for challenging excessive withholding taxes.

For Italy and other Member States, the message is unequivocal: outbound dividends must be taxed no more heavily than equivalent domestic dividends for comparably situated taxpayers. For global investors, this opens the door to significant refund claims and a more level playing field in cross-border dividend taxation.

For multinational groups, pension funds, and asset managers, these rulings open the door to significant refund opportunities in Italy and across the EU. More importantly, they underscore the increasing role of EU law – and the ECJ’s binding jurisprudence – in shaping the taxation of cross-border dividends.