The specific case involves a UK resident philanthropic foundation – as English limited partner – and an English Limited Company as general partner. The Limited Partnership holds a participation in Italian resident companies.
The Italian Revenue Agency points out that the UK entity does not meet the tax residency requirements, as required by Article 1 of the Convention, and therefore highlights the problem of the applicability to reduce the 26% withholding tax on the dividends. However, also taking into account the explanations set out in the Commentary to the 2014 OECD Model and in the 1999 OECD Partnership Report, the Italian Tax Authority concluded that the Limited Partner could claim for the applicability of the Convention. This latter qualifies as a UK tax resident entity to which the UK tax legislation attributes the income through fiscal transparency, regardless of the actual distribution.
It is useful to note that this issue is particularly innovative in the current interpretative Italian tax framework. In the light of substance over form principle, it opens for the application of the reduced 15% withholding tax, pursuant to Article 10(2)(b) of the Convention, applicable to the specific case.
In general terms, however, it should be recalled that Article 10(2)(b) of the Convention provides for a 5% withholding tax if the shareholding guarantees at least 10% of the voting rights in the paying company.
The Italian Tax Authority , therefore, seems to be combining fiscal transparency with economic transparency. In particular, based on economic transparency, the Convention would be invocable by the partner provided the following requirement are met: first of all, that the articles of association of the partnership provide the automatic distribution – at least annually – of the income to the partner; secondly that the income is subject to taxation in the partner’s hands from its country of residence (economic transparency).
The relevance of this response to ruling No. 17 is also confirmed by other positions in which the Italian Tax Authority clarifies its position on “treaty entitlement”. It has also published response to ruling No. 19 and No. 24 concerning fiscally transparent collective investment undertakings.
In response no.19, the transparent vehicle is an English ACS (Authorised contractual scheme) and the institutional investors are resident for tax purposes in the UK; also in this case the Italian Tax Authority grants the application of the reduced withholding tax of 15% on outbound dividends from Italy under Article 10(2)(b) of the Convention: the requirements of tax transparency and BO are deemed to be fulfilled, but not the possession of a shareholding with at least 10% voting rights.
In response no.24, the same arguments are followed, although with reference to Luxembourg, from which Italian financial instruments are invested (the case concerns a Luxembourg FCP with multiple sub-funds, participated by institutional investors resident in UK and Ireland – and in other States- to which the Fcp’s income is imputed in those countries for taxation purposes); also in this case the invocation of the Conventions between Italy and, respectively, UK and Ireland is granted on the basis of the compliance with the fiscal transparency requirements.
