The entry into force of the Withdrawal Agreement, or the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (hereinafter the “Withdrawal Agreement“), implied, as known, the exit of the United Kingdom from the European Union at the end of a transitional period which ended on 31 December 2020.
As of 1 January 2021, the United Kingdom therefore became a non-member of the European Union.
This exit involves important changes in many areas, including taxation. In particular, the withdrawal of the United Kingdom from the European Union determines the inapplicability of very important tax regulations on intra-group income flows: these are, mainly, the Parent Company Directive (no. 2003/49/EC) and the Interest & Royalties Directive (no. 2011/96/EU), which provide, under certain conditions, for the exemption from withholding taxes on intra-group payments of dividends, interest and royalties, between subjects belonging to the EU.
In the following article, we will see how the taxation of these flows out of Italy and towards the UK is determined, considering that, to date, only the Convention against Double Taxation on Income signed between Italy and the United Kingdom (“Italy-UK Convention“) and the domestic legislation of each country may apply.
Dividends distributed by Italian companies to companies resident in the United Kingdom
The Italian legislation provides for the application of a withholding tax at the rate of 26%, for dividends paid out of Italy, with the possibility of a reduction to 1.2% for profits paid to companies and entities subject to corporate income tax in the Member States of the European Union and in the States of the European Economic Area (“EEA”).
Therefore, with reference to dividends paid by an Italian company to a company resident in the United Kingdom, after the end of the transitional period, the 1.2% rate is no longer applicable since the United Kingdom must be considered to all intents and purposes a non-EU Member State.
Consequently, the 26% withholding tax is applicable, subject to the lower rate provided for by the Italy-United Kingdom Convention. The latter provides for a 15% withholding tax on dividends, but if the recipient company has at least 10% of the voting rights in the company paying the profits, the rate is reduced to 5% (Article 10.2 of the Convention).
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Interest paid by Italian companies to companies resident in the United Kingdom
Like dividends, Italian law provides for the application of a withholding tax at the rate of 26% on interest leaving Italy. Italy does not provide for any particular reduction on this rate, except for the exemption from withholding tax on interest paid in relation to medium and long-term loans and in favour of qualified investors not resident in Italy (i.e. European credit institutions and insurance companies).
Like the analysis carried out on dividends, as an alternative to domestic taxation, it is possible to apply the provision of the Italy-United Kingdom Convention, which provides, in Article 11, for a withholding tax of up to 10% on interest leaving Italy.
Royalties paid by Italian companies to companies resident in the United Kingdom
With reference to royalties, Italian law provides for the application of a 30% withholding tax on the taxable amount of royalties paid to a non-resident entity.
Also in this case, the reference to the Italy-United Kingdom Convention allows a reduction of the tax burden applicable to these income streams, bringing it to a maximum of 8% (Article 12 of the Convention).
In summary, as is evident from the proposed scheme, the conventional legislation allows for favourable treatment compared to the Italian legislation on all three flows analysed:
|Italy-United Kingdom Convention||15 – 5% (with a participation ratio of at least 10%)||10%||8%|
|European Directives||Exemption no longer applicable||Exemption no longer applicable||Exemption no longer applicable|
It should also be noted that the transition from the exemption provided by the Directives to the reduced withholding tax under the Conventions also implies a change in the formalities. In fact, while in the first case the Italian resident taxpayer had to obtain forms E and F of the Provvedimento dell’Agenzia delle Entrate n. 2013/84404, complete with the certificate of tax residence of the foreign recipient, in the second case the forms to be used are A, B and C (respectively for dividends, interest and royalties), always accompanied by the aforementioned certificate of tax residence.
As highlighted above, the exit of the United Kingdom from the European Union has led to an increase in the taxation of income flows paid between the two countries.
It should be noted, however, that the Italian legislation providing for exclusions from taxation on income received by residents in so-called “white list” countries, a condition verified for the United Kingdom even after the withdrawal from the European Union, remains unchanged: this is, for example, income from deposits and current accounts other than bank and postal accounts, remuneration for the provision of guarantees, income deriving from carryovers and repurchase agreements on securities and currencies (mentioned in Article 26-bis of Presidential Decree 600/73) or income from Italian UCITS. Obviously, the effects of other domestic rules excluding taxation of all non-residents also remain unchanged, such as the one concerning interest and other income from bank and postal current accounts contained in Article 23 paragraph 1 letter b) of the Italian Tax Code.
Finally, we would like to draw attention to an issue that has so far not been addressed by official practice, but which has already been raised by the doctrine, concerning the possible effects of Article 129 of the Agreement on Trade and Cooperation concluded between the EU and the UK (“Trade Agreement“), which entered into force on 1 May 2021, which states that “each Party shall accord to investors of the other Party, as regards establishment and operation in its territory, treatment no less favourable than that it accords in like circumstances to its own investors and enterprises“.
If the rule could be extended also in the tax area, there would be the possibility to support the maintenance of the effectiveness of the – more favourable – national provisions that have been included in order to safeguard principles of non-discrimination (e.g., the 1.20% withholding tax on dividends under Article 27 paragraph 3-ter of Presidential Decree 600/73). It will therefore be appropriate to monitor the evolution of legislation in this regard, in order to verify whether it may be possible to reduce the tax burden compared to the Italy-United Kingdom Convention, which is currently the most favourable to companies resident in the two States.