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New Tax Regime For Foreign Investors On Real Estate Funds


New tax regulations regarding the profits of non-resident investors on Italian real estate funds have been introduced. Prior to this distribution of profits to all foreign investors residing in white listed countries were generally exempt from the 20% withholding tax applicable to distributions to Italian tax residents. According to the new regime the exemption regime will apply only to certain categories of investors, while other investors will longer benefit from the exemption of the withholding tax. Taxand Italy examines the interpretations of these tax rules made by the Italian tax authorities in March 2011.

With regards to Article 32 of Law 122/2010 the withholding tax exemption once granted to all foreign investors on Italian real estate funds will now only apply to specific entities, such as:

(i) pension funds and
(ii) collective investment schemes that are tax residents in white-listed jurisdictions.

Furthermore the exemption will continue to apply to international organisations, according to international agreements executed in Italy, and central banks of other States.

Other investors are now subject to a withholding tax, ordinarily at a 20% rate, on the profits received. However, distributions made to foreign investors residing in white-listed countries may be subject to the minor rate contemplated by the relevant double taxation treaty if applicable.

As illustrated by Italian tax authorities, the new taxation regime will apply only to the distribution of profits:

(i) made from 31 May 2010 and
(ii) generated by the relevant funds in the financial years starting on or after 1 January 2010.

On the contrary, profits distributed to foreign investors after 31 May 2010 but generated and accrued in periods closed until 31 December 2009 will remain subject to the previous legislation.

According to Italian Tax authorities in lack of a specific provision contained in the relevant double taxation convention, profits directly arising out of participation in Italian real estate funds should be treated as "interests" for the purposes of double tax conventions.

The Italian based management company distributing the profits generated from the real estate fund, will have to obtain relevant documentation from the foreign investors as:

  • Declaration from the non-resident beneficial owner of the sums confirming the existence of all and any of the conditions for the application of the double tax treaty regime and
  • Statement by the Tax Authority of the country of residence of the beneficial owner confirming the tax resident status of such entity. This declaration produces effects until 31 March of the year following the year in which the statement has been produced.

Taxand's Take

Italian tax authorities have released recent instructions on methods for the determination of profits relevant for the application of withholding tax. Moreover, Italian tax authorities have also commented on the "exempt categories" of foreign investors. In particular, according to the first interpretation by the Italian authorities an assessment should be made on a case by case basis to ascertain whether such entities may fall within such categories even from a substantial perspective and not only from a formal perspective.

The law together with significant legal changes, will have a significant impact on real estate investment in Italy.

Your Taxand contacts for further queries are:
Guido Arie Petraroli
T. +39 02 7260591

Alberto Alfredo Ferrario
T. +39 02 7260591

Taxand's Take Author