Withholding Tax on Cross-Border Dividends: New Opportunity for Reimbursement Claims in Italy

Speed Read

On 17 September 2026, the Court of Justice of the European Union delivered its judgment in Case C-139/25 (iShares Europe ETF), holding that differential withholding tax on dividends paid to non-resident collective investment undertakings constitutes a restriction on the free movement of capital under Article 63 TFEU. The Court also confirmed that such a restriction may be neutralised by a bilateral double tax treaty but only where the investor can actually and fully deduct the excess tax. A merely theoretical possibility is not enough. Notwithstanding this potential neutralisation, the decision reinforces important principles already recognised by Italian tax court decisions that strengthen the position of investors resident in third countries seeking reimbursement of excess Italian withholding tax on dividends.

Clients with Italian-source dividend income should assess their eligibility for a refund claim without delay and submit their reimbursement request to the tax authorities in order not to be barred by limitation periods.

Background: The Facts and the Questions Referred

The case originated in Spain where iShares Europe ETF, a collective investment undertaking registered in the United States, received dividends from Spanish listed companies. The Spanish law, in line with the Spain–US double tax treaty (DTT), provided that dividends distributed to non-Spanish-registered collective investment undertakings (CIUs) were subject to withholding tax at a rate of 15%. By contrast, dividends paid to resident Spanish CIUs were taxed at an effective rate of just 1%.

iShares Europe ETF sought a refund of the difference between the 15% treaty rate and the 1% domestic rate, arguing that the differential treatment constituted a restriction on the free movement of capital prohibited by Article 63 TFEU. iShares Europe ETF operated under a tax transparency regime in its state of residence, meaning that it was not itself subject to income tax in the United States; instead, it passed through dividends and associated tax credits to its unitholders.

The Spanish Court referred the matter to the CJEU, asking, in substance, whether the restriction on the free movement of capital could be considered neutralised by the bilateral double tax treaty in circumstances where the non-resident CIU benefits from a tax transparency regime and the tax burden is effectively shifted to the unitholders.

The CJEU’s decision

Differential Treatment as a Restriction on Free Movement of Capital

The Court confirmed that subjecting dividends paid to non-resident CIUs to a withholding tax rate of 15%, while dividends paid to comparable resident CIUs are taxed at 1%, constitutes a restriction on the free movement of capital prohibited by Article 63(1) TFEU.

Crucially, the Court held that the fact that the non-resident CIU is not taxed in its state of establishment, or that it passes the tax burden through to its unitholders under a transparency regime, has “no bearing” on the existence of the restriction.

Comparability of Resident and Non-Resident CIUs

The Court reiterated its established case law, including the AllianzGI-Fonds AEVN (C-545/19), that once a Member State exercises its taxing jurisdiction over both resident and non-resident CIUs in respect of dividends, their situations become objectively comparable. The source State cannot rely on differences in the overall tax treatment of resident and non-resident funds to justify the differential withholding tax rate and claim that the cases concern situations which are not objectively comparable, according to Article 65(3) TFEU.

Neutralisation Through a DTT

The Court held that a restriction may be neutralised by a DTT, but only if the application of the DTT ensures, in all cases, that the full amount of the tax differential can be deducted. 

The Court explicitly stated that a merely “theoretical” possibility of deduction is insufficient. The referring court must verify whether unitholders can actually benefit from the DTT and achieve full deduction. In the Court’s own words, Article 63 TFEU requires that unitholders “can actually benefit from such an application, inasmuch as that application allows them to deduct in full from the tax payable by them in their State of residence the amount corresponding to the difference” between the tax rates applied to non-resident and resident CIUs.

Implications for Italy: A Reinforced Case for Reimbursement

The iShares Europe ETF decision has direct and significant implications for non-resident investors receiving dividends from Italian companies.

Italy applies a withholding tax of 26% on dividends paid to non-EU/EEA (i) collective investment undertakings or (ii) companies, possibly reduced under applicable tax treaties (for example, to 15% under the Italy–US DTT). By contrast, dividends paid to:

• collective investment undertakings resident in Italy, or UCITS-compliant and UCITS-non-compliant collective investment undertakings whose manager is subject to forms of supervision in the foreign country in which it is established pursuant to the AIFMD and established in the EU/EEA, are exempt from withholding tax;
• Italian tax resident companies are subject to an effective rate of 1.2%, derived from the inclusion of only 5% of the dividend in the taxable base at a 24% IRES rate; the same rate applies to EU/EEA companies and entities.

The differential between the treaty rate (or the standard 26% rate) and the exemption or 1.2% effective rate is precisely the type of restriction addressed by the CJEU in iShares Europe ETF. This position, now firmly supported by the European Court of Justice, was already supported by the Italian Supreme Court, which has consistently held since July 2022 that this differential treatment violates Article 63 TFEU.

Subsequent decisions have confirmed and expanded this principle, including to third-country investors where adequate mechanisms for the exchange of information exist, as is the case for UK or US residents.

The iShares Europe ETF judgment reinforces this domestic case law from the highest European judicial authority, confirming at EU level that: (i) the differential treatment of non-resident recipients of dividends constitutes a restriction on the free movement of capital; (ii) the comparability test between resident and non-resident CIUs is met once the source State exercises its taxing jurisdiction; and (iii) neutralisation via a double tax treaty is subject to strict conditions.

Recommended Client Action

In light of the iShares Europe ETF judgment and the settled Italian case law, we recommend the following steps:

• Assess eligibility. Non-resident corporate shareholders and investment funds that received dividends from Italian companies and were subject, respectively, to withholding tax exceeding the 1.2% or to withholding tax at whatever rate should evaluate their eligibility for a refund claim.
• Check the deadline. Refund claims must be filed within 48 months from the date the withholding tax was paid, pursuant to Article 38 of DPR 602/1973. It is essential to verify the applicable deadline for each dividend payment to ensure no claims are time-barred.
• Gather documentation. Claimants should prepare corporate registration documents, tax residence certificates issued by the competent authority, financial statements for the relevant years, proof of dividend receipt and withholding (such as bank statements and withholding tax certificates), and evidence of beneficial ownership of the underlying shares.
• Act promptly. Given the 48-month limitation period, dividends paid from 2022 onwards are generally still within the refund window.

Conclusion

The iShares Europe ETF judgment is a significant development that, combined with the increasingly settled Italian domestic case law - from the Supreme Court to the lower courts - creates a strong and timely opportunity for non-resident investors to recover excess Italian withholding tax on dividends. The CJEU’s strict approach to neutralisation via double tax treaties should be carefully considered on a case-by-case analysis. Clients with Italian-source dividend income should assess their position and act before the limitation window closes.

Authors: Michele Milanese, Partner and Roberto Ingrassia, Counsel.

Other key contacts: Roberto Ingrassia, Counsel.