Tax Treaty Case Law around the Globe 2023

1. Introduction

The Italian Supreme Court (Corte di Cassazione) handed down a landmark decision concerning the foreign tax credit under Article 23 of the Italy-United States Income Tax Treaty (1984) which may affect the interpretation and application of many other tax treaties that Italy has currently in force.

Under most of its less recent treaties, Italy is allowed to refuse granting a foreign tax credit if the item of income sourced and taxed in the other contracting state is subjected in Italy (state of residence) “by request of the recipient of the said income in accordance with Italian law” (emphasis added) to a flat substitute tax instead of the standard personal income tax. However, under Italian law, for resident individuals, the flat substitute tax has been mandatory on foreign dividends from portfolio participations since 2004 (and from all types of participations since 2018), i.e. it is not an election or a request. Therefore, the court held that the special treaty rule that excludes the foreign tax credit cannot apply because the flat substitute tax on foreign dividends does not depend on a request of the recipient of the income. This leads to the application of the gene...