With Ruling No. 203/2025, the Italian Revenue Agency provided important clarifications regarding the tax treatment of dividends paid by Italian companies to investors fiscally resident in Japan through transparent entities.
The request specifically concerned the application of the Double Tax Treaty between Italy and Japan and the direct application of the treaty rate by the Italian withholding agent. To this end, the applicant submitted four questions discussed below.
As to the first, the applicant (an Italian company acting as a trust bank for the pension funds of Japanese companies, managing their investments) asked the Tax Authority whether the Italy–Japan Treaty could be directly applied to Japanese-resident investors, specifically the treaty withholding tax rate of 15% (instead of the 26% rate under Italian domestic law).
In line with the Partnership Report of 1999, the applicability of the Treaty depends on meeting two requirements. Investors must be:
- Treaty entitled / liable to tax: in order to apply the Treaty, the investor must be considered a “resident” subject to taxation. This is the so-called “liability to tax,” meaning that the income of the subject invoking the Treaty must be subject (even potentially) to taxation.
- Beneficial owners: once the investor qualifies as a taxpayer, they must also meet the requirements to be considered the beneficial owner.
In this case, even though the Gamma trusts are not independent taxpayers (since they are transparent entities under Japanese law) and therefore are not direct beneficiaries of the Treaty, they are merely investment vehicles through which Italian-source income flows to the actual beneficiaries, namely the Beta companies and the individual pension fund members.
Therefore, the above conditions must be satisfied not by the Gamma trusts, but by the Beta companies and the individual pension beneficiaries.
Specifically:
- Beta companies: although pension income is exempt from taxation, they are considered taxpayers as they are “liable to tax,” meaning potentially taxable.
- Individuals: they are taxpayers since they are subject to personal income tax, and they are the beneficial owners under the Treaty.
The Tax Authority thus clarified an important principle: Treaty benefits are granted to the beneficiaries of a trust regardless of the presence of transparent entities (the Gamma trusts), which do not prevent the application of the Treaty.
The applicable tax regime for dividends is set out in Article 10 of the Italy–Japan Treaty, which allows Japan to tax dividends paid by an Italian company to a resident of Japan.
However, the source State (Italy) may also apply a withholding tax on dividends distributed, but this tax cannot exceed 15% of the gross amount of such dividends. Japan may still tax the dividends according to its own rules, granting the investor a foreign tax credit to eliminate double taxation.
The second question concerned whether cumulative certificates issued by the Japanese tax authority were sufficient to meet the formal requirements for Treaty application.
A certificate of recognition of tax residence issued in cumulative form by the authority of one of the two Contracting States (in this case, Japan) is suitable for establishing the qualification of beneficiary for the purposes of applying the Convention, provided that the document includes:
- Identification data (e.g., legal form, residence address, corporate name, etc.) clearly and precisely indicated,
- Tax Identification Number or other identifying number,
- Reference year of tax residence.
Such personal data must match with respect to the same entity. In essence, there cannot be a dissociation between the formal investor (as indicated in the certificates of residence) and the recipient of the dividends. In such a case, in fact, the conditions for the application of treaty treatment would no longer be met.
