Northern Trust has claimed a breakthrough in the treatment of income paid to foreign investors by the Italian tax authorities. Reclaiming tax in Italy is notoriously difficult.
The bank says that, following a recent landmark ruling from the Italian Tax Authority (ITA),it is able to secure reduced withholding tax rates for investors holding Italian equities through a tax-transparent, cross-border pooling vehicle.
The reductions apply to dividend income arising from investing in Italian stocks. Northern Trust says this could potentially increase total return for investors in Italian equities via such vehicles by over 40 basis points a year.
The ITA ruling was obtained on behalf of a client’s Irish Common Contractual Fund (CCF), which invests in Italian stocks.
“Confirmation of tax-transparency by tax authorities is pivotal for cross-border pooling, enabling investors within a `pool’ to obtain the same withholding tax treatment as though they were investing directly,” said Northern Trust in a statement released today. “In this case, it means that the underlying investors in the pooled investment fund are subject to the same withholding tax rates as if they had invested directly in Italian equities, but with all the added benefits of investing via a pooled fund for example, tighter governance, better risk management, economies of scale and access to new asset classes.”
Northern Trust adds that the ITA ruling is a “a significant development in the pooling arena owing to the fact that, for some time, it has been understood that Italian domestic law would not typically recognise such structures as tax transparent. This has not been an issue in the majority of other major investment markets.”
“This is a major milestone in tax-transparent pooling,” says Aaron Overy, pooling business development manager in Northern Trust’s asset servicing sales team. “While the ruling is only binding on the specific CCF, it sets an exciting precedent. Each of our tax-transparent pooling clients that invest in Italian stocks could also achieve a positive outcome from the ITA and potentially go on to keep more of their investment returns.”
Northern Trust says it is working with other clients with Italian equity investments using the CCF fund structure to guide them through the process of approaching the ITA on the issue of tax transparency. At the same time, the bank is urging other pooling clients, including those using the Luxembourg Fonds Commun de Placement (FCP) and the Dutch Fonds voor Gemene Rekening (FGR) structures, who have an interest in Italian equities, to consider the same approach.
Northern Trust has always set great store by its cross-border pooling expertise. It announced in August 2007 that it had more than doubled its cross-border pooling assets under custody in the last year to over US$24 billion (approximately 18 billion).