Taxation of Portfolio Income and Withholding Tax Issues

Portfolio income arises from investments in stock and bonds, licensing of intellectual property (patents, trademarks, copyrights, proprietary information), purchasing units of collective investment funds, leasing of residential or commercial real estate, commercial machineries and equipment, granting loans, and engaging in similar investments in the host country (as opposed to income arising from active business operations conducted through a regular and continous presence in the host country through offices, agents, distributors, employees, local branches and subsidiaries).

Portfolio income includes dividends, interest, royalties, capital gains, rents and income distributions from investment funds.

Typically, portfolio income is subject to a fixed rate withholding tax in the country of source, which applies to the gross amount of the income without deduction for investment costs and expenses. The payor is responsible to apply the tax and pay it to the tax administration.

A withholding tax exemption is often granted to foreign investors under the source country’s internal tax law (or any applicable tax treaty) provided that the foreign recipient issues and provides a withholding tax certificate to the payor, attesting the identity, tax residency and tax status of the beneficial owner of the income. The payor is responsible to collect the withholding tax exemption certificate from the payee, and file it with the tax administration of its country of residency.

Under currenct international tax reporting rules, identifying and properly filling out the correct withholding tax certificate with all required information has become an often daunting task.

If you are a non resident or foreign person investing in Italy or the U.S. your are likely subject to the rules on withholding tax on Italian or U.S. source portfolio income you earn from you Italian or U.S. investments such as dividends, interest, rents, royalties, gains and the like. Both Italy and the U.S. grant exemptions from withholding for certain type of income earned by foreign investors in Italy and the U.S. Tax exemptions may be limited or excluded in case of investments conducted through conduits or entities organized in low-tax countries.

“In this labyrinthine area of international tax law we help clients understand the rules, structure their investments in such a way as to properly manage, eliminate or minimize withholding taxes, issuing and providing withholding agents with the proper withholding tax certififcates, and satisfy the procedural, administrative and documentation requirements related thereto”.

“We also assist withholding agents such as companies, banks and financial institutions to comply with their withholding tax obligations and avoid exposure to personal withholding liability”.

Our services in this area include:

  • analyzing how the withholding rules apply to your facts;
  • advising on how to structure your investments so as to eliminate or minimize withholding taxes through domestic or treaty exemptions;
  • analyzing how tax treaties impact your withholding obligations;
  • determining whether and how anti-abuse and conduit rules may affect your withholding tax obligations;
  • assuring that you comply with any return filing and administrative requirements;
  • assisting investors in filling out, issuing and providing proper withholding tax certificates;
  • advising the payor on its withholding tax duties.