ITALY - Global custody and investment house Northern Trust has been granted a landmark Italian withholding tax ruling which will see one of its multinational clients' funds pay lower dividends on equities.

The Italian Tax Authority (ITA) has give one of Northern Trust's clients a reduced withholding tax rate on Italian stocks - which equates to an additional total return of around 40 basis points a year - as it is investing in what the ITA recognises as a tax-transparent cross-border pooling vehicle.

Instead of recognising the vehicle's multinational tax status, the ITA will recognise and apply the withholding tax treaties applied to the pooled vehicle as though they were individual investors in each country, according to Northern Trust.

This could be especially important as the European Commission has already hinted it may take legal action against the Italian government unless it changes its laws and stops penalising overseas pension funds who choose to invest in Italian stocks. (See earlier IPE story: Italy and Finland to face dividend spotlight)

ITA said the deal is only applicable to the Irish Common Contractual Fund (CCF) held by this client, but the move is significant because pension funds can invest in CCF pooled vehicles and overseas pension funds currently pay a higher dividend tax than domestic pension funds through withholding tax also applied.

It also suggests it may now be possible for cross-border pension funds to secure a deal with the ITA which puts their tax position on a par with domestic pension fund investors, even though existing Italian tax law has yet to recognise pooled investment vehicles as

At this stage, Northern Trust is unable to apply the deal as a generic ruling to all of its vehicles but it is now talking to clients to establish whether it might be appropriate and how they go about gaining the tax recognition.

"It will very much depend on how they are invested, and they will need to be of sufficient size for it to be worthwhile. What we have seen recently is Revenues [collection departments] look to ensure they understand what is happening with each vehicle and it may be possible at a later date for a general ruling to be applied," continued Overy.

"The vehicles change from client to client, so it is difficult to apply to all as standard but it may be possible at a later stage," he added.

Moreover, Northern Trust said it has developed a methodology for other clients with Italian equity investments using the CCF structure, so they may approach the ITA about gaining a reduced dividends tax bill.

Northern Trust is also advising other pooling clients, including those using the Luxembourg Fonds Commun de Placement (FCP) and the Dutch Funds voor Gemene Rekening (FGR) structures to consult tax advisers if they hold Italian stocks.

Aaron Overy, pooling business development manager in Northern Trust's asset servicing sales team, described the landmark ruling as "significant".

"This is a major milestone in tax-transparent pooling. While the rule 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," added Overy.

Northern Trust announced in August it had more than doubled its cross-border pooled assets under custody in the last year to over €18bn.