Dividends are distributions of profits or retained earnings from a corporation (e.g., LLC) to its shareholders. They must be clearly distinguished from salaries or other remuneration paid to directors/managers. Dividends are investment income and not remuneration for work or services rendered.
Normally, profit distributions are made pro rata to shareholdings, unless otherwise specified in the articles of association or shareholders’ agreement.
The profit distribution is determined by a resolution of the shareholders' meeting. The shareholders' meeting decides on the scope and amount of the profits to be distributed (e.g., from annual profits or retained earnings). The prerequisite is that the capital maintenance rules must be complied with; in particular, the distribution must not impair share capital or non-distributable reserves (e.g., legal reserves or reserve funds).
In practice, distributions should be economically justified, properly approved, and correctly recorded. This includes, in particular, the proper minutes of the shareholders’ meeting and clear evidence of the distributable profit/reserve base.
Taxes: Two levels
Level 1 – Company: Profits are generally taxed at the company level (IRES and IRAP). Dividends are therefore a distribution of after-tax profits and are not deductible as expenses for the distributing company, but reduce equity.
Level 2 – Recipient: Taxation depends on the recipient’s status (individual/entrepreneur/corporation) and tax residence (Italy/abroad). Withholding tax and assessment rules apply here.
Dividends to entrepreneurs and companies
Dividends in the business/enterprise sphere benefited from partial relief (e.g., for IRES companies: 95% exemption / 5% taxable).
Dividends to Italian private individuals
For private individuals resident in Italy, taxation is normally carried out typically via a 26% substitute/withholding tax (depending on the case and intermediary).
Foreign dividends may be subject to reporting and declaration requirements.
Dividends abroad: withholding tax, double taxation agreement, and EU rules
If an Italian company pays dividends to recipients not resident in Italy, Italian withholding tax (often 26%) is generally payable, which can be reduced by a double taxation agreement (DTA) (often, for example, to 5% or 15%, depending on the respective DTA and the level of participation).
In certain EU/EEA cases, specific regimes may apply (e.g., exemption under the EU Parent–Subsidiary Directive if conditions are met).