The ratification text of the tax treaty with Italy contains two versions of the same article. The one that circulates most has been superseded for thirteen years — and the one that applies hides a timing condition that, in the first financial year, changes the arithmetic.
It happens with some regularity. An entrepreneur arrives with a well-prepared schedule in which the dividends the Italian company will pay to its San Marino holding company are shown at 5%, with a footnote referring to a qualifying shareholding of 25%. The document is tidy, the sources are cited, and the citation points to the Convention for the avoidance of double taxation between Italy and San Marino.
The problem is that that text has not been in force since 2013.
The Convention between the Italian Republic and the Republic of San Marino was signed in Rome on 21 March 2002. Ten years later, on 13 June 2012, the parties signed a Protocol amending several of its articles. Italy ratified both with a single act — Law no. 88 of 19 July 2013 — and the Convention entered into force on 3 October 2013.
This is where the misunderstanding comes from, and it is not the fault of those who fall into it. In the ratification text the two versions coexist: first the Convention in its original form, then, at the end, the Protocol that amends it. Anyone who reads from the beginning and stops before the end finds Article 10 in its 2002 wording — and that wording speaks of a 5% withholding tax with a shareholding of at least 25%.
It is the text still found today in a considerable share of the material in circulation.
Article I of the 2012 Protocol replaced the dividend regime. In the current version, the withholding tax in the State of the distributing company is:
Two differences from the superseded text, and both matter. The shareholding threshold falls from 25 to 10 per cent: an easier condition to meet, and it widens the field. But a condition appears that was not there before, and it is a timing condition.
The twelve months are not a formality. The rule requires them to be already completed, and counts them at a precise date: that of the distribution resolution. Not the payment date, not the financial year-end. The resolution.
The wording is in the past tense — has held — and uses the word preceding. It looks backwards. And the treaty provides no mechanism allowing the period to be completed afterwards, nor any form of subsequent refund: tools that exist elsewhere, but not here.
Consider the most common situation among those approaching this subject: an entrepreneur who has owned his Italian company for years and decides to place the shareholding under a San Marino holding company.
Instinct suggests the twelve months are comfortably exceeded — he has owned the company for a decade. But the rule does not look at him: it looks at the beneficial owner of the dividend, which is the San Marino holding company. And that holding company, if it was incorporated for the transaction, has held the shareholding since it was contributed.
The calendar, then, becomes decisive. Contribution in June; profits for the year approved and distributed the following spring; between the two dates, ten months. Below the threshold. That distribution falls into the residual case and bears the fifteen per cent.
It is not a permanent obstacle. It is a first-round obstacle, but it falls in exactly the year in which the structure costs most and yields least — the one in which incorporation, start-up and the first compliance obligations all add up. Finding it after the fact is unpleasant; knowing it beforehand is a planning element.
Precisely because the rule looks at the resolution and not at the payment, the remedy is an ordinary one: the distribution resolution is placed beyond twelve months from the acquisition of the shareholding.
It requires no constructions, no interpretations. It requires having looked at a calendar before fixing the date of the contribution, rather than after. It is the kind of check that costs nothing if done at the right time and cannot be recovered if done at the wrong one.
One case deserves separate examination, and we flag it without settling it here: the one in which, rather than incorporating a new company, a San Marino company already holding the shareholding is acquired. The question — whether the twelve-month count remains the company's or starts afresh — has no answer that can be given in the abstract, because it depends on how the transaction is built. It is one of the first things to put on the table when weighing whether to incorporate or to acquire.
The zero rate is not unconditional. Article V of the Protocol ties the regime to the effective exchange of information between the two administrations: if suspended, the withholding tax on dividends reverts to five per cent. It is a clause that produces no effect today, but it exists and should be known.
Interest and royalties follow different rules. For these too the Protocol introduced a zero withholding tax, but with a higher shareholding threshold — twenty-five per cent — and with a timing reference that is not the resolution but the date of payment. They are distinct mechanisms, and treating them together with dividends is an easy mistake. Anyone with loans between related companies, or using trademarks and software within the group, has one more chapter to examine.
If a reorganisation is under way or under consideration, three questions deserve a written answer before proceeding:
On this last point, a useful clarification, because it causes confusion: twenty-five per cent is not always an error. It is the correct threshold for interest and royalties. If it appears there, it is in the right place. It is on dividends that it signals a reading of the wrong column.
If a reorganisation of this kind is on your table, a confidential conversation commits you to nothing.
Get in touchThis note sets out the regulatory framework in general terms and does not constitute advice on a specific situation. Every transaction has elements of its own — the starting structure, the timing, the nature of the shareholdings — that alter its conclusions.
Luciano Ciavatta
United Consulting S.r.l. — Republic of San Marino
