By Judgment no. 413/2026 of 3 June 2026, the First-Instance Tax Court of Brescia recognized that individuals resident in Italy are entitled to a tax credit for taxes paid in Brazil on capital gains arising from the sale of shareholdings in Brazilian companies, even where such income is subject in Italy to a 26% substitute tax. This is, as far as is known, the first decision to address the issue with reference to the Italy–Brazil Convention and to extend to capital gains the principles already established by the Court of Cassation in relation to dividends.
The treaty framework and the restrictive position of the italian tax authority
The Convention for the avoidance of double taxation between Italy and Brazil provides, as a general mechanism, for the recognition of a tax credit in the country of residence: Article 23(2) allows Italian residents to deduct the tax paid in Brazil from the tax due in Italy, up to the limit of the Italian tax attributable to the foreign-source income.
Italian domestic legislation, however, under Article 165 of the TUIR, conditions the crediting of foreign taxes on the requirement that the relevant income be included in the total taxable base subject to ordinary income tax (known as “IRPEF”). On this basis, the Italian tax authority takes the view that, for income that does not pass through the ordinary taxable base and is instead subject to a withholding tax as final tax or to a substitute tax, no credit is available for taxes paid abroad.¹
This is precisely the situation of foreign-source dividends and capital gains received by individuals acting outside a business regime: such income is subject to a 26% levy, with no option to elect for ordinary taxation. According to the tax authority’s approach, this results in full double taxation of the same income: the taxpayer bears the withholding tax in the foreign State and, once again, 26% in Italy. This interpretation, which gives precedence to domestic law over the treaty obligation undertaken by Italy and Brazil, is reflected in the tax return forms themselves, which do not even provide any field for reporting a credit in relation to such income.
The court of cassation’s interpretation: the credit is due when the substitute regime is mandatory
A contrary line has been established by the Court of Cassation.² While its rulings arose in the context of the Italy–USA Convention, they turn on language that appears in numerous treaties concluded by Italy, including the one with Brazil. The conventions in question, after establishing Italy’s obligation to grant a deduction for the foreign tax, exclude it only where the income is subject in Italy to a withholding tax as final tax, or to a substitute tax, “at the request of the beneficiary”.
According to the Court of Cassation, the exclusion clause therefore presupposes a free choice by the taxpayer. A contrario, where the substitute regime derives from a statutory obligation and not from a choice by the taxpayer, as is the case for individuals outside a business regime, the exclusion does not apply and the tax credit is due, with the treaty provision prevailing over Article 165 of the TUIR. Systematic confirmation is drawn from a comparison with more recent treaties: when Italy intended to deny the credit in every case, it said so expressly, adding the phrases “even at the request of the beneficiary” or “whether or not at the request of the beneficiary”. The different wording of the earlier conventions is therefore a deliberate negotiating choice, which cannot be undone by way of interpretation.
The brescia tax court’s judgment
The Italy–Brazil Convention contains the wording considered decisive by the Court of Cassation. On this basis, the Brescia judges upheld the appeals of four shareholders resident in Italy who, having sold a Brazilian shareholding, had paid taxes in Brazil and the 26% substitute tax on the gross capital gain in Italy, and subsequently applied for a refund. The Court held that the principles established in relation to dividends could be extended to capital gains by virtue of the same ratio, recognized the definitive nature of the Brazilian taxes, and clarified that the failure to complete Schedule C, which is not designed for this type of income, does not preclude a refund in litigation proceedings.
The 25% matching credit on dividends
For dividends, the Convention offers a further advantage: under Article 23(4), the Brazilian tax “shall always be deemed to have been paid” at a rate of 25% of the gross amount, even if not paid or paid at a lower rate (the so-called matching credit). Consequently, an Italian resident could offset a notional credit of 25% against the 26% substitute tax. This issue has become particularly topical, given that, as from 1 January 2026, Brazil applies a 10% withholding tax on dividends paid to non-residents.³ For capital gains, by contrast, only the tax actually paid in Brazil remains creditable.
Opportunities for taxpayers: how we can assist you
The Italian tax authority has not yet adopted this approach, and the path to recovery currently involves (i) payment of the substitute tax, (ii) filing an administrative refund claim and, in the event of rejection or tacit denial, (iii) initiating tax litigation—a route which the Brescia judgment shows can lead to concrete results.
The amounts at stake are often significant: consider those who have sold shareholdings in Brazilian companies in recent years, or those who regularly receive Brazilian-source dividends. In many cases, it is still possible to recover taxes already paid. Looking ahead, the 25% matching credit may reshape the tax efficiency of Italian investments in Brazil, allowing the Italian levy on Brazilian-source dividends to be substantially eliminated, with an effective tax burden in Italy of 1%. It remains the case, however, that the 10% outbound withholding tax applied in Brazil constitutes a non-recoverable cost. As regards capital gains, it will also be possible to recover the taxes paid in Brazil, always within the limit of the tax due in Italy, equal to 26%.
Guarnera Advogados, thanks to its consolidated presence in Brazil and Italy for over 36 years and its integrated expertise in both legal systems, is ideally positioned to assist investors at every stage. For those who have received dividends or realized capital gains of Brazilian source in recent years and wish to review their position promptly, it is important to note that the limitation periods run from the date of payment. Our Italian-Brazilian team is available for a preliminary assessment of your specific case.
1 Circular Letter no. 9/E of 5 March 2015.
2 Court of Cassation, judgments no. 25698/2022 and no. 10204/2024.
3 Law no. 15,270/2025, which introduced the withholding tax on dividends distributed to non-resident beneficiaries.
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