Global Tax Alert | 14 March 2014

Italy announces increase of tax on financial income and decrease of IRAP

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Executive summary

On 12 March 2014, the Italian Government announced that the 20% flat tax currently applicable to dividends, interest, and certain capital gains will increase to 26%. Interest and capital gains on Italian Government Bonds should remain taxable at the reduced 12.5% rate. The increase in revenue is intended to finance a 10% reduction of the Italian regional tax on productive activities (IRAP).

These rate changes were addressed in a presentation held by the Italian Prime Minister on 12 March 2014 and approved by the Council of Ministers on the same day. According to the Government plan, these tax measures will be enacted by 1 May 2014.

Detailed discussion

Taxation of financial income

Italian source financial income derived by nonresidents is currently subject to the following tax regimes.

Dividends

Nonresident companies (without an Italian permanent establishment to which the participations are effectively connected) are subject to a different dividend withholding tax regime depending on their residence and other circumstances.

  • A general 20% domestic withholding tax is applicable with a refund available (corresponding to the corporate income tax incurred by the recipient in its state of residence) up to the limit of one-fourth of the Italian withholding tax (i.e., up to 5% of the dividend).
  • Residents of EU and EEA countries can benefit from a reduced 1.375% rate under certain circumstances. In this case, the refund up to the limit of one-fourth of the Italian withholding tax does not apply.
  • EU qualifying companies may benefit from a withholding tax exemption under the Parent-Subsidiary directive regime (qualifying Swiss companies may benefit from an exemption under certain conditions too).
  • Withholding taxes may be lowered by any applicable double tax treaty. In this case, the refund up to the limit of one-fourth of the Italian withholding tax does not apply.

Interest

Nonresident companies (without an Italian permanent establishment to which the interest proceeds are effectively connected) are subject to a different interest withholding tax regime depending on their residence and other circumstances.

  • Interest payments on loans are subject to a 20% withholding tax.
  • Interest payments on bonds issued by the Government and other public bodies are subject to a 12.5% substitute tax and may qualify for exemption in the case of white listed recipients.
  • Interest payments on bonds issued by the Large Issuers and on listed bonds are subject to a 20% substitute tax and may qualify for exemption in the case of white listed recipients.
  • Interest payments on other Italian bonds are subject to a 20% withholding tax
  • Interest proceeds accrued on Italian bank deposits by nonresidents are tax-free.
  • EU qualifying companies may benefit from a withholding tax exemption under the Interest and Royalty directive regime (qualifying Swiss companies may benefit from an exemption under certain conditions too).
  • EU qualifying companies may benefit from a 5% withholding tax when they use the Italian sourced proceeds to pay interest to bond holders.
  • Withholding taxes may be lowered by any applicable double tax treaty.

Capital gain

Nonresident companies (without an Italian permanent establishment to which the participations are effectively connected) are subject to a different capital gain tax regime on the disposition of shares depending on such stock being substantial or not.

  • Capital gains derived upon disposal of substantial participations are subject to 13.67% effective taxation (i.e., 27.5% corporate income tax on 49.72% of the gain base). Substantial participations shall represent (i) more than 2% of the voting rights or 5% of the equity in companies listed in regulated markets or (ii) more than 20% of the voting rights or 25% of the equity in other companies.
  • Capital gains derived upon disposal of non-substantial participations in companies that are not listed are subject to 20% substitute tax. However, if derived by white listed recipients, such capital gains may be exempt.
  • Capital gains from non-substantial participations in companies listed in recognized regulated markets are exempt.
  • Any applicable double tax treaty may prevent capital gain taxation.

According to the presentation by the Prime Minister, the 20% tax applicable in any of the above cases will increase to 26%.

IRAP

As announced by the Government, the increase in the taxation of financial income should cover the cost that will result from an IRAP reduction which is estimated in the region of 10%.

IRAP is generally levied at 3.9% on a tax basis which differs from the corporate income tax (IRES) basis. The IRAP basis derives directly from the profit and loss EBIT (earnings before interest and tax) but some significant adjustments are made especially with reference to personnel costs which are generally disallowed.

On the basis of the limited information available to date, it is not clear how the reduction of the IRAP will be technically enacted (i.e., whether the tax rate will be reduced or if additional deductions from the taxable basis will be introduced). Future Alerts will cover developments.

For additional information with respect to this Alert, please contact the following:

Studio Legale Tributario in association with Ernst & Young, Milan
  • Marco Ragusa
    +39 02 8514 926
    marco.ragusa@it.ey.com
  • Paolo Zucca
    +39 02 8514 938
    paolo.zucca@it.ey.com
  • Giancarlo Tardio
    +39 02 8514 947
    giancarlo.tardio@it.ey.com
  • Domenico Borzumato
    +39 02 851 4503
    domenico.borzumato@it.ey.com
  • Marco Magenta
    +39 02 851 4529
    marco.magenta@it.ey.com
Studio Legale Tributario in association with Ernst & Young, Bologna
  • Mario Ferrol
    +39 335 122 9904
    mario.ferrol@it.ey.com
Ernst & Young LLP, Italian Tax Desk, New York
  • Emiliano Zanotti
    +1 212 773 6516
    emiliano.zanotti@ey.com
  • Andrea De Nigris
    +1 212 773 0478
    andrea.denigris@ey.com
  • Fabio Rousset
    +1 212 773 9302
    fabio.rousset@ey.com

EYG no. CM4265