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Executive summary
The Italian Parliament has definitively approved the Italian Windfall Tax for Banks, affecting both Italian banks and Italian branches of foreign banks. The new tax was first introduced by Article 26 of the Law Decree 10 August 2023, No. 104 (Decree), which Parliament amended on 5 October 2023.
The Decree introduced an extraordinary tax imposed on Italian banks (and Italian branches of foreign banks) solely for fiscal year (FY) 2023 — commonly referred to as the Italian Windfall Tax for Banks, hereinafter simply "Windfall Tax."
The Windfall Tax, before the amendments passed by the Italian Parliament, was to apply as follows:
i. Taxable persons: Italian banks and Italian branches of foreign banks (jointly referred to as "Banks")1
ii. Tax rate: 40%
iii. Taxable basis: The increased interest margin realized by the Banks calculated by reference to the higher between:
a. FY2022 vis-à-vis FY2021, with a 5% floor
b. FY2023 vis-à-vis FY2021, with a 10% floor
iv. Tax ceiling: 0.1% of the value of the assets reported by the Bank in its financial statements for the reporting year preceding the one pending as of 1 January 2023
v. Payment deadline: Commonly 30 June 2024, however specific rules apply for Banks (a) approving financial statements later than the end of the fourth month following the end of the reporting year, and (b) having a financial year not aligned with the calendar year
vi. Windfall Tax deductibility against the Italian direct taxes (i.e., corporate income tax (IRES) and regional tax (IRAP): Disallowed
As the Decree was converted with amendments into Law 9 October 2023, No. 136, definitively approved by the Italian Parliament on 5 October 2023, Article 26 was amended as follows:
i. Taxable basis: The increased interest margin realized by the Banks must be calculated by reference solely to FY2023 vis-à-vis FY2021 with a floor of 10% (regardless of the amount realized in FY2022).
ii. General anti-avoidance rule: The Italian Tax Authorities may challenge the existence of an abusive practice in relation to the Windfall Tax payment duty by applying the general anti-avoidance rule.
iii. Tax ceiling: The ceiling is 0.26% of the total amount of the risk-weighted assets (as determined under Article 92(3) and (4) of the EU Regulation 575/2013, dated 26 June 2013), to be determined at the closing date of the financial year preceding the one pending as of 1 January 2023.
iv. Banks Capitalization alternative to the Windfall Tax cash out: As an alternative to the Windfall Tax cash out, the Banks may opt to book, when the financial statements are approved for the financial year preceding the one pending as of 1 January 2024 (commonly, FY2023), an amount not lower than two and a half times the payable amount of the Windfall Tax to a non-distributable reserve (Locked Reserve).
v. Windfall tax burden shifting prohibition: Banks are prohibited from shifting liability for the Windfall Tax levy to the costs of services provided to their clients.
Parliament did not amend the functioning of the Windfall Tax with regard to (i) taxable persons, (ii) the tax rate, (iii) the payment deadline or (iv) deductibility of the Windfall Tax against the Italian direct taxes (i.e., IRES and IRAP).
Detailed discussion
The Windfall Tax, which applies to both Italian banks and to Italian branches of foreign banks, was first introduced by Article 26 of the Law Decree dated 10 August 2023, No. 104 — for preliminary discussion around the Windfall Tax, please refer to the EY Global Tax Alert, Italy announces proposed one-time windfall tax for banks, dated 9 August 2023.
On 5 October 2023, the Italian Parliament passed the Law converting the Decree with amendments (addressing inter alia the functioning of the Windfall Tax). The new Law was published on the Official Gazette on 9 October 2023 and becomes effective from 10 October 2023.
The Windfall Tax, as amended upon the conversion into law of the Decree, shall apply as follows:
i. Taxable persons. Per Article 26(1) of the Decree, taxable persons are Banks (i.e., Italian banks and Italian branches of foreign banks), as defined under Article 1 of the Consolidated Law on Banking and Credit, referred to in Legislative Decree 1 September 1993, No. 385, that are licensed to perform banking activities in Italy. From the above it can be inferred that other financial intermediaries (such as "società di gestione dei fondi comuni di investimento" — and brokerage companies — in Italian, "società di intermediazione mobiliare") would not be liable for the Windfall Tax.
ii. Tax rate. Per Article 26(2) of the Decree, the tax rate is 40%.
iii. Taxable Basis — Per Article 26(2) of the Decree, the taxable basis is the (portion of the) interest margin, booked under Item 30 of the profit and loss accounts approved by the Bank of Italy, for the FY before the one pending as of 1 January 2024 (commonly, FY2023), that exceeds of at least 10% the interest margin of the FY before the one pending as of 1 January 2022 (commonly, FY2021). As the Decree was converted into Law 9 October 2023, No. 136, the Windfall Tax ceases to apply to the increase of the interest margin (with a minimum of 5%) realized by the Banks in FY2022 vis-à-vis FY2021.
iv. Application of the general anti-avoidance rule. Per Article 26(2) of the Decree, the Italian Tax Authorities may resort to the general anti-avoidance rule, set forth in Article 10-bis of Law 27 July 2000, No. 212, to challenge the existence of an abusive practice that undermines the ability of the Banks to timely and accurately pay the Windfall Tax.
v. Tax ceiling. Per Article 26(3) of the Decree, the Windfall Tax payable amount cannot exceed 0.26% of the risk-weighted assets (as determined under Article 92(3) and (4) of the EU Regulation 575/2013, dated 26 June 2013), to be determined at the closing date of the financial year preceding the one pending as of 1 January 2023 (commonly, FY2022). Before the Decree was converted into law, the tax ceiling was 0.1% of the value of the assets recorded in the financial statements for the reporting year preceding the one pending as of 1 January 2023 (commonly, FY2022). The amendment made as the Decree was converted into Law 9 October 2023, No. 136 seems aimed at excluding the government securities from the Windfall Tax computations (considering that those securities are not included among risk-weighted assets)
vi. Payment deadline. Per Article 26(4) of the Decree, the Italian Windfall Tax shall be paid by the end of the sixth month following the end of the FY preceding the one pending as of 1 January 2024 (commonly, 30 June 2024).
For Banks that approve the financial statements later than the end of the fourth month following the end of the reporting year, the payment deadline of the Windfall Tax is the end of the month following the one in which the financial statement is approved.
For Banks with a financial year that is not aligned with the calendar year, where the payment deadline of the Windfall Tax falls within calendar year 2023, the relevant payment will be performed during calendar year 2024, in any case no later than 31 January 2024.
vii. Windfall Tax deductibility against the Italian direct taxes (i.e., IRES and IRAP). Per Article 26(5) of the Decree, the Windfall Tax will not be deductible against the Italian direct taxes (e.g., corporate income tax (IRES) and regional tax (IRAP).
viii. Banks Capitalization alternative to Windfall Tax cash out. Per Article 26(5-bis) of the Decree, as an alternative to the Windfall Tax cash out, Banks may opt to book, when the financial statements are approved for the financial year preceding the one pending as of 1 January 2024 (commonly, FY2023), an amount not lower than two and a half times the payable amount of the Windfall tax to a non-distributable reserve (Locked Reserve). The Locked Reserve should be accounted among the elements of primary Tier 1 capital (in compliance with the conditions laid down in Regulation (EU) No. 575/2013). In the event of a financial loss or insufficient profits, the Locked Reserve shall be constituted or supplemented by using, first, the profits of previous financial years, starting from the most recent ones, and subsequently the other available equity reserves. This requires that the booking of the Locked Reserve is deemed as an instrument for Banks' capitalization.
The Windfall Tax, plus applicable interest, will become payable in 30 days if the Locked Reserve is distributed. Providing the option for the Locking Reserve seems to stem from the observations that the European Central Bank (ECB) sent to the Italian government on 12 September 2023. Specifically, the ECB made some recommendations aimed at introducing changes to the Windfall Tax regime and strengthening the capitalization of Italian banks.
The Locked Reverse option should also be considered available to Italian branches of foreign banks. This is based on the general principle under which an Italian branch is regarded, for tax purposes, as separate and independent entity from its parent company — carrying out the same or similar activities, under the same or similar conditions, taking into account the functions performed, the risks assumed and the assets used. As a result, it can be reasonably inferred that the Italian branches of foreign banks should be entitled to elect the Locked Reserve option.
ix. Windfall tax burden shifting prohibition. Per Article 26(6-bis) of the Decree, Banks are prohibited from shifting their Windfall Tax liabilities to the costs of services provided to their clients. The Competition and Market Authority shall supervise strict and timely compliance with this prohibition through random inspections and annual reporting to the Italian Parliament.
Windfall Tax implications
The potential accounting and tax implications stemming from the Windfall Tax regime, as depicted above, are not yet fully evident because the relevant tax framework is still incomplete. The main concerns expressed by the Banks so far with respect to the Windfall Tax regime can be summarized as follows:
- The accounting treatment of the Windfall Tax under IFRIC 21:2 According to what is seen in the Italian banking environment, the Windfall Tax has been reported in the interim accounting reports as a tax liability other than income tax for the purposes of IFRIC 21. In the absence of official guidelines, this seems to be a fair approach from an accounting perspective; it is nonetheless advisable to investigate this matter further if, and to the extent that, official guidelines will be issued.
- Whether the amount booked in the Locked Reserve is eligible for the notional interest deduction (thus becoming, to some extent, tax deductible for IRES purposes) — the inclusion of the Locked Reserve in a tax-deductible amount for IRES purposes seems to be inconsistent with the rationale of the Windfall Tax regime, which prevents the tax from being deducted from Italian direct taxes (i.e., IRES and IRAP).
For additional information with respect to this Alert, please contact the following:
Studio Legale Tributario, Financial Services Office, Milan
- Paolo Zucca
- Giuseppe Marco Ragusa
- Antonfortunato Corneli
- Giancarlo Tardio
- Gabriella Cammarota
- Alberto Fuccio
- Roberto Carotenuto
- Michele Tarantino
