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Italy: Increase of Tax on Financial Income and Decrease of Local Corporate Tax (IRAP) | Tax Connect Flash

Law Decree of 24 April 2014, n. 66, provides the increase of the withholding tax rate applicable to certain income, dividends and capital gains. The increase is aimed to finance a 10% reduction of the regional corporate tax (IRAP).

Increase of withholding tax rate

The standard rate, currently at 20%, will step up to 26% as of 1 July 2014.

The new rate will not be applicable, inter alia, to:

a) interest, premium, and other income and capital gains related to bonds issued by the Italian State or other UE/EEA States included in the so-called white list, the rate of which is confirmed as of 12,50%;

b) interest on loans from EU lenders qualifying for the EU Interest/Royalties Directive, when the beneficial owner uses the loan proceeds to pay interest to bondholders, the rate of which is confirmed as of 5%;

c) profits paid to pension funds established in EU/EEA States, the rate of which is confirmed as of 11%;

d) dividends paid to EU/EEA parent company, the rate of which is confirmed as of 1,375% should the exemption to dividends received by European Union (EU) parents qualifying for the EU Parent/Subsidiary directive be not applicable. Dividends received by others are subject to 26% withholding tax, unless a reduced rate is available under an applicable treaty.

Foreign Tax Refund

A refund of up to 11/26 of the Italian tax may be available if the recipient is not resident in Italy, to the extent that the tax is paid in the recipient’s country of residence.

Entry into Force

The new rules will enter into force from 1 July 2014. In particular, the new 26% rate generally will apply to:

  • loan interest due on or after 1 July, 2014;
  • capital gains from disposals of non-qualified shares (less than 20%, or 2% in case of shares traded on regulated markets) realized on or after 1 July, 2014. A capital gain is realized once the deed of transfer is executed, regardless of the consideration payment;
  • dividends received on or after 1 July, 2014; and
  • interest on bonds accrued on or after 1 July, 2014.

Substitute Tax

Law Decree n. 66/2014, provides also a substitute tax which allows the taxpayer, starting from 1 July 2014, to opt for the step up of the value of shares, quotas, rights, foreign currencies, financial instruments, receivables, etc., at 30 June 2014, instead of the purchase cost or value, for the determination of capital gains or losses, to the conditions that the taxpayer:

a) opts, within 30 September 2014, for the determination of the capital gains, capital losses concerning all shares, financial instruments, receivables, etc., except those related to OICVM;

b) pays the substitute tax within the 16 November 2014.

Special rules are provided with reference to particular tax regime (the so-called “regime dichiarativo” or “regime amministrato”). Capital losses, losses and negative balance concerning the option for the substitute tax are partially offset with realized capital gains subsequently at 30 June 2014. In particular, they can be offset to the extent of 76,92% of their amount or 48,08% in case of capital losses, losses and negative balance realized until 31 December 2011 if they have not been yet offset at the time the substitute tax is applied.

Regional Tax on Productive Activities (IRAP)

With effect from the tax year following the one ongoing on 31 December 2013, the IRAP standard rate will be decreased from 3,9% to 3,5%. In addition, for enterprises that operate based on a public concessions the rate will be reduced to 3,8% (previously, 4,2%), for banks and other financial institutions the rate will be reduced to 4,2% (previously, 4,65%) and for insurance companies the tax rate will be reduced to 5,3% (previously, 5.9%).