Rate increase to 26%
Law Decree no. 66 of 24 April 2014 was converted into Law no. 89 of 23 June 2014, and published in the Italian official gazette no. 143 of 23 June 2014.
Articles 3 and 4 of the law confirm an increase, from 20% to 26%, in the rate of withholding and substitute tax with respect to income from various financial instruments—including dividends, interest, premiums, and capital gains (as previously proposed by the Italian government).
The effective date is from 1 July 2014.
Not applicable to certain income
The changes do not affect certain types of investment income, such as income from Italian government bonds or securities issued by other public bodies and similar instruments (e.g., securities issued by supra-national organisations recognised by Italian law and non-Italian government bonds from “white-list countries”). These types of income remain subject to substitute tax at a rate of 12.5%.
Reduced IRAP rate
The increased withholding and substitute tax rate was introduced to counterbalance a decrease in the rates of the Italian regional tax on productive activities—IRAP—as provided in article 2 of the new law.
From the tax periods beginning after 31 December 2013:
- The standard IRAP rate of 3.9% has been reduced to 3.5%.
- The IRAP rate for financial institutions has been reduced from 4.65% to 4.2% and the IRAP rate for insurance companies has been reduced from 5.9% to 5.3%.
After amendments introduced during the parliamentary process, the substitute tax rate currently applicable to the yearly net result of pension funds (i.e., 11%) was replaced by an 11.5% rate which applies only for the tax year 2014.
However, the 11% domestic withholding tax on outbound dividend payments to EU/EEA pension funds remains unaffected.
Tax authority guidance
Also, the Italian tax authority on 27 June 2014 released Circular no. 19/E to clarify the scope and application of the enacted changes.
Substitute tax on certain loans
Law Decree no. 91/2014 of 24 June 2014 (of which, article 22 was effective 25 June 2014) concerns interest on medium- and long-term loans (i.e., loans having a maturity of more than 18 months) and paid by Italian companies to:
- Banks (credit institutions) established in an EU Member State
- Insurance companies established in an EU Member State and authorised under the law of the same Member State
- Qualifying investment funds established in an EU/EEA “white-list country”
Such interest will not be subject to domestic withholding tax.
This law decree (which, under the Italian legislative regime, must be converted into law by the Italian Parliament within 60 days of its coming into force) also introduces tax facilities for the issuing of non-listed bonds and extends the application of the 0.25% substitute tax applicable under certain conditions to medium- and long-term loan agreements.
For more information, contact a tax professional with the KPMG member firm in Italy.