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Italy: Investment Funds Tax and Capital Gains Changes

Introduction

A new investment funds tax regime has been enacted in Italy meaning investment funds are no longer subject to tax on an accrual basis. Investors are instead taxed on a cash basis. Furthermore, from 1 January 2012 withholding tax and substitutive tax on interest, dividends and capital gains will be set at 20%.

New investment funds tax regime

A Law Decree1 introduced a new tax regime for Italian and foreign investment funds. The new provisions have been in force since 1 July 2011. Investment funds established in Italy and historical Luxembourg funds are no longer subject to tax on an accrual basis, instead investors are taxed on a cash basis. A 12.5% (20% from 1 January 2012) withholding tax is applied on a final basis to individuals not engaged in business and to exempt entities; the same withholding tax is applied on an advance basis to other taxpayers.

Furthermore, the Law Decree provides for amendments to the Italian tax regime of foreign investment funds, compliant or not to EU Directives. Subject to conditions, Italian investors in European investment funds are also subject to tax on a cash basis at 12.5% (20% from 1 January 2012).

Investment funds tax rate increased to 20%

From 1 January 2012 income from capital and capital gains derived from the participation in Undertakings for Collective Investment in Transferable Securities (UCITS), from portfolios of investments managed on a client-by-client basis and from capital distributed according to insurance contracts, will be subject to tax at 20% 2.

Specific provisions apply to real estate investment funds whose regime has been recently subject to comprehensive amendments.

Interest, dividends and capital gains tax rate set at 20%

From 1 January 2012 withholding tax and substitutive tax on interest, dividends, any other income from capital and capital gains will be set at 20%. Previously, a 12.5% or a 27% tax rate applied.

Exception

Interest from state securities (and similar securities), from foreign state securities (only white list countries Art. 168-bis, par.1, TUIR) and from other special securities will be subject to a 12.5% withholding tax.

Net incomes derived from complementary pension plans will still be subject to a substitutive tax of 11%.

The increased withholding tax rate will not apply to dividends distributed by companies and other entities subject to company income tax in other member states of the European Union (EU) or of the European Economic Area (EEA) that allow an adequate information exchange (white list Art. 168-bis, par.1, TUIR). These incomes will still be subject to a final withholding tax of 1.375%.

Treaty provisions and EC directives

Treaty provisions override statutory withholding tax rates when they are more favourable to the taxpayer. Therefore, lower treaty rates may apply.

Furthermore, subject to conditions, dividends distributed to a qualifying EU parent company are exempt from withholding tax under the EC Parent-Subsidiary Directive.

Finally, subject to conditions, interest payments to associated EU companies are exempt under the EC Interest and Royalties Directive.

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