Italian government adopts a new law on capital gains taxation that turns upside down the scenery of taxation of financial income.

The opportunities for non-resident investors.

The legislative decree n. 461 of 21st November 1997 means a real revolution in the tax regime of financial income that will come into force from next 1st July. It introduces essential changes in the mechanisms of tax collection and, mostly, it radically modifies the concept of capital income compared with the past. With the new provisions, either income (interests or dividends, for example) - meaning the return on invested capital - or the increased value of securities resulting from trading will be taxable income.

There are two expected rates, 12,50% and 27%, depending on the nature and maturity of the financial assets. Interests on bonds and similar securities are subject to the 27% rate if they have a maturity below 18 months and to the 12,50% rate for maturities above 18 months. Capital gain is taxed at 27% rate in the case of a ‘’qualified’’ participation (representing more than 2% of the rights of vote in ordinary meeting and 5% of the share capital, in the case of listed companies, and more than 20% of the rights of vote or 25% of the share capital, in the case of unlisted companies); at the 12,50% rate in all other cases. These are, in a very summarised way, the main features of the new tax regime for the financial income applied to residents.

Essential innovations have been introduced also for capital income received by non-residents in Italy. The foreigner receiving an income related to a securities deposit in Italy will be subject to a different tax treatment depending on three elements:

• the above mentioned features of the received revenue and the maturity of the financial asset;
• the existence of a tax treaty between Italy and the receiver’s country of residence;
• the inclusion of the receiver’s country of residence among the countries which Italy has settled with an agreement for the exchange of information.

More precisely, in case of a treaty country the capital income is not subject to the withholding tax of Italian legislation but to the treaty provisions, usually more convenient for the taxpayer. Furthermore, the existence of an agreement for the exchange of information permits the foreigner to receive gross income deriving from bank deposits and accounts, perpetuities, guarantees, repo agreements and security lendings without being subject to any kind of tax in Italy. This special regime of exemption granted to non-residents is to be added to the other one introduced by article 6 of law n. 239/1996 for interests and other revenues on bonds and securities (already discussed in the July-August 1996 issue).

As regards the tax regime of dividends and capital gain from transfer of shares, it is necessary to clarify some aspects. Always from 1st July, the rate of the withholding tax on dividends received by non-residents will decrease from 32,4% to 27%, except for the minor withholding tax established by tax treaties.