At last the Prodi government has issued the decree law concerning the application of a reduced tax rate to corporate income. The measure, which is awaiting publication in the Official Gazette, fulfills one of the thirteen delegations in the area of taxation which were granted by the Italian Parliament to the current Government with the 1997 Budget Law and no doubt represents one of the most interesting changes introduced in the Italian fiscal system since the reform of the seventies.

Indeed, so far recourse to risk capital for financing new investments has been strongly discouraged on account of a taxation system which was much more burdensome with respect to the one applying to borrowed capital. The consequent undercapitalization of most Italian companies is precisely what the new regulations aim to attenuate (Table 1) by means of a discipline similar to that adopted in Scandinavian countries around the end of the eighties.

Basically, taxable corporate income is divided into two bands : the first ("facilitated income") is proportionate to the new inflows of invested capital and is taxed with the 19% soft rate, while the residual portion ("ordinary income") is subject to the regular tax rate (equivalent to 37% for companies and commercial entities which are subject to IRPEG, the Italian corporate income tax). The only enterprises that are excluded from the application of the Dual Income Tax (DIT) are the ones that belong to the banking and insurance sectors, for which the Government has prepared a separate package of facilities.

The DIT will come into force as of the fiscal period following the one under way at 30 September 1996. Therefore, it will be possible to benefit from the facility already with the next income tax return ; consequently, financial decisions made at year end must be carefully assessed in order to obtain as much tax savings as possible.

In order to identify the share of facilitated income one has to determine the increase in net equity as compared to the figure presented in the balance sheet at 30 September 1996. Basically, one has to consider all the inflows of "liquidities" deriving from cash contributions (like corporate capital increases or capital account payments) and from the shares of retained earnings, from which one subtracts all the intentional net equity reductions for distribution of the capital or reserves to the shareholders. This, therefore, excludes the equity reductions decided in order to balance the operating loss.

An "ordinary return rate" will be applied to the new capital inflows. Such an index is determined year by year with a special decree of the Finance Minister on the basis of the average yield of treasury bonds increased by 2% maximum to bear into account the higher risk of the investment (table 2a). The result will represent the income share taxed with the 19% soft rate (table 2b). However, it is worth highlighting that the DIT cannot be lower than 27% of the overall operating profit so as to prevent an excessive loss of tax revenue for the Italian government (table 2c).

The scope of the new regulations is further enhanced by the fact that also newly-established companies, namely companies that were set up after 30 September 1996, can benefit from the DIT . In this case, the entire incorporation capital is considered as a valid increase for the purpose of the DIT .

Even more substantial benefits are foreseen for companies listed on the Stock Exchange for the first time : in fact, for them the soft tax rate is of 7%, while the average rate applying to the total income cannot drop below 20%.