FINALLY, REGULATIONS FOR WITHHOLDING TAX EXEMPTION ON BONDS ACQUIRED BY FOREIGNERS IS IN EFFECT

A set of rules for exemption on withholding tax of 12,5% imposed on interest, rebates and other earnings from securities and bonds owned by Foreigners, such as federal bonds (BOT) and municipal bonds (BOC), will soon be put into effect. This act exists now as income tax act of 1996 (Law 549/95 paragraph 168 and 169) which was defined in detail under Legislative Decree 239 on April 1st, 1996.

First of all, it has been determined that on January 1st, 1997 this law will be put in effect along with all of the formalities necessary to apply it. It is required that these bonds be deposited into either a bank, securities company, or similar foreign financial firm with a permanent establishment in Italy. Furthermore, it is required that the firm can provide a direct line of computer data-transfer with the Italian Ministry of Finance.

The bank and/or securities company must, therefore, need to obtain from the fiscal authorities a confirmation of the country in which the title holders maintain residence status. The bank/securities firm must also furnish pertinent information regarding the identification of non-resident title holders, and will also assume full responsibility for any false and/or incorrect information given. Failure to provide reliable information will result in the loss of all rights on tax exemption of the named beneficiaries on titles and bonds.

Furthermore, a 1,5% penalty will be imposed for each month, (and partial month), of infraction starting with the first month in which the proper regulations for deposit should have been adhered to.

However, not all foreign citizens have equal rights to take advantage of this important fiscal benefit. In fact, this law is applied exclusively to residents of Nations that have existing tax treaties with Italy. These are countries that permit to the Italian Financial Administration to have access to necessary information which certifies the existence of qualifications required for title holders to take advantage of this new tax exemption law.

Under Ministerial Decree of September 4th, 1996, published in the Official Gazette on September 19th, 1996, the Ministry of Finance determined the countries of which residents can participate. Surprisingly, out of 67 countries that qualify which include Zambia, Turkmenistan and other nations of relatively important financial status, Switzerland is excluded. The Swiss authorities have not agreed to authorise access of necessary information without prior consent of Swiss investors.

Given the details of this decree and forecasted minor transferrals of public funds to the municipal sector, it is clearly foreseen that there will be a considerable increase of municipal bonds (BOC) acquired by foreign residents in the initial weeks of the coming year.

In order to stimulate the interest of foreign investors, some new incentives have been put into effect by some Italian municipalities. The most interesting incentives are the following :

A) In order to assist in gaining access to the international capital market and to reduce finance costs, certain municipalities requested the assignment of an international rating. i.e.) Standard and Poor's rating of AA+ for the city of Bologna Lira Debt; a level surpassed only by major European centres such as Vienna and Paris.

B) For the restoration of 'Spedale di Santa Maria delle Grazie' of Siena, the municipal authorities issued revenue bonds -'project finance' particular form- which tied up the reimbursement of debts and remuneration of capital invested in the project. As a guarantee for investors the law that governs municipal bonds (BOC) obliges the municipal authorities to deposit a part of the earnings (fiscal and others) in order to finance the payment of debts.