NEWS FOR FOREIGN INVESTORS INTERESTED IN ITALIAN TREASURY BONDS AND COUNCIL BONDS

Recently the Italian Cabinet confirmed the Decree Law that abolishes the withholding tax for non-residents on Treasury Bonds (BOT) and Council Bonds (BOC); the Decree Law was already approved by the competent Commissions of the Parliament.

We would point out at any rate that the above Decree was not yet published on the "Gazzetta Ufficiale", and we are still awaiting this essential procedure so as to be absolutely sure that the Law will require as reported below.

Before we look into the recent tax treatment on Treasury Bonds (BOT) and Council Bonds (BOC) for non-residents, we would like to recall the related tax regulations often non-easy for the foreign investors.

At first Treasury Bonds issued in Italy were not subject to the withholding tax but they subsequently were (in 1986)

• as advance corporation tax for the companies,
• as tax in the different hypothesis.

In this context, the last Financial Act (No. 549/1995, art. 3, paragraph 168 and 169) announced the reform of the withholding tax and recently the Government headed by Mr Lamberto Dini abolished the withholding tax (12,5%) for non-residents on Treasury and Council Bonds.

Since the introduction of the withholding tax with Decree Law No. 556/1986 was established, the right to refund for subjects investing in Treasury Bonds and residing in countries that have signed with Italy the Treaties to avoid double taxation.

The new regulations have been issued to simplify the matter for foreign investors; the new tax treatment will come into force on 1 January 1997 and it will be in use only with the countries that have signed with Italy the Treaties to avoid double taxation.

The tax reform rationalises the withholding tax regulations. As mentioned above, the new treatment abolishes the withholding tax on "interest and premiums of bonds and similar securities, public and private", as provided for by the Decree of the President of the Republic No. 600/73 art. 26 and No. 601/73 art 31 for non-residents in Italy (but residing in countries that have signed with Italy the Treaties to avoid double taxation) provided that the Treaty allows the Administration to take over the information required to prove the existence of the requirements.

Regarding non-residents different from the above-mentioned and for residents in non-EU tax havens non-EU the Law requires a substitute tax paid through an account kept by financial intermediaries where they

• will credit the amount of substitute tax corresponding to the amount of interests, premiums and the difference between the maturity’s amount and the issue’s price,
• will credit the substitute tax amount corresponding to the above-mentioned point due to the seller,
• and will debit the substitute tax amount corresponding to the above-mentioned point due to the buyer

Moreover, the joint-stock company, commercial organisation and commercial partnership resident in Italy and the permanent establishment of non-residents will not be included in the substitute tax mentioned above; the income participates to making the taxable income.

Obviously the best advantage will concern the foreign investors residing in countries that have signed a Treaty with Italy to avoid double taxation; so, the new tax regulations should increase the demand of Treasury Bonds by foreign investors also considering that the Government decided to extend the new regulations to the recent Council Bonds (BOC).

Law 724/1994 disciplined the issuing of Council Bonds, a new instrument aimed to finance the investments of the local authority.

In this context we examine the Council only as a local authority given that the recent Decree Law mentioned above abolished the withholding tax for the Council Bonds.

Law 724/1994 sets the conditions and limits for the issuing of such Bonds; one of them, probably the most important, is that the Bonds have to be issued only to finance the investments and not the short-term activities. Moreover, the Bonds must be issued at least for five years and the withholding tax will not be applied for non-residents as indicated above.

For these reasons, we consider this new Bond interesting for international non-resident investors that now have a new stimulating tax regulations and two financial instruments.