New tax regime for bonds and notes
Changes to the Italian Tax Regime for Debt Securities
Law Decree No. 138 of 13 August 2011 ("Decree 138/2011") together with Law Decree No. 98 of 6 July 2011 (“Decree 98/2011”) have introduced significant changes to the Italian tax implications of the issuance of debt securities by Italian companies and EU-based companies that are parents or subsidiaries of Italian companies.
In broad terms the new regime provides for:
(a) a less favourable tax treatment of medium term notes from the perspective of Italian resident individuals and non-commercial entities;
(b) a more favourable tax treatment of short-term instruments such as commercial paper issued directly by Italian listed companies and banks from the perspective of “white list” international investors;
(c) formalised tax treatment of intra-group loans in situations where an EU vehicle issues debt instruments and passes the proceeds to an Italian direct affiliate or parent company.
Previous tax treatment of debt securities
Prior to the introduction of Decree 138/2011:
(i) in the case of bonds issued by Italian listed companies or banks with a maturity of at least 18 months, a 12.5% substitute tax was applied by financial intermediaries on interest paid to Italian resident individuals and non commercial entities.
Subject to certain procedural formalities, the substitute tax did not apply on interest paid to and beneficially owned by foreign bondholders resident in those jurisdictions which are on the “white list”. Financial intermediaries (including Euroclear and Clearstream) have special procedures in place for the application of the exemption and the reporting to the Italian tax authorities of the details of payments made to non-residents benefiting therefrom;
(ii) the 12.5% substitute tax (and the exemption therefrom) did not apply to securities not qualifying as bonds from an Italian tax perspective, such as those not providing for the repayment of their principal amount at maturity (so called “atypical” securities) that were taxed at 27% (or, for non-residents, at the lower applicable treaty rate);
(iii) in the case of bonds issued by Italian unlisted companies other than banks or of bonds having a maturity of less than 18 months, interest payments were subject to a withholding tax applied by the issuer, with no exemption for interest paid to non residents (that were nevertheless entitled to reduced applicable treaty rates) which made the direct issuance of commercial paper unattractive from a tax perspective; and
(iv) in case of redemption prior to 18 months from the issue date of bonds with an original maturity of at least 18 months, the issuer was required to pay to the Italian tax authorities a surtax equal to 20% of any interest accrued on the redeemed bonds up to the time of the early redemption.
Tax treatment under the new regime
The implementation of Decree 138/2011 has brought about the following changes:
A. the mechanism for the application of the substitute tax described above continues to apply, but any such substitute tax will now be levied at the higher rate of 20% rather than at the previous rate of 12.5%.
The increase in the substitute tax rate to 20% does not affect investors entitled to the exemption from the substitute tax (such as “white list” foreign investors). In addition, non-resident investors not entitled to the exemption may continue to pay the substitute tax at the reduced treaty rate where applicable;
B. the substitute tax (and the exemption thereof) will continue to be unavailable for bonds issued by unlisted companies other than banks, and/or for securities that do not qualify as bonds from an Italian tax perspective (such as atypical securities). Interest arising from such securities will be subject to withholding tax at the rate of 20% applied by the issuer. However, the substitute tax (and the exemption thereof) will in any case apply on securities falling within the scope of capital adequacy EU Directives and national prudential regulations that are issued by banking and insurance intermediaries;
C. the tax treatment of interest on bonds will no longer be affected by the maturity date of those bonds. In particular, the exemption for non resident “white list” investors will also apply on bonds issued by listed companies or banks having a maturity of less than 18 months;
D. the redemption of Notes having a maturity of at least 18 months prior to 18 months from the issue date will no longer trigger the application of the 20% surtax on interest accrued prior to the redemption.
Notes issued by EU-based vehicles
Decree 98/2011 has introduced a new regime for interest paid on loans made by a foreign issuing vehicle to an Italian resident company (“ItalCo”).
According to the new regime, interest is subject to withholding tax at the reduced rate of 5%, rather than at the higher ordinary domestic rates that would have applied if the Italian tax authorities had chosen to “look through” such a structure, if:
(a) the loan is granted to ItalCo by a foreign vehicle (the “Issuer”) issuing bonds that are listed in an EU regulated market or on an EEA regulated market which allows an adequate exchange of information with Italy;
(b) interest paid on the loan meets all the other requirements provided for by the EU Interest and Royalties Directive, but the Issuer does not qualify as the beneficial owner of the interest payment under the loan;
(c) interest paid by ItalCo to the Issuer on the loan is aimed at servicing payments of interest to the holders of the bonds;
(d) the bonds issued by the Issuer are guaranteed by either ItalCo or the controlling company of ItalCo or another company controlled by the same controlling company. Such guarantee would in any case be subject to registration tax at the rate of 0.25%.
The new regime applies to interest paid since 6 July 2011. In respect of interest which had already been paid after 31 December 2010 but prior to 6 July 2011, withholding tax applies at the higher rate of 6% (and no additional payment is required to cover registration tax on the deed of guarantee).
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