Italian Bank Tax Breaks Attract EU Scrutiny

by Ulrika Lomas, Tax-News.com, Brussels

01 June 2007

The European Commission has opened an investigation to find out whether tax breaks offered to Italy's formerly state-owned banks breach EU laws on state aid.

The Commission announced on Thursday that it will probe the provision of Italy’s 2004 Finance Law that allowed former state-owned banks to release hidden capital gained during their corporate restructuring in the 1990s by paying a nominal tax of 9% in lieu of the ordinary company tax of 37.25%.

The EC said that the gains recognised totals of over EUR2 billion (US$2.7 billion) among the nine banks which decided to use the system. The difference between the tax ordinarily payable and the tax actually paid amounts to over EUR586 million, it said.

The Commission is concerned that the release of the gains may unduly affect the ongoing consolidation process of bank conglomerates in the EU, without contributing to economic development to any significant extent. The investigation will allow interested parties to comment on the measures under scrutiny.

The scheme has enabled certain Italian banks to eliminate their tax liabilities resulting from hidden capital gains at a tax cost much lower than the ordinary company tax. The EC believes that this may give them an economic advantage, in particular by increasing their attractiveness and their economic value, both for investors and corporate acquirers.

According to the Commission, such an advantage might constitute state aid to certain banks to recognise their hidden capital gains and that such aid might be incompatible with the Single Market.

Italy did not notify the scheme to the Commission before its implementation. Should the investigation find that the scheme constitutes incompatible state aid, Italy would have to recover the aid illegally granted.

Under Italian law on the privatisation of the Italian banking system, a major reorganisation of formerly state-owned banks took place in Italy in the 1990s. The law also authorised the payment of the substitute tax in three installments (50% in 2004, 25% in 2005 and 25% in 2006), without interest.

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