Italy Prepares To Axe Dividend Tax Credit

by Ulrika Lomas, Tax-News.com, Brussels

24 November 2003

The Italian Parliament has approved the first part of a fiscal reform which involves abolishing the tax credit attaching to dividends from the start of next year. It is anticipated that the final decision will be sealed next week, and that the measure will slash the value of dividend payments by as much as 20%.

Industry insiders say the move could have a significant effect on business, and one leading custodian told the Journal of International Securities Financing that it could cut revenues from securities lending by up to 10%.

One of the aims of the reform is to make the Italian tax system more consistent with the tax systems of most other EU member states, which provide for lower tax rates and participation exemption regimes. Italy is one of the last countries that still allow a full imputation credit on dividend distributions.

The changes will include introduction of a participation exemption regime, the introduction of consolidated tax systems for both domestic and foreign subsidiaries of the same group, and the introduction of thin capitalisation rules.

In future, dividends paid to individuals from “non-qualified” participations will only be subject to a 12.5 per cent final withholding tax. Dividends paid to individuals from “qualified” participations will be partially included in the taxpayer’s taxable income and subject to a new (reduced) scale of individual tax rates.

Similar rules will apply to capital gains, with the existing distinction between gains from capital and 'other income' being abolished.

The new regime provides for a 95% exemption on dividends distributed to Italian companies. However, a 100% exemption will be available if both the distributing and the recipient companies of the same group opt for the new consolidated tax system that will also be introduced by the tax reform.

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