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Operational tax news - Italy update / New tax reporting requirements - 30 December 2011


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2012 Italian tax reform – Issues to consider for Luxembourg investment funds

In September 2011 a law decree modified the taxation on financial instruments for residents and non-residents introducing, as from 1 January 2012, a single 20% taxation which will replace the various current tax rates (12.5% to 27%). Government bonds and assimilated securities shall however be taxed at the rate of 12.5%. Lower tax rates for non-residents are still available under tax treaties, based on various EU Directives or on specific domestic measures. Implementing regulations have been officially published in the Italian Official Gazette on 16 December 2011.

Issues to be taken in consideration may be divided in two categories.

Direct investment - Taxation of investments made by Luxembourg investment funds in Italian bonds

Until 31 December 2011, a 12.5% tax rate currently applies on income deriving from most Italian financial products. The 12.5% rate will be increased to 20% as from 1 January 2012. The application of the 12.5% tax rate would be granted in respect of interest accrued as at the date of 31 December 2011.

With regards to Italian government bonds or bonds issued by listed Italian companies and banks, these new provisions would not have any material impacts for Luxembourg investment funds which benefit from the domestic exemption granted to institutional investors and would receive a gross interest amount in any case.

For any other type of Italian bonds or similar securities, the new rate of 20% would apply on interest and other income payable from 1 January 2012 even in respect of interest accrued up to 31 December 2011 (this effect might be avoided where the bonds are sold before 31 December 2011).

Indirect investment - Impact of the tax reform on Italian private investors holding units in foreign investment fund

As from 1 January 2012, distributed income, capital gains and liquidation profits derived by Italian resident (private investors) from Luxembourg established investment funds will be subject to the new 20% taxation either through their Italian paying agents or through declaration in their tax return.

Based on current law, the 20% taxation will also apply on accrued profits until 31 December 2011 as long as the corresponding income of private investors is distributed or realised through the sale of units/shares after 1 January 2012.

However, the Italian authorities allow investor to recognise a step up in value as at 31 December 2011 in order to neutralise the adverse implications on accrued income as at 31 December 2011 of the increased tax rate.

The step up mechanism is optional, reserved to private investors, and will be operated through a request sent to their Italian intermediary (at the latest on 31 March 2012) or by the Italian tax payer through the 2011 tax return.

If the option is retained, investors will need to pay a tax of 12.5% on unrealised profits that may never be realised in practice.

New reporting requirements for Italian and foreign investment funds as from 1 January 2012

As from 1 January 2012, direct investment in government bonds (taxed at 12.5%) will be taxed at a lower rate than comparable investments made through Italian or Luxembourg regulated investment funds (taxed at 20%).

In order to allow the application of the 12.5% tax rate to investment funds investing into government bonds, investment funds will be required to perform an asset test which will estimate the percentage of the portfolio invested in qualifying government bonds. This test will be based on the last available published accounts (average of holdings based on annual and semi-annual accounts). The result of this test will need to be communicated to Italian paying agents and investors in order to allow them to apply/claim the reduced tax rate on the income which is deemed derived from government bonds.

The implementing regulations have been issued on 16 December 2011 and they outline the principles to be considered when computing the percentage of investment in government bonds although without providing specific details regarding the computation (items to be considered, practical presentation…).

In any case, this means that fund administrators and fund distributors will have to consider implementing tax reporting for all their sub-funds invested in Government bonds that are distributed in Italy. If the activity is subcontracted by a UCITS IV management company, the management company needs to supervise the activity performed by the service providers in order to ensure that information provided to investors is reliable.

How can Deloitte help you?

Deloitte may assist you in reviewing your exposures in relation to the above and in assessing the tax impacts of the reform.

Should you have any queries, please do not hesitate to contact us.

We will keep you updated on any future developments.

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