63ti0269 la candia panteghini venturi by Ignazio La Candia

Volume 63, Number 4

July 25, 2011

by Ignazio La Candia, Paolo M. Panteghini, and Federico Venturi Reprinted from Tax Notes Intâ&#x20AC;&#x2122;l, July 25, 2011, p. 269

Italian Taxation of Investment Funds

by Ignazio La Candia, Paolo M. Panteghini, and Federico Venturi

Ignazio La Candia and Federico Venturi are with Studio Pirola, Pennuto, Zei & Associati in Milan, and Paolo M. Panteghini is with the University of Brescia.

aw No. 10 of February 26, 2011, converting Decree Law No. 225 of December 29, 2010 (the ‘‘Decreto Milleproroghe’’), into law, introduced major changes to the taxation of Italian and Luxembourg investment funds to align their tax treatment with that of harmonized and non-harmonized foreign funds, thus removing distortions that had been penalizing Italian investment fund products for years.1 Before analyzing the new rules, we will provide a brief overview of the earlier tax legislation in which Italian and Luxembourg funds were subject to a 12.5 percent substitute tax, levied annually. Such tax treatment was highly disadvantageous for investments in Italian funds compared with investments in foreign funds, on the grounds that income from Italian funds was taxed on accrual (that is, on a yearly basis) while income from harmonized mutual funds was taxed at the time of realization (that is, at the time of payment to investors).2

For a description of the changes, see G. Barbagelata and M. Piazza, ‘‘Per i fondi comuni arriva la stagione della parità fiscale,’’ Il Sole 24 Ore, Mar. 2, 2011, p. 12; A. Immacolato, ‘‘Fondi italiani più europei,’’ Italia Oggi, Mar. 9, 2011, p. 37; S. Capolupo, ‘‘La nuova disciplina dei fondi di investimento mobiliare,’’ Il Fisco, Issue 1, No. 14/2011, p. 2162. 2 For further details on Italy’s pre-reform regime, see E. Bonzani, P.M. Panteghini, and F. Venturi (2002), ‘‘Italy’s Taxation of Financial Income at a Crossroads,’’ Tax Notes Int’l, Nov. 4, 2002, p. 469, Doc 2002-23581, or 2002 WTD 202-7; J. Alworth, G. Arachi, and R. Hamaui, ‘‘What’s Come to Perfection Perishes: Adjusting Capital Gains Taxation in Italy,’’ Nat’l Tax J. 56 (2003), pp. 197-219.

TAX NOTES INTERNATIONAL

Tax Changes Under the new rules, which entered into force July 1, 2011, the following changes were introduced: • introduction of a new taxation method; • review of the tax regime of foreign funds; • introduction of a new regime for the determination of capital gains and losses from nonsignificant shareholdings; • implementation of a transitional regime for shares or units held on June 30, 2011; and • no reference to the arm’s-length value of the shareholding. Investors in Italian and Luxemburg funds will no longer be taxed on an accrual basis but on a cash basis. Income from Italian mutual funds, except for real estate funds,3 will thus be directly taxed in the hands of investors, who will be liable to the 12.5 percent withholding tax upon realizing the relevant proceeds as a result of divestment or sale of their units. (See Table 1 for an overview of the tax rates on the different categories of investors in securities funds.) Instead, in the event of losses deriving from full or partial redemption of units, the withholding agent will

See Tax Authorities Circular No. 11/E of March 9, 2011, which provided major clarification on the tax regime applicable to income from closed-end real estate investment funds paid to nonresidents, which has been recently amended by article 32 of Decree Law No. 78 of May 31, 2010, converted with amendments into Law No. 122 of July 30, 2010. The new tax regime applies to income received as of May 31, 2010, provided that it relates to the funds’ activity after December 31, 2009.

JULY 25, 2011 • 269

Italian Taxation of Investment Funds

PRACTITIONERS’ CORNER

Unit Holder

Taxation of Capital Income From Italian and Non-Italian Equivalent Funds

Taxation of Capital Income From Other NonHarmonized Funds

Private individuals, simple partnerships, noncommercial entities, and trusts outside the conduct of business

Withholding tax as final liability 12.5%.

Withholding tax 12.5%.

Commercial entrepreneurs (private individuals, partnerships, and joint-stock companies)

Withholding tax 12.5%. The income is included in business income subject to standard taxation.

Italian investment funds

No taxation.

Italian real estate funds

No taxation.

Persons resident in whitelist countries

No taxation.

deliver to the investor a statement of the losses deriving from its investment in the fund, which are immediately available for offset against any capital gains realized by the investor on other financial instruments registered in its name and held in custody, under management, on deposit, or otherwise.4 Asset management companies (SGRs) will continue to be able to recover any losses, not by offsetting them against the income realized by the funds managed but by directly crediting the loss-making fund with the 12.5 percent withholdings levied on the proceeds realized by the investors.5 Regardless of the advantages deriving from the reform, investors will have to deal with the tax aspects of the transaction and the relevant compliance work.

4 Note that the offset is available only if the investor’s relationship with the intermediary exclusively refers to units of mutual funds. 5 The rationale of the new procedure for the recovery of losses is to deal with the significant amount of tax savings that the taxation regime on an accrual basis gave rise to in the hands of Italian funds during the negative performance of stock exchanges, now in the region of €4 billion. For this reason, starting from July 1, the SGR will have to pay to the fund, rather than the state, the withholdings levied on the investor who realizes a capital gain upon leaving a managed fund. See G. Ursino, ‘‘Nel ‘milleproroghe’ la grande svolta per risparmiatori e Sgr,’’ Il Sole 24 Ore, Mar. 5, 2011; P. Bonarelli, ‘‘Nuovo regime impositivo per i fondi comuni mobiliari italiani,’’ IPSOA, Feb. 28, 2011.

270 • JULY 25, 2011

However, the legislation assists the investor in that the asset management company, the variable capital investment company (SICAV), or the placing entity will act as withholding tax agent and thus will levy the 12.5 percent withholding on the proceeds. If the units or shares of the SGR, SICAV, or placing entity are held by a central securities depository managed by an authorized company, the relevant withholding tax will be levied by the entity6 holding those units or shares, who will act as withholding agent. Unfortunately, the classification of income for tax purposes has not been changed. Italy’s tax system still distinguishes between capital income and other financial income. Capital income includes interest, dividends, gains, annuities, and other specifically listed proceeds. Other financial income contains all relationships that may give rise to positive and negative differentials as a result of a contingency (such as capital gains and derivatives income). The amendment to the rules also concerns investors in fund units outside the scope of asset management:7 Given that effective July 1, the gains of Italian funds will give rise to capital income, they will no longer be available to offset the related losses recorded as other income.8 One last word about funds investing in assets other than financial instruments (for example, accounts receivable, securities representing accounts receivable, and any other asset for which a market exists and whose value can be determined with certainty at least every six months), which, starting from July 1, falls under the new rules. These funds will also be liable to the taxation regime ‘‘on a cash basis’’ applicable to harmonized EU investment funds. Following the changes introduced by article 14 of Decree Law No. 13525 of September 2009, a similar tax treatment also applies for non-harmonized foreign funds subject to regulatory control and established in member states of the EU or the European Economic Area. These funds will also be taxed on a cash basis.

Taxable Base The investor’s actual tax liability will be calculated on the basis of the change in value of the unit holding as shown in the periodical investment bulletins as the difference between the value of the units at the date of sale or transfer and that at the date of purchase or subscription (the NAV delta).

For example, by Italian resident companies (corporate income taxable persons) and by nonresident entities that have joined the central securities depository. 7 We refer solely to nonsignificant equity interests. 8 For further details on the tax treatment of capital gains and losses from investments in mutual funds, see G. Ursino, ‘‘Imparare a muoversi tra minus e plusvalenze,’’ Il Sole 24 Ore, Mar. 5, 2011.

TAX NOTES INTERNATIONAL

Table 1. Taxation of Fund Investors

PRACTITIONERS’ CORNER

Effective Date and Transitional Regime

On June 30, the asset management companies had to calculate the management result realized by the fund and, if positive, pay the relevant substitute tax in a maximum of 11 installments starting from February 16, 2012. If the management result at that date is negative, the asset management companies will be able to offset the losses realized by the fund before July 1 with the proceeds of the fund or of the other funds managed by the same asset management company realized until June 30.

As shown in Table 2, the profits earned by investment funds are taxed at different rates depending on the type of proceeds earned. In particular, despite the changes, different rates are still in place, which could lead to tax arbitrage. For example, bank interest is taxed at 27 percent (well above the 12.5 percent rate levied on other financial products), and listed real estate investment companies (which despite initial expectations have not yet met with great favor in the Italian financial scenario) are subject to taxation at the rate of 20 percent.12 We can therefore say that there is still room for tax arbitrage. ◆

Table 2. Taxation of Fund Income Type of Income Received

Historical Luxembourg and Italian UCITS

Concluding Remarks The above legislative changes are an effort to align the Italian tax system to that of many other countries; however, they leave many unresolved issues, and as a result, Italian rules continue to be rather complex. The current rules provide for two categories of financial income: capital income and other income.9 In the report by the Council of Ministries (2001), there appears to be the will to ‘‘abandon the distinction between capital income and other income, which is a source of market segmentation, to the benefit of a single class of ‘financial income’ regardless of the taxpayer, the maturity and the instrument used to generate it, including income from any source.’’ Here again, the purpose of the change is to align the Italian system to the standards of other tax systems.10 At present, how-

Bank and P.O. interest

No taxation

Interest on Italian bonds with a maturity of less than 18 months (other than Italian government bonds or equivalent securities)

Withholding tax or substitute tax 27%

Interest on foreign bonds with a maturity of less than 18 months

27%

Interest on foreign bonds with a maturity of not less than 18 months

No taxation

For an analysis of this distinction, see F. Gallo, ‘‘La nozione dei redditi di capitale alla luce del D.Lgs. 21 novembre 1997, n. 461,’’ Diritto e Pratica Tributaria (1998), pp. 1219-1230. 10 The tax systems of Anglo-Saxon and Nordic countries provide for a single category of financial income (capital income), which includes interest, dividends, capital gains, and other financial income.

TAX NOTES INTERNATIONAL

11 Other income includes capital gains from the sale of bonds, while bond interest is included among capital income. 12 See I. La Candia, F. Venturi, and P.M. Panteghini, ‘‘Italy Launches Real Estate Investment Regime,’’ Tax Notes Int’l, Oct. 8, 2007, p. 118, Doc 2007-21932, or 2007 WTD 190-6.

JULY 25, 2011 • 271

The new regime entered into force effective July 1; however, considering the significant scope of the changes created by the rules, it has been considered appropriate to introduce a specific transitional regime to regulate the shift to the new legislation. On June 20, the asset management companies had to estimate the value of the investment that will constitute the new NAV delta to be taken as a basis for the new method of taxation. From a tax standpoint, the investment will be divided into two parts. In the first phase (until June 20), nothing changed for the investor since the taxes due will have been paid by the fund.

ever, the distinction still applies, and capital income includes interest and dividends, while other income includes capital gains from securities and equity interests and income from derivative contracts, which are characterized by uncertain results.11 As a result of this distinction, capital losses cannot be offset against dividends and interest.