Italy’s tax authorities issued a tax ruling this week in response to an application submitted by a Swiss bank concerning the tax treatment of interest payments made to the bank by Italian individuals.
The tax ruling (no. 379 of 11 September 2019) substantially confirms and clarifies the position of the tax authorities as previously announced in an October 2018 ruling. These two tax rulings clarify that the withholding tax rate of 12.5% (pursuant to the income tax treaty between Italy and Switzerland) applies with regard to interest payments made by Italian individuals on loans from a Swiss bank. Also, the tax rulings indicate that the Swiss bank must file Italian corporate income tax returns.
The October 2018 tax ruling (no. 41 of 23 October 2018) addresses the general rule on the taxation of interest paid to foreigners by Italians. The general rule under Italian tax law is that foreigners are taxed in Italy only on Italian-source income and that capital income (such as interest) is considered to be Italian-source income if it is paid by an Italian tax resident.
Concerning interest paid by someone who is not a withholding agent (for instance, an individual), the tax must be applied in Italy through the submission of a corporate income tax return by the foreign entity. In the years at issue, the rate of corporate income tax in Italy was 27.5%. The Italy-Switzerland income tax treaty, however, provided for a reduced rate of 12.5% if the recipient of the interest was the effective beneficial owner.
In the 2018 tax ruling, it was concluded that the income tax treaty rate of 12.5% applies also to foreign banks that receive interest payments from a person who is not a withholding agent. In this situation, it was necessary that the bank submit a corporate income tax return in Italy.
The two tax rulings provide that foreign banks that have made loans to tax residents of Italy and that failed to file a corporate income tax return in Italy to declare the income derived from the loans may encounter certain risks including interest and penalties (on top of the tax due).
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