International retail businesses that have businesses or subsidiaries with banking facilities in Italy should be aware of recent tax changes within the country. The changes apply to medium or long-term loans executed and granted by a bank or financial institution in Italy (loans longer than 18 months are considered medium and long-term loans).

The previous rule consisted of a mandatory application of the Substitutive tax. The Substitutive tax applied a tax rate of 0.25% on the amount of the loan, instead of applying registration tax, stamp duty, mortgage and cadastral tax and franchise tax.

The new rules now allow borrowers to choose which taxation regime should be applied to the loan, and the decision must be made in writing in the relevant loan agreement or banking documentation.

Substitutive tax (0.25%) covers pledges, guarantees, mortgages as well as the loan agreement; this means that no other tax is payable in respect of the loan arrangements.

Under the ordinary tax regime however a borrower with a mortgage granted over its own property would be required to pay in addition a mortgage tax rate of 2% of the value of the mortgage.  In this case, the Substitutive tax is likely to be more advantageous than the ordinary tax regime.

However, the ordinary tax regime could be more advantageous for retail businesses, particularly for:

  • loans with no guarantees, since only the registration tax of €200 applies as well as the stamp duty (nominal amount); and
  • loans granted by banks or financial institutions where the same borrower grants a pledge on shares or participating interests. The ordinary tax regime has a taxation rate of 0.50% on the face value of the shares, which is usually lower than the Substitutive tax rate of 0.25% on the total amount of the loan.

Food and drink businesses with Italian borrowing requirements should consequently review their Italian borrowing arrangements, ensuring where possible they have the benefit of the regime which offers the lowest tax burden, and the loan documentation correctly provides for this.