International industrial and manufacturing businesses which have Italian businesses or subsidiaries which have banking facilities in Italy should be aware of recent Italian tax changes which apply to medium or long-term loans executed in Italy 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 provided for the mandatory application of the Substitutive tax, which applied a tax rate of 0.25% on the amount of the loan, instead of the application of registration tax, stamp duty, mortgage and cadastral tax and franchise tax.

The new rules specify that borrowers now have the possibility to choose which taxation regime should be applied to the loan. That 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 application of the ordinary tax regime will be more advantageous, particularly for:

  • loans with no guarantees, since only registration tax of EUR 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 provides for 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.

Industrial and manufacturing 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.