Law no. 97, implemented on 6 August 2013, has modified the rules on the Fiscal Monitoring Regime which is applicable to individuals and associations situated in Italy.
Under Italian law, taxpayers are required to complete a Foreign Asset Monitoring Return Form (“Return Form”) if they are engaged in investment activities abroad (which does not include other monetary flow). New Law no. 97 reduces the number of duties that a taxpayer is required to fulfil in relation to filing of the Return Form and also reduces the level of fines for misreporting to a minimum of 3%, and a maximum of 15%, of the value of assets not declared (previously this was 10% to 50%).
These changes were enacted due to the European Commission challenging that, firstly there was no sufficient reason to justify some of the duties taxpayers were required to fulfil in relation to the Return Form, since Italy could obtain the same results through utilizing the exchange of information between EU countries. Secondly they challenged that the fines for violations of those duties were discriminatory when compared to the fines issued for violation of similar duties in relation to income arising from assets and investments made in Italy (EU Pilot 1711/10/TAX).
Although the above changes can be seen as a positive change for Italian taxpayers, taxpayers should also be aware that the Italian Parliament has also introduced a withholding tax for specific income generated abroad which were previously subject to taxation in the Return Form only. The new withholding tax will apply from 1 January 2014 and will apply on an account basis with the remaining balance being assessed in the Return Form at the personal tax rate.
Examples of incomes caught include:
- The capital gains arising from the sale of a participating interest,
- The capital gains arising from the sale of premises owned for less than five years,
- Income arising from business activities and occasional self-employment,
- Income arising from brands, patents, know-how, lottery winnings, rent of premises abroad, etc.
The new rules require any financial intermediaries involved to apply a withholding tax of 20% on the taxable income generated abroad. This is not only on the management of investments but also with simple monetary transfers. Furthermore, this new rule states that the taxpayer must provide the financial intermediary with the specific documentation needed to determine what is the taxable base of any transfers or transactions. If the taxpayer does not provide such information, and the financial intermediary in unable to ascertain such information following investigation, the financial intermediary is obliged to apply the withholding tax to the entire amount regardless of any exemptions or whether it has already been taxed (article 4, paragraph 2, of Law Decree no. 167/1990, as modified by the Law no. 93/2013).
For individuals in partnerships or self-employment, there is a presumption that the withholding tax will not apply unless the taxpayer declares that it should be subject to withholding tax. However, a financial intermediary is obliged to report the taxpayer’s name if not liable for the withholding tax levy.
The withholding tax to be applied to the incomes noted above seems to contrast with European Law, specifically with the free movement of capital, particularly as the same monetary flow taking place solely within Italian borders would not be subject to the withholding tax. Furthermore, the law does not identify the type of proof that is required in order to determine the taxable base.
The taxpayer will be forced to demonstrate the source of the amount, whether there has been any taxation abroad or even if the same amounts have already been taxed in Italy.
The taxpayer must also be aware that income arising from financial activities abroad that is taxed in Italy in the financial year that the income arose may also be taxed in Italy some years later if the income is later sent to the taxpayer through a financial intermediary. In order to avoid the application of the withholding tax, the taxpayer will have to demonstrate to the intermediary that this transfer has already been subjected to taxation some years earlier.
The European Court of Justice has already responded to this withholding tax issue, asserting the predominance of the principles of European law over national law: “although direct taxation falls within the competence of the Member States, the latter must none the less exercise that competence consistent with Community law”.