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Tax Alert (Italy) – Budget Law For 2018 Introduces Major Developments To Domestic Tax System



This is the fifth of a series of posts on the major developments introduced by Law No. 205 (enacting the Italian Budget Law for 2018),

Individual taxation – Regime applicable to dividends and capital gains derived from individuals outside a business capacity

The current tax regime applicable to dividends and capital gains, realized by individuals acting as non-entrepreneurs, depends foremost from the type of qualification that the holding assumes in the hand of the individual.

Specifically, they are classified as substantial participations, if it represents more than 2% of the voting rights or 5% of the capital in the case of participations in listed companies or 20% and 25%, respectively, for non-listed companies. Conversely, they are non-substantial participations in all other cases.

Dividends from substantial participations, received up to 31 December 2007, are therefore included in the relevant taxable base of the individual for 40% of their value, and taxed at progressive tax rates. Dividends received from 1 January 2008 to 31 December 2016 are instead taxed for 49.72% of their value, while dividends received from 1 January 2017 to 31 December 2017 are finally taxed for 58.14% of their value. Worth noting that the increase of the percentage of the tax basis is made to adequate the corresponding decrease of the corporate tax base for corporations over the years (respectively, 33%-27.5%-24%), otherwise affecting the amount of distributable profits.

Dividends from non-substantial participations are subject to a final withholding tax at 26%, and therefore not included in the aggregate taxable income (subject to progressive tax rates) of the individual.
Budget Law for 2018 has amended the tax treatment applicable, as from 1 January 2018, to dividends derived by individuals outside a business capacity providing for a flat tax rate at 26% (either for substantial and non-substantial participations). For completeness sake, this rule is already generally applied to non-resident individuals that do not hold shares through an Italian permanent establishment.

Thus, a transitional regime is introduced: from 1 January 2018 to 31 December 2022, dividend distributions referring to profits accrued up to 31 December 2017, will be taxed according to the regime applicable in the respective fiscal year. However, if at 31 December 2022 dividends referring to years prior to 31 December 2017 are still not paid out, such dividends will be taxed with a flat tax at 26% upon distribution.

The same provision amended the tax regime applicable to capital gains on the sale of participations. Briefly, in the case of substantial participations, 58.14% of the gain realized is tax relevant. Therefore, this amount is added to the aggregate income of the individual (and taxed at progressive tax rates). Contrarily, for gains deriving from the sale of non-substantial participations, the taxation is limited to a final withholding tax at 26% rate.

Budget Law for 2018 has amended the tax treatment applicable, as from 1 January 2019 (one year later than for dividends), to capital gains derived by individuals outside a business capacity and, from now on, also applicable to non-resident individuals that do not hold shares through an Italian permanent establishment, providing for a flat tax rate at 26% (either for substantial and non-substantial participations). However, no transitional regime is introduced. Hence, gains realized from FY 2019 will follow straightforwardly the new rule.

Entry into force of Law No. 205 of 27 December 2017: 1 January 2018.

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