The tax will also benefit from the most favorable fiscal treatment of 12.5%, in line with the art 11 of the fiscal Convention signed between Italy and Switzerland. All this comes from a tax ruling recently issued by the Italian Revenue Agency in response to an application submitted by a Swiss bank concerning the tax treatment of interest payments made to the bank by Italian individuals. Particularly, this last Financial Administration response on the taxation in Italy of the interest received by a non-resident on financial loans granted to Italian residents is to be considered a further confirmation of a new orientation that is being consolidated. In fact, the Agency confirms the obligation of domestic taxation of interest income received by Swiss banks and paid by Italian residents due to the application of national fiscal rules, yet in doing so it considers as relevant the residence of the individual who paid the interests, without considering any connection with the place where the activity that generated the income was carried out.
Taxation of interest paid by Italian individuals to foreign banks
The general rule under Italian tax law is that foreigners are taxed in Italy only on Italian-source income and that capital incomes, such as interests, are considered to be Italian-source income if are paid by an Italian tax resident. Essentially, the last tax ruling, no. 379 of 11 September 2019, substantially confirms and clarifies the position of the tax authorities. Particularly, it clarifies that the withholding tax rate of 12.5% applies with regard to interest payments made by Italian individuals on loans from a Swiss bank. That’s because the Italy-Switzerland income tax treaty provides for a reduced rate of 12.5% if the recipient of the interest is the effective beneficial owner.
The obligation for the bank to complete and submit a corporate tax return in Italy
Also, the tax ruling indicates that the Swiss bank must then file an Italian corporate income tax return. Indeed, in relation to interests paid by someone who is not a withholding agent, for instance, an individual, the tax must be applied, according to Italian fiscal rules, through the submission of a corporate income tax return by the foreign entity, in this case a Swiss bank. In the years at issue, the rate of corporate income tax in Italy was 27.5%. Yet, thanks to the Italy-Switzerland income tax treaty provisions, the bank will pay a reduced rate of 12.5%, provided that the recipient of the interest was the effective beneficial owner. That said, it’s important to stressed that if foreign banks that have made loans to Italian tax residents than failed to file a corporate income tax return in Italy to declare the income derived from the loans, well in this case may encounter certain risks including interest and penalties on top of the tax due.
Fiscal treaties and conventions need to be always evaluated
Furthermore, is also useful to pointed out that the domestic regulations must be harmonized each time with the provisions of any international agreements concluded with Italy. In any case, the Revenue concludes that the exercise of a business activity in the Italian territory constitutes a de facto condition that cannot be evaluated in the ruling and, therefore, it remains in the faculty of the Financial Administration to eventually verify the correctness of what reported from the applicant.