9.2.6.1 Dividends and capital gain.
Participations are another important budget item for banks, both in terms of income (dividends and capital gain) and costs (capital losses).
They are subject to the so-called participation exemption regime which provides a partial exemption on both dividends and capital gain. 14
With regards to dividends, banks, as corporate taxpayers are generally entitled to a 95 per cent exemption on received dividend, according to Art. 89 of the Consolidated Act.
Such exemption regards dividends received from both resident and non-resident companies provided they are white listed companies and that dividends are non-deductible in the country of residence of the payer.
Since the current corporate tax rate is 27.5 per cent, dividends are subject to an effective rate of 1.375 per cent (27.5 per cent × 5 per cent).
Such exemption does not apply in some cases:
1) the subsidiary is resident in a black listed country (one of the countries in the special list of low tax jurisdictions) or the divi- dends are distributed from a black listed country;
2) the parent company is IAS adopter and gets dividends on “avail- able for sale” participations.
If dividends are received by a bank that opted for group consolida- tion, they are fully tax exempt.
With regards to capital gain and losses, Art. 87 of the Consolidated Act states that the application of the “participation exemption” needs to meet four requirements.
Two conditions refer to the shareholder:
a) The shareholder must have held the stock uninterruptedly for 12 full months before the month in which the transfer occurred;
b) The shareholder must have carried the stock as a financial asset on its first balance sheet approved during the stock holding period.
Two requirements concern the participated company.
a) The owned company must be (fiscally) resident in a not black listed country;
b) The owned company must be engaged in the active conduct of a trade or business.
In accordance with Art. 87 of the Consolidated Act, Art. 101 provides that losses from disposal of stock that qualifies for the exemption are non-deductible.
Realisation events that may cause recognition of exempt gains or non-deductible costs include:
a) sale or exchange;
b) distributions in complete or partial liquidation of a company or in redemption of stock that are treated as a sale or exchange under the ordinary corporate tax rules;
c) distributions of capital reserves in excess of a shareholder’s basis in the distributing company’s stock;
d) involuntary conversion of stock into a claim for damages for the loss of value of the stock;
e) withdrawal of stock from a trade or business;
f) issuance or transfer of limited rights on the stock or equity instrument.
If one of the above named four requirements is not met, the capital gains shall be considered fully part of the taxable income in the fiscal year in which they were realized.
The taxation can be spread on a straight line basis over a period not exceeding five financial years, at the tax payer’s choice, provided that the participation had been registered as long-term assets in the previous last three balance sheets. 15
9.2.6.2 Replacement/conversion of loans into participations
The analysis of taxation on bank loans must also include a provision contained in the Consolidated Income Tax, which provides the tax rule on shares which are acquired on the conversion of loans or on their extinction as it is agreed in the financial restructuring plan of companies in crisis. 16
Art. 113 of the Consolidated Act allows banks to apply to the received participations the tax treatment of loans extinguished/
converted, provided that the Inland Revenue accepts the Advance Tax Ruling.
The positive response to the ruling allows the new investors (which are banks) to reclassify, only for tax purposes, the shares received as the previous credits.
Hence, the subsequent write downs or losses made on equity invest- ments will be deducted according to the above explained provision of Art. 106, para. 3 of the Consolidated Income Tax. The shares keep the proper fiscal discipline on any dividends from shareholdings post conversion/credit waiver.
The Tax ruling has to be submitted 120 days prior to expiry of the deadline for submission of the tax return for the tax year in which the participations have been acquired (according to the Circular of the Inland revenue No. 42/E of 3 August 2010).
Art. 113 provides two kinds of acquisition of participations:
a) replacement of the original loans with participations that are issued by the enterprise/debtor;
b) conversion of the original credits in participations.
Participations may be not only equity, but also similar instruments:
as long as they are marketable securities, whose remuneration totally consists of the participation to the economic results of the company.
After the positive response to the ruling:
i) banks are exempt from the limits provided by Art. 87 of the
Consolidated Income Act so that they are allowed to deduct write downs and losses;
ii) banks can apply to such participations the same regime of losses and write downs which regards the extinct or converted receivables.
In order to obtain a successful ruling, the value of previous credit must be transferred to the received shares. Since the shares have to be listed at their fair value, reflecting the (negative) results of the issuing company, their value is lower than the last book value of the credits.
The difference between the value of registration of the participa- tion and the fiscal value of the credit before conversion, produces a
negative differential that cannot be detected as a loss on credits under Art. 101, para. 5, of the Consolidated Income Tax.
On the contrary, it is detected as a write down, pursuant to Art. 106 of the Consolidated Income Tax.
9.2.6.3 Substitute taxation on capital gain from the revaluation of Bank of Italy participation quotas held by banks
At the end of 2013, the government approved a “one shot” measure regarding the Bank of Italy participation quotas. Law Decree 30 November 2013 provided that such quotas, so far held by banks and other companies, had to be sold if over an edge. 17
According to paragraph 148 of Law 27 December 2013, No. 147 (“Stability Law 2014”), those assets also had to have been qualified as “available for sale”, so that they had to be registered among the trading portfolio at the new value.
The new value has the same amount of the face value of the new issued quotas according to Art. 4, para. 2 of the above named Law Decree No. 133 of 2013: € 25,000 per each quota.
The attribution of the new value caused a very noticeable misalign- ment between the face value and the tax value of the participations.
Before selling such participation quotas, the former owners had to make the step-ups of such higher values of the assets, through the payment of a substitute tax of IRES, IRAP and possible surtaxes.
The substitute tax, formerly fixed at 12 per cent, was increased to 26 per cent by Law Decree No. 66 of 24 April 2014. The tax had to be paid in three instalments, through the completion of the F24 payment form (tax code “1850” named “Imposta sostitutiva sui maggiori valori delle quote di partecipazione al capitale della Banca d’Italia – art. 1, comma 148, della legge 277 dicembre 2013, no. 147 ”).7