Nobody likes them, but everybody has to pay them: taxes. As investors, we have to make our necessary contribution to live in a fair and equitable society. In this article, we will analyse investment taxes in Italy, creating a step-by-step guide to navigating the complex Italian tax system.
The information presented here is up-to-date at the time of writing. However, every new government likes to make some changes to the tax system so it might be outdated by the time you’re reading this. Check at the top when this article was last updated, and please remember to do your own research!
What are the taxes for Italian investors?
In Italy, there are 3 main types of taxes you have to pay as an investor:
- Taxes on financial income
- Stamp duty
- Tobin Tax
Let's dig into each one.
Taxes on financial income
Taxes on financial income come into play when a profit is received from a financial instrument, either in the form of a capital gain like buying an instrument at a lower price than the purchase price, or in the form of interest or dividends. The tax rate varies depending on the type of instrument as we'll discover below, but the general rate is 26%.
Stamp duty is a 0.2% tax, which is calculated on the market value of all financial instruments held on the last day of the tax period. It must be paid annually and is debited directly from the current account relating to one's investments.
The Tobin tax is a tax on transactions in financial instruments issued by companies resident in Italy. The tax rate is 0.10% for transactions that take place on regulated markets, and 0.20% for all other transactions.
Type of income
Income in Italy is divided into two categories: capital income and miscellaneous income.
- Capital income consists of interest, coupons and dividends from investments.
- Other income, on the other hand, is income generated by the difference between the purchase and selling price of an investment.
This difference is crucial for understanding which tax rate should be applied to each individual instrument and for understanding how the tax offset mechanism works, which we will look into later on in the article.
Tax per financial instrument
In this section, we'll examine the taxation relative to each financial instrument considering the nature of the income they generate. Here's a summary before we dig into each one:
*Domestic and whitelist government bonds only
Profits or losses from buying or selling are considered miscellaneous income. Note that dividends are classified as capital income.
Tax rate: 26%
Bonds generate miscellaneous income, both for profits or losses from the sale and for those from redemption at maturity. Instead, coupons and issue discounts are considered capital gains.
Tax rate: 12.5% for domestic and whitelisted government bonds, 26% for all other bonds
ETCs and ETNs
These instruments only generate miscellaneous income, both dividends and gains or losses from their purchase or sale.
Tax rate: 26%.
ETFs generate only capital income, making them non-compensable, both for dividends and profits. Only capital losses can be considered miscellaneous income that can be offset against capital gains on other income.
Tax rate: 26%. The caveat is that the rate is 12.5% for the portion invested in Italian government securities or those of countries on the whitelist.
Active funds and SICAVs
These instruments also generate only capital income, both dividends and profits. Only capital losses constitute miscellaneous income that can be offset against capital gains on other income.
Tax rate: 26%. Similar to ETFs, the rate of 12.5% is applied for the portion invested in Italian government securities or those of countries on the whitelist.
Current accounts generate capital income through interest, with a tax rate of 26%. In addition, holding a current account involves the payment of a stamp duty of €34.20, unless the average deposit is less than €5,000.
The interest tax for the deposit account is 26%.
How to pay your taxes as an Italian investor
Having examined what taxes every Italian investor should know, we now go on to examine how taxes are actually paid.
In Italy, when we open a current account or buy financial instruments, we can choose between three types of tax regimes to adhere to, which differ according to how taxes are declared and paid:
- Administered Regime
- Declaratory Regime
- Managed Regime
Under the administered regime, the calculation and payment of tax obligations arising from investments are the responsibility of the intermediary through which we bought the securities (bank, online broker, etc.). This is the case for any type of income, regardless of whether it is capital income or other income.
In this case, taxation will take place, in the case of capital gains, when the financial instruments are sold.
Under the declarative regime, investors independently report miscellaneous income in their tax return for the relevant year. Capital income, on the other hand, will continue to be managed through the financial intermediary, who will act as withholding agent. An example of this is DEGIRO which provides you with an annual tax document.
In this last case, the management of the portfolio is entrusted to an intermediary, who also handles the tax management. In this case, the difference between capital income and other income is eliminated, but taxation on capital gains is paid even if the financial instrument was not sold and therefore the capital gain was not actually received.
How to minimise your tax bill: offsetting losses
A crucial aspect of investment tax management is the offsetting of losses. Under Italian tax law, losses can be used to offset profits, thereby reducing the overall tax due. This process is known as tax offsetting.
Losses may arise from various sources, such as the sale of shares or other financial instruments at a lower price than the purchase price. It is crucial to distinguish between capital losses and other losses, as the rules of set-off may vary.
In the case of losses on capital income, these can only be offset against profits on capital income, whereas losses on miscellaneous income can be used to offset any type of income. For example, if there are losses on buying and selling shares, these losses can be offset against profits on bonds or other investments.
Careful investment planning can help you maximise the benefits of tax offsetting by reducing your overall tax burden.
Questions you may have
When do I have to declare my investments?
If you opt for the declaratory regime, you will have to file your tax return by 30 September or 30 November of the year following the tax year, depending on the type of income you have to declare.