Italian Revenue Agency Ruling Reaffirms that the Substitute Tax Applies to Refinancing Transactions

Overview


A recent ruling by the Italian Revenue Agency has reaffirmed the applicability of the Italian “substitute tax” to medium to long term loans in refinancing transactions. This had previously been denied in a controversial judgment issued by the Italian Supreme Court of Cassation (Cass. 16 January 2015, no. 695).

In Depth


Under Italian law, parties to loans granted by banks or financial institutions and with a duration of at least 18 months can opt for the application of a substitute tax of 0.25 per cent of the amount of the loan, in lieu of the ordinary taxes applicable on each piece of the financing and security package. This option allows substantial tax savings when the loan is secured by guarantees that are normally subject to high transfer taxes, such as the mortgage on real estate property, the pledge on securities, or the transfer of receivables.

For the substitute tax to apply, the law does not indicate any criteria other than the minimum 18 months maturity of the loan. In a recent, controversial judgment, however, the Supreme Court of Cassation stated that the substitute tax does not apply in pure refinancing transactions, i.e., loans aimed at repaying existing debt. In the Court of Cassation’s view, the substitute tax is a benefit that implicitly requires that the funds are used for a “productive” activity, and not for the repayment or remodeling of existing debt.

Although unanimously criticised by tax practitioners and tax law experts, this judgment generated substantial uncertainty in the financial markets and was perceived as a risk factor in refinancing transactions.

The Italian Revenue Agency Ruling

The Italian Revenue Agency ruling was requested by a non-Italian resident bank established in another EU Member State, in connection with a complex refinancing of an Italian company in the renewable energy sector. The tax treatment of the transaction, i.e., whether or not the substitute tax applied, was key to ensuring a satisfactory package of guarantees for the lender at an acceptable cost.

The Italian Revenue Agency made express reference in the ruling to the controversial Supreme Court of Cassation decision and confirmed that the substitute tax did actually apply in the case at hand, given that the deal generated the injection of fresh funds, irrespective of the fact that those funds were almost entirely aimed at repaying an existing debt.

While the ruling is legally binding on the tax authorities only with regard to this specific case, the position taken by the Revenue Agency is potentially wide-reaching and likely to help restore certainty over the terms and conditions under which refinancing transactions can obtain this favourable tax treatment.