Financial income is taxable in Italy, those income sources are taxed at different tax rates compared to the regular IRPEF brackets. It is therefore important to divide such income sources in the following income sources:
- Interest and dividends
- Capital gains and capital losses
- Other financial income
Interests and dividends taxation
Interest and dividends are taxable at a flat 26% rate. Italian bank account interest tax is levied by your financial institution, and paid to the tax office accordingly; there is then no need to disclose your interest income in your tax return.
Same thing applies to the dividends tax. The Italian company paying the dividend will withhold 26% of it, thus leaving you with no tax to be paid (nor reported).
Things get a little more complicated whenever you receive such income sources from overseas. In case you receive interests from overseas bank accounts, you must self assess and disclose such earnings in your tax return (Section RM). You can opt for the 26% flat tax rate, or you can opt for the accrued IRPEF taxation; if you choose the latter, your taxation varies depending on the tax bracket you fall in.
Foreign dividends are taxable at flat 26%, and they must be disclosed in section RM of your tax return.
Since the 26% flat tax is a substitute tax rate, you cannot claim any foreign tax credit paid overseas. It is therefore crucial to request a withholding tax waiver from the foreign tax office to receive your financial income gross of tax.
If the withholding tax still applied, the 26% is calculated on the “net border” value, hence the value minus the foreign withholding tax.
Capital gains and capital losses
If you trade stocks or other financial assets, you are acquainted with the concept of capital gains and capital losses. Gains and losses are calculated as the difference between the buying price and selling price, if the latter is higher you will generate a gain, otherwise a loss.
Capital gains are taxable at 26% regardless of their source. Capital losses can be offset against future capital gains up to 5 years, it is therefore important to realize your losses before you realize your gains so you can offset one against the other.
A reduced 11% tax rate applies on capital gains realized on the transfer of private companies shares. This reduced tax rate requires a third party assessment of the company value (done by an accountant), and the disclosure in your tax return. Such a reduced rate can be paid in one solution, or in three equal installments in a 2 years period.