BDO Corporate Tax News

The Italian parliament has amended the controversial Windfall Tax on banks introduced on 11 August 2023, following criticisms from both the banking sector and the European Central Bank. The Windfall Tax, which imposes a one-time 40% tax on certain banks for 2023, targets bank profits, which grew exponentially as a result of interest rate hikes to counteract inflation (for prior coverage, see the item in the Bytes column in the August 2023 issue of Corporate Tax News).

The amended Law Decree was published in the official gazette on 9 October 2023 and became effective on 10 October. The main changes to the August decree are as follows:

• Taxable base and rate: Under the August decree, the Windfall Tax would be levied at a rate of 40% on the excess profits earned from higher interest rates in 2022 and 2023. Under the revised decree, the tax applies to the portion of the net interest margin booked in the profit and loss accounts approved by the Bank of Italy that was achieved in the fiscal year (FY) preceding the FY in progress on 1 January 2024 (i.e., FY 2023 for banks adopting the calendar year) and that exceeds by at least 10% the interest margin achieved in the FY preceding the FY in progress on 1 January 2022 (i.e., FY 2021 for banks adopting the calendar year). However, the Windfall Tax payable is capped at 0.26% of the total risk exposure amount (determined by reference to the closing date of the FY preceding the FY in progress on 1 January 2023 (i.e., FY year 2022 for banks adopting the calendar year).
• General anti-avoidance rule (GAAR): The tax authorities can invoke the GAAR to challenge any abusive practices.
• Prohibition on passing on costs: Banks cannot pass on the costs of the Windfall Tax charge to clients. The Competition and Market Authority will have oversight in this area and will ensure that banks are complying with the rules.
• Alternative to payment of Windfall Tax: Covered banks are given an alternative to paying the Windfall Tax. A bank can avoid the tax if it allocates at least 2.5 times the amount of the tax due to a non-distributable reserve at the time it approves its financial statements for the FY preceding the FY in progress on 1 January 2024 (i.e., FY 2023 for banks adopting the calendar year). If operating profits or losses for the year are less than the required reserve amount, the reserve will be funded or supplemented by using the profits of previous years starting with the most recent profits and then other available equity reserves. It should be noted that if the reserve is subsequently distributed as dividends, the full Windfall Tax will have to be paid, in addition to interest.

The following provisions from the August Law Decree remain unchanged:

• Taxable persons: The Windfall Tax applies to all Italian banks and Italian branches of foreign banks that are licensed to carry on banking activities in Italy.
• Deductibility of the tax: The Windfall Tax may not be deducted for corporate income tax or the regional tax on productive activities purposes.
• Payment deadline: Banks generally must pay the Windfall Tax due by the end of the sixth month following the end of the FY preceding the FY in progress on 1 January 2024 (i.e., 30 June 2024 for banks adopting the calendar year).

BDO insights

Although the Italian parliament has redesigned the August Law Decree to address the criticisms, not all doubts about the constitutionality of the law connected to the Windfall Tax seem to have been resolved, especially in light of the introduction of a provision that appears to be more punitive (in terms of reducing available profits) for banks that decide not to pay the Windfall Tax. It is interesting to note that some of Italy's largest banks have already chosen to allocate funds to a non-distributable reserve instead of paying the Windfall Tax to avoid the risk of possible shareholder liability actions.


Angelo Raffaele Cardinale
Giuseppe Carbone
BDO in Italy