United States: The Recently Introduced FTT - What’s New And What Are The Implications For FTT Taxpayers?

Last Updated: February 11 2013
Article by Bernadette Accili, Patrizio Braccioni and Domenico Gioia

Introduction

From 1 March 2013, trade of stock, other equity instruments, and derivatives shall be subject to a new tax on the value of the transfer, according to the provision of Article 1 (para. 491 thru 500) of Law No. 228 of 24 December 2012 (hereinafter "Law 228/2012"), widely known as the Stability Law.

Stock and Other Equity Instrument Transactions

The transfer of stock issued by companies registered in Italy, as well as the transfer of other equity instruments (both referred to as "Financial Instruments"), regardless of the place of registration of the issuer shall be subject to tax at the rate of 0.22% of the transaction's value.1 Starting from 2014, this rate will be reduced to 0.20%.

The transfer of shares deriving from bond conversion is also subject to the application of the same rate.

Transfers on regulated markets and multilateral trading facilities are subject to tax at the 0.12% rate; this will be reduced to 0.10% starting from 2014.

The following are excluded from the tax:

  • the transfer of ownership of shares traded on regulated markets or multilateral trading facilities issued by companies with a capital of less than 500.000.000,00 euros (the capital value shall be the value at November of the prior year);
  • the issuing and/or the cancellation of Financial Instruments;
  • new issue of shares resulting from a conversion and temporary purchase of securities transactions referred to in Article 2 (10) of (EC) Commission Regulation 1287/2006 of 10 August 2006;2
  • transaction with the European Union, the European Central Bank, the central banks of EU Member States, the central banks or organizations that manage the official reserves of other countries or international organizations or agencies established on the basis of international agreements ratified by Italy;
  • transactions between related companies;
  • transactions related to instruments qualified as ethic and social according to Article 117-ter of Legislative Decree No. 58, dated 24 February 1998;
  • corporate reorganization transactions done under the conditions described in the Ministerial Decree to be issued by the Minister of Economics and Finance within 30 days from the date of Law 228/2012 going into effect;3
  • transactions carried out by financial intermediaries in order to facilitate the share liquidity of the issuer;
  • transactions in the context of market making activities as defined;4
  • complementary pension funds and mandatory social security entities;
  • transfer of shares from an estate or received as gifts.

The Italian legislator has expressly provided that the tax is payable regardless of the transaction's place of signing or the country where the parties reside in.

No tax is applied to intermediaries in transfer transactions because it is levied at the purchasers' level and must be withheld by banks, fiduciary companies, and investment firms authorized to provide professional and investment services to the public, as well as by notaries and/or non-resident intermediaries.

Derivatives

As of 1 July 2013, transfer and/or sale of the following derivatives are subject to a tax contingent on the derivative and the value of the transfer:

  • derivatives on one or more Financial Instruments;
  • derivatives calculated on the value of one or more Financial Instruments;
  • transactions on securities allowing the sale and/or purchase of one or more Financial Instruments; or
  • transactions that entail a cash settlement determined mainly by one or more Financial Instruments, including warrants, covered warrants, and certificates.

Also derivatives are subject to tax regardless of the place where the transaction is concluded, or the country of residence of the parties.

Each of the party to the transaction will commonly determine the respective amount of tax due on these transactions. No tax is applied to intermediaries in transfer transaction.

A tax reduction equal to 1/5 of the withholding is available for transactions carried out on regulated markets or multilateral trading facilities.

Where derivatives also provide for the transfer of Financial Instruments, the transfer of ownership will be subject to the rules set for the transfer of Financial Instruments ownership.

Common Provisions

Finally, the legislator has provided for a tax on the high-frequency trading5 of the Financial Instruments as well as derivatives.

The tax will be applied at a rate of 0.02% on the countervalue of orders canceled or modified that exceed a numerical threshold to be established by the Decree of the Minister of Economy and Finance in a market day. This will be issued within 30 days of the Law 228/2012 coming into force. This threshold cannot in any case be less than 60% of the orders sent.

In this case, the withholding tax is applied to the party on behalf of which the orders are carried out.

The Introduction of a Common System of Financial Transaction Tax at the EU Level

On 28 September 2011, the European Commission adopted a proposal6 for a Council Directive (hereinafter the "Proposed Directive") on a common system of financial transaction tax (hereinafter "FTT").

According to Article 17 of the Proposed Directive, Member State shall apply the provisions set forth by national laws necessary to comply with the Proposed Directive from 1 January 2014.

However, due to the essential differences in Member State opinion as regards the need to establish a common system of FTT at EU level and the consequent conclusion that a common system of FTT cannot be attained within a reasonable period by the Union as a whole, 11 Member States7 have addressed formal requests to the Commission indicating that they wish to establish enhanced cooperation between themselves in the FTT area (hereinafter the "Cooperation").

On 25 October 2012, the European Commission authorized the Cooperation and has specified that the scope and objectives of the enhanced Cooperation will be based on the Proposed Directive.

In such a scenario, the provisions introduced by Law 228/2012 can be considered as the anticipation of the common system of FTT at EU level in Italy, in accordance with the Cooperation.

Nevertheless, the provisions set forth by Law 228/2012 cannot be considered totally in line with the Proposed Directive.

As described above, Law 228/2012 expressly excludes from the tax the transactions between related companies.

On the contrary, according to the Proposed Directive, FTT shall become chargeable for each financial transaction at the moment it occurs and, for the application of the FTT, "final transaction" means, inter alia, the transfer between entities of a group of the right to dispose of a financial instrument as owner and any equivalent operation implying the transfer of the risk associated with the financial instrument.

Another difference can be found with respect to the country where the parties reside in.

The Proposed Directive provides that, in order for a financial transaction to be taxable in the EU, one of the parties needs to be established in the territory of a Member State.

On the other hand, the Italian legislator has expressly provided that the tax is payable regardless of the transaction's place of signing or the country in which the parties reside. Consequently, Law 228/2012 expressly includes, in an opposite way from the Proposed Directive, the non-EU parties for the application of the tax.

Finally, the Proposed Directive provides that Member States shall apply the same rate to all financial transactions that fall under the same category.

Law 228/2012 appears in contrast, also, with such disposition; actually, transfers of Financial Instruments as well as derivatives are subject to a tax rate reduction if regulated on markets and multilateral trading facilities.

Main Implications and Potential Issues for our Clients

The most outstanding implications are associated with the internal organization, with the effects relating to corporate governance and responsibilities about the implementation and effectiveness of the new requested set up and international legal effects.

Managing the new FTT implies a strict coordination and cooperation among the tax function, the compliance function and the IT and back office services. In case of failure of correct implementation, responsibilities should be clearly determined in advance, especially in a scenario where little or no experience at all on such tax can be derived from the past.

It will also be of vital importance to explain this new tax to the commercial functions so that they will be able to report the explanations to clients, ensuring that sufficient transparency is put in place for the client about the consequences of this new tax.

Finally, potential legal and tax issues, as explained above, might arise in the following areas:

  1. Conflicts between EU Directive and national Legislation: which one would prevail, in which conditions, and to what extent? Is the EU Directive to be considered detailed enough in order to prevail in respect of National legislation?
  2. What if a conflict arises between two National Legislations on the application of the tax? It is clear that since 11 Domestic Legislations have implemented FTT without a formal EU coordination, such National legislations might overlap, causing either potential double FTT taxation or no FTT taxation at all. This issue may be particularly sensitive in the case of permanent establishments.
  3. What are the potential defensive measures a taxpayer should take against a FTT double taxation in the lack of specific provisions, being that FTT is outside the scope of Double Taxation Agreements?

Footnotes

1 The transaction's value is either the value of the net balance of the daily transactions of the same financial instrument completed on the same business day by the same party, or the amount paid.

2 Article 2 (10) of the EC Regulation 1287/2006 of the Commission dated 10 August 2006 provides that: 'securities financing transaction' means an instance of stock lending or stock borrowing or the lending or borrowing of other financial instruments, a repurchase or reverse repurchase transaction, or a buy-sell back or sell-buy back transaction.

3 i.e., 1 January 2013

4 According to Article 2, paragraph 1, letter k of EU Regulation No. 236/2012 of the European Parliament and Council dated 14 March 2012, "market making activities" means the activities of an investment firm, a credit institution, a third-country entity, or a firm as referred to in point (l) of Article 2 (1) of Directive 2004/39/EC, which is a member of a trading venue or of a market in a third country, the legal and supervisory framework of which has been declared equivalent by the Commission pursuant to Article 17 (2) where it deals as principal in a financial instrument, whether traded on or outside a trading venue, in any of the following capacities:

i. by posting firm, simultaneous two-way quotes of comparable size and at competitive prices, with the result of providing liquidity on a regular and ongoing basis to the market;

ii. as part of its usual business, by fulfilling orders initiated by clients or in response to clients' requests to trade;

iii. by hedging positions arising from the fulfilment of tasks under points (i) and (ii).

5 High-frequency trading is considered to be trading generated by a computer algorithm that automatically determines the decisions related to the placement, modification, or cancellation of orders and their parameters, where the placement, modification, or cancellation of orders on financial instruments of the same kind are made with a minimum interval less than the value established by the Decree to be issued by the Minister of Economics and Finance within 30 days of Law 228/2012 coming into effect. This value cannot in any case be above half a second.

6 COM(2011) 594 dated 28 September 2011.

7 Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia, and Spain.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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