Taxation of Financial Instruments – Part One

Introduction

Understanding how your financial investments are taxed is essential for the informed management of your wealth. In Italy, the tax treatment for individuals varies significantly depending on the type of financial instrument, the nature of the income produced, and the tax regime chosen. Knowing these rules makes it possible to optimise your portfolio, avoid surprises when filing your tax return, and make the most of the opportunities for offsetting gains and losses.

Given the complexity of the subject, we will devote a series of in-depth articles to this topic: in this first contribution, we introduce the fundamental distinction between investment income and miscellaneous financial income, as well as the summary framework of the tax rates applicable to the main financial instruments.

Investment Income and Miscellaneous Financial Income: A Fundamental Distinction

The first concept to master is the distinction between the two categories into which the tax legislator classifies financial income:

Investment income (redditi di capitale)

These are the proceeds received that derive from the use of capital. This category includes:

• Interest on bonds and debt securities (coupons);

• Dividends distributed by companies;

• Income distributed by investment funds and ETFs (periodic distributions);

• Capital gains on the redemption/sale of fund and ETF units (the positive difference compared with the weighted average cost);

• Interest income on current accounts and bank deposits.

Key feature: investment income is taxed at the time it is received and cannot be offset against capital losses realised on other instruments (without prejudice to what will be said about the managed savings regime, which will be covered in the next article).

Miscellaneous financial income (redditi diversi di natura finanziaria)

This is income arising from transactions in financial instruments that generate a positive or negative difference compared with the purchase price (capital gains/capital losses). This category includes:

• Capital gains/losses on the sale of shares, bonds, ETCs and certificates;

• Capital losses on the sale of investment fund units and ETFs;

• Income from derivative instruments (futures, options, CFDs);

• Conditional coupons on certificates.

Key feature: miscellaneous financial income can be offset against capital losses of the same category, according to the methods that will be described in the next article.

General rule: no offsetting is permitted between investment income and miscellaneous income (without prejudice to what will be said about the managed savings regime, which will be covered in the next article). This means, for example, that the taxed coupons of a bond (investment income) cannot be reduced by any capital losses realised on the sale of shares (miscellaneous income).

Non-harmonised collective investment undertakings (CIUs) and ETFs

It is essential to bear in mind that, in the case of investments in non-harmonised CIUs and ETFs, i.e. those that do not comply with the European framework deriving from the UCITS Directive, all proceeds are subject to ordinary IRPEF taxation and will therefore contribute to the taxpayer’s total income, to be taxed by tax brackets, with the 26% substitute tax not being applicable.

Bonds and accrued interest

Accrued interest represents the portion of interest that has accrued on a bond from the date on which the last coupon was detached until the day on which the security is bought or sold. In this case, it is essential to bear in mind that accrued interest, being a portion of interest that has accrued, cannot be included in the miscellaneous income produced by the capital gain or loss arising from trading the instrument, but must be classified separately as investment income.

This is very common, considering that on the secondary market bonds are generally quoted at the “tel quel” (or “dirty”) price, i.e. the price inclusive of accessory rights (in the case of bonds, the dividends in the course of accrual).

Dividends from foreign shareholdings and the “netto frontiera” basis

Pursuant to Article 27, paragraphs 4 and 4-bis, of the Italian Consolidated Income Tax Act (TUIR), where the administered savings regime or the managed savings regime applies (regimes that we will examine in the next article), remuneration received by individuals deriving from holdings in the capital or assets of non-resident entities is subject to a withholding tax of 26%, applied by the intermediary with which such instruments are held, to be calculated on the so-called “netto frontiera” (net-of-border) basis, i.e. on the value of the dividend received net of the withholdings applied by the foreign State.

Where, instead, the foreign shareholding is held under the declarative regime (which will also be examined in the next article), a substitute levy in lieu of income taxes of 26% applies, to be calculated on the so-called “lordo frontiera” (gross-of-border) basis, i.e. on the value of the dividend not reduced by the withholdings applied by the foreign State.

In both cases, the resulting double taxation – the withholding applied by the foreign State, on the one hand, and the Italian tax calculated on the net or gross border value, on the other – may in principle be mitigated through the recognition of a tax credit for taxes paid abroad. However, this is a particularly controversial matter in practice, on which the Supreme Court has ruled on several occasions.

The issue of recognising a tax credit for taxes paid abroad on dividends received by resident individuals, even where such dividends are subject in Italy to withholding tax as a final tax or to mandatory substitute tax, has been the subject of two of our previous contributions, to which reference is made for a complete overview of the subject:

• The refund of Italian withholding tax on foreign dividends: the Supreme Court’s approach is consolidating in tax case law

• International tax principles in conflict: the areas where the Italian Revenue Agency resists treaty and EU law

In brief, the Supreme Court, in judgments No. 25698/2022 and No. 10204/2024, held that, where a double taxation convention is in place, the substitute taxation provided for by domestic law does not preclude the foreign tax credit, provided that the foreign tax has been definitively paid and the treaty provisions do not expressly exclude the recognition of the credit: since, for dividends received by individuals under Article 18 TUIR, this is not a substitute tax “at the request of the beneficiary” (it now being mandatory and not optional), the treaty clause that would in that case exclude the credit cannot operate, otherwise resulting in a double taxation that the Conventions are precisely intended to avoid.

This principle now appears to be substantially consolidated in the case law of the lower courts as well, with numerous favourable rulings issued during 2025 and the first half of 2026, and with the first confirmations also coming from the second-instance tax courts (C.G.T. II Tuscany No. 48/1/26 and C.G.T. II Lombardy No. 1013/9/26). Despite this now-stable orientation, the Italian Revenue Agency continues to systematically reject the related refund applications at the administrative stage, forcing taxpayers to bring litigation whose outcome is, as things stand, largely predictable in their favour.

Practical examples:

1. A taxpayer under the administered regime holds a shareholding in company ABC, whose registered office is in a foreign country that applies a 10% withholding tax at source on dividends. Assuming a dividend of 100, the 26% withholding for Italian tax purposes will be applied to the net-of-border amount of 90, resulting in tax of 23.4. As a result, the effective tax rate will be 33.4%.

2. A taxpayer under the declarative regime holds a shareholding in company ABC, whose registered office is in a foreign country that applies a 10% withholding tax at source on dividends. Assuming a dividend of 100, the 26% tax for Italian tax purposes will be applied to the gross-of-border amount, resulting in tax of 26 (in addition to the withholding applied by the foreign State). As a result, the effective tax rate will be 36%.

In both cases, a taxpayer who believes they are entitled to the tax credit for taxes paid abroad (or to a larger credit, as in the administered regime example) may file a specific refund application to recover the excess amount paid, bearing in mind, however, that the Italian Revenue Agency tends to reject it at the administrative stage, generally making it necessary to bring the matter before the tax courts in order to obtain recognition (see the in-depth analyses referred to above).

Tax Rates by Type of Instrument

The following table summarises the substitute tax rates applicable to the main financial instruments, under the legislation currently in force (Decree-Law No. 66/2014, as subsequently amended):

Financial instrument	Type of income	Rate
Italian government bonds (BTPs, BOTs, CCTs, CTZs)	Investment and miscellaneous	12.50%
Foreign government bonds (white list countries)	Investment and miscellaneous	12.50%
Bonds issued by local authorities (Regions, Municipalities)	Investment and miscellaneous	12.50%
Bonds issued by international organisations	Investment and miscellaneous	12.50%
Shares (dividends)	Investment	26%
Shares (capital gains on sale)	Miscellaneous	26%
Corporate bonds	Investment and miscellaneous	26%
Harmonised ETFs and CIUs* (income/capital gains)	Investment and miscellaneous	26%
Financial certificates (coupons and capital gains/losses)	Miscellaneous	26%
ETCs/ETNs (Exchange Traded Commodities/Notes)	Miscellaneous	26%
Current accounts / bank deposits (interest)	Investment	26%
PIRs – individual savings plans (if the investment restrictions and the 5-year holding period are met)	Investment and miscellaneous	Exempt
Non-harmonised ETFs and CIUs	Investment and miscellaneous	IRPEF

* For harmonised ETFs and CIUs (i.e. those complying with the European UCITS Directive): capital gains arising from redemption/sale are always investment income; capital losses are miscellaneous income. The rate may vary depending on the share invested in government securities eligible for the preferential 12.50% taxation.