According to Italian tax law, some specific incomes are taxable in Italy through a substitute withholding tax when are paid to foreign beneficiaries. This rule applies when the debtor is (the taxable incomes are paid by) a taxpayer obliged by law to apply the above mentioned substitute withholding tax.

This happens, for example, when a foreign bank, without a permanent establishment in Italy, provides funding to an Italian company which pays interests to the foreign lender. In this case, the Italian company shall apply the domestic withholding tax or, if requested by the lender, the possible lower withholding tax provided by the tax treaty in force, when all the related conditions are met.

Otherwise, when the debtor is not a substitute for taxes (for example, a physical person who acts as a private person and not as an entrepreneur), the withholding tax is not applied. In this case, the foreign beneficiary must pay the Italian tax by filing the tax return in Italy.

Recently the Italian tax office has confirmed that, where:

• the substitute withholding tax provided by Italian law is not applicable because the taxable income is paid by a subject who is not substitute for taxes;
• and there is a tax treaty which provides a more favorable withholding tax

the foreign beneficiary must file the Italian tax return in which can directly apply, if the related conditions are met, the more favorable withholding tax provided by the tax treaty (for example, the 12,5% instead the 26% on interests paid to a bank domiciled in Switzerland).