Tax Alert: Budget Law Series

Law No. 199 of 30 December 2025, published in the Official Gazette No. 301 of 30 December 2025 (the Budget Law 2026) provides for relevant tax measures interesting for international players and lenders with connections to Italy. This Alert provides an overview of certain tax provisions, including: (i) dividend distributions under minority shareholding; (ii) increase on the Italian Financial Transaction Tax (IFTT); (iii) new carve out from the 10% surcharge on variable compensation for managers in the financial sector; (iv) IRAP exemption on dividends received by Italian banks and insurance companies which qualify for parent-subsidiary directive benefits; (v) new measures to contrast non-compliance with VAT rules and (vi) increase of the flat tax. The Budget Law 2026 enters into force as of 1 January 2026, unless otherwise stated therein.

Dividend distributions in case of minority shareholding (article 1, paragraphs 51-55, of the Budget Law 2026)

Article 1, paragraphs 51-55, of the Budget Law 2026 narrows the application of the dividend exemption regime in case of distribution to minority shareholding.

According to the regime in force until fiscal year 2025 (applicable to distributions resolved up to 31 December 2025), dividends paid by Italian companies to Italian or EU/EEA companies benefit from a partial exemption, being subject to an effective tax rate of 1.2%.

The Budget Law 2026 narrows access to the 1.2% rate, which as of 1 January 2026 applies only if the shareholder meets at least one of the following conditions:

• a direct shareholding of at least 5% in the distributing company; or
• a tax value of at least € 500.000,00 (for equity-like participating instruments without voting rights - such as strumenti finanziari partecipativi - only this condition will be of relevance).

To prevent tax arbitrage resulting from the application of different tax regimes during the holding period (full taxation) and upon disposal (exemption), the same conditions will also apply to capital gains.

However, the new measure on capital gains applies to shareholding acquired as of 1 January 2026.

Points of Attention

Transactions involving minority shareholdings may be impacted negatively.

This change could negatively affect returns on small holdings and instruments used in stock lending, repos and similar transactions.

• Illustrative treatment under the new regime

Increase on the Italian financial transaction tax (IFTT) (article 1, paragraphs 29-31, of the Budget Law 2026)

Article 1, paragraphs 29-31, of the Budget Law 2026 introduced amendments to the the Italian financial transaction tax (IFTT) framework under Law No. 228/2012 and subsequent implementing decrees.

IFTT applies to:

• transfers of ownership of shares and equity‑like instruments issued by Italian‑resident companies above certain market capitalization thresholds.
• transactions in certain derivatives whose underlying or value is linked to such instruments or related indices; and

Moreover, a higher frequency trading tax (HFT Tax) applies on captured order-entry activity.

IFTT is due regardless of the place of execution if the instrument is within scope. Collection and reporting obligations fall on intermediaries executing or settling the transaction, or on the taxpayer in the absence of an Italian intermediary.

Until 31 December 2025, IFTT applied as follows:

• 0.2% on purchases of in-scope shares and other equity-like participating instruments (0.1% for transactions executed on regulated markets)
• 0.02% on high-frequency trading transactions.

The Budget Law 2026 increases rates from 1 January 2026 to:

• 0.4% on purchases of in-scope shares and equity-like instruments (0.2% on regulated markets), and
• 0.04% on high-frequency trading.

The higher rates would apply to transactions settled as of 1 January 2026, even if executed before that date, on the most likely interpretation of the law.

Disapplication of the 10% additional rate on variable compensation for managers in the financial sector (article 1, paragraph 137, of the Budget Law 2026)

Article 1, paragraph 137, of the Budget Law 2026 derogates to the 10% surcharge on the variable compensation paid in favour of managers operating in the financial sector (e.g. banks).

According to the regime in force as at 31 December 2025, variable compensation (including bonuses and stock options) paid or granted to beneficiaries who are managers with an employment contract or a continuous collaboration in the financial sector are subject to an a 10% surcharge for the amount of the variable component exceeding the fixed portion of the remuneration.

The Budget Law 2026 provides that the 10% surcharge do not apply in case the employer pays, in favour of non-profit organizations, an amount equal to at least twice of the additional 10% rate, provided that such entities are different from those that directly or indirectly control the employer, are controlled by them, or are controlled by the same party.

The Director of the Italian Revenue Agency has been demanded to adopt regulations to implement this measure.

IRAP exemption on dividends cashed by banks, insurance companies and other regulated intermediaries (article 1, paragraphs 46-50, of the Budget Law 2026)

Article 1, paragraphs 46-50, of the Budget Law 2026 provides that 95% of dividends distributed from companies resident in an EU Member State or in a SEE State allowing an exchange of information with Italy are excluded from the IRAP taxable base for financial intermediaries (e.g. banks and società di intermediazione mobiliare) and insurance companies, provided that the requirements for the application of the Directive 2011/96/EU (Parent-Subsidiary Directive) are satisfied.

Specifically, the conditions are as follows;

• the recipient holds at least 20% in the capital of the distributing company;
• the distributing company takes one of the forms listed in Annex I, Part A, of the Directive 2011/96/EU;
• the distributing company is tax resident in an EU Member State;
• the distributing company is subject to one of the tax listed in Annex I, Part B, of the Directive 2011/96/EU;
• the shareholding has been held for at least one year.

The Budget Law 2026 provides that the 95% exclusion of intra-EU/SEE source dividend distribution applies from fiscal year 2025 onwards.

For prior fiscal years, the Budget Law 2026 allows taxpayers to claim for refund within 48 months from the original payment the portion of IRAP paid on dividends. Alternatively, Italian banks may use the entire excess IRAP amount to offset certain reserves (affrancamento della riserva di extra profitti).

Based on the foregoing, tax refund claims remain the preferred route for the past periods, relying on the binding interpretative effect of the European Court of Justice judgment for intra-EU dividends (particularly on the principles set forth by the European Court of Justice in its latest decision dated 1 August 2025, C-92/24, C-93/24 and C-94/24) and the Budged Law 2026.

Notably, the new provision does not specifically address domestic dividend distributions. That said, Italian tax courts have increasingly adopted a favorable approach regarding dividend received by Italian financial institutions and insurance companies. In particular, according to the domestic case law, the inclusion of dividends in the IRAP taxable base of banks, financial institutions and insurance companies is contrary to EU law (reference is to Articles 49, 54, and 63 TFEU) and, as such, the domestic legislation on IRAP taxable base calculation must be disapplied not only with respect to intra-EU dividend distributions but also to domestic distributions.

The principles outlined above open the door to IRAP tax refund claims on dividends paid to Italian financial institution and insurance companies, both EU/SEE white list and Italy-sourced.

New measures to contrast non-compliance to VAT rules (article 1, paragraph 111, of the Budget Law 2026)

Article 1, paragraph 111, of the Budget Law 2026 introduces a new VAT assessment procedure applicable in case the taxpayer fails to file the annual VAT return.

In that event, the Italian Revenue Agency may, by 31 December of the seventh year following the one in which the return should have been filed, assess the VAT due on the basis of electronic invoices, telematic receipts, and data from periodic VAT settlement communications (so called LIPE).

The procedure provides a fast-track assessment mechanism with the following effects:

• VAT credits from the previous year are disregarded to companies under such assessment, and only payments already made may be deducted.
• the assessment is notified to the taxpayer, who has 60 days either to provide clarifications, or to pay the VAT, interest, and penalties.
• in the absence of action or sufficient evidence, the tax debt is forwarded to the Tax Collection Agent (Agenzia delle entrate – Riscossione), which starts the collection procedure.
• if the taxpayer's submissions lead to a reassessment, a new notice is issued and the 60-day term restarts; and
• offsetting the assessed VAT debt with other tax credit is excluded at all stages.

Penalties apply at 120% of the assessed tax, which could be reduced to 40% (one third) if payment is made within 60 days. To avoid duplication, penalties apply only on the net “tax due” after any related assessment.

The measure applies only to omitted returns generating payable VAT, while VAT credits may still be recognised if duly proven.

Increase of the flat tax (article 1, paragraphs 25-26, of the Budget Law 2026)

Article 1, paragraphs 25-26, of the Budget Law 2026 increases the annual substitute tax applicable to foreign-source income for eligible individuals transferring tax residence in Italy and opt for the applicable of the relevant regime,

According to the regime in force until 31 December 2025, the substitute tax was due as follows:

• Annual flat tax of EUR 200,000 for the eligible individual; and
• Annual flat tax of EUR 25,000 for each qualifying family member.

The Budget Law 2026 increases the substitute tax as follows:

• Annual flat tax of EUR 300,000 for the eligible individual; and
• Annual flat tax of EUR 50,000 for each qualifying family member.

The higher flat tax would apply only to individuals who transfer their tax residence starting from 1 January 2026. Existing beneficiary will retain their lower flat tax and existing status.