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Italian Budget Cuts Detailed

July 2011 - Tax & Private Client. Legal Developments by Hassans.

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Following the presentation of a modified decree containing the Italian government's proposed budget reductions, an explanation has been provided of how they should eliminate Italy's budget deficit by 2014.

To reach the targets the government has previously agreed within the European Union - of reducing the country's fiscal deficit from the 3.9% of gross domestic product targeted for this year, to 0.2% in 2014 - the whole new programme of budget cuts will now total some EUR68bn (USD97bn).

It is planned that EUR51.1bn of that total will be obtained from the budgetary decree that has already been gazetted, and should be approved in parliament before the summer recess. EUR2bn, EUR6bn, EUR17.8bn and EUR25.3bn, respectively, are to be found in the four fiscal years from 2011 to 2014.

However, it has been disclosed that a further EUR16.9bn (EUR2.2bn in 2013 and EUR14.7bn in 2014) will be needed from future fiscal reforms, the framework for which was released at the same time as the budgetary decree, but the approval of which is unlikely to be received until next year.

While the tax reform package is based on the overriding principle that it will produce no net decrease in the government's overall revenue collections, it is foreseen that parallel reforms to Italy's social security and welfare system, including an attack on abuses and complexities, should provide the necessary savings. However, to cover the event that those reforms do not happen, it is likely that some form of safeguard - such as pre-arranged spending cuts across all departments - will be introduced into the budgetary decree before it is passed.

The measures in the decree, the effect of which is therefore concentrated in 2013 and 2014 and beyond elections which could be held next year, include the raising of the pension age, whilst also curtailing the annual rise in higher pension rates from next year; making a further attack on central and local government spending through the organization of a spending review; and looking at other actions to reduce tax evasion in the economy.

The decree also introduces certain preferential tax regimes, aimed at encouraging economic development. In particular, the government has confirmed that it will work with Confindustria, the Italian business association, and Italy's trade unions to arrange a lower income tax rate for employees earnings arising out of work arrangements that improve corporate productivity.

In addition, the existing special 20% tax regime for new firms will be reduced to 5% for a period of five years, but will now be restricted to small businesses established by individuals under the age of 35 or the newly-unemployed, and where the individual has not been involved in a similar activity in the previous three years.

The concept of venture capital funds, giving a tax exemption on earnings arising therefrom, will also be introduced. Such funds will need to be involved in providing seed, start-up, early-stage or expansion financing for non-listed companies, which are not more than three years old.

However, while the separate income taxation of banks proprietary trading activities, and the duty on every financial transaction performed by their investment banking operations, have been dropped from the final version of the decree, the minimum regional corporate tax rate has been increased from 4.25% to 4.65% for banks and other financial companies and to 5.90% for insurance companies.

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