Overall process for tax calculation/exemption from withholding tax

In order to be exempt from Italian withholding tax on interest from debt securities, clients must:

Segregate securities held for exempt and non-exempt investors into at least two separate securities accounts, one taxable and one exempt.
Send to Clearstream a Master Instruction for each exempt account.
Send to Clearstream the appropriate documentation per beneficial owner whose securities are held in the account specified in the Master Instruction (including those of the client itself, if applicable).
Notify Clearstream of the beneficial owner's Tax Identification Number for each transfer of securities related to an exempt omnibus account (in which Italian debt securities are held for more than one beneficial owner).
Report to Clearstream transfers per beneficial owner for an exempt omnibus account (account with more than one exempt beneficial owner).

1. Segregate securities held for exempt and non-exempt investors into at least two separate securities accounts, one taxable and one exempt

Clients can hold debt securities for:

Exempt investors (for whom the certification procedure has been fulfilled):
- In a single “exempt” account (“S” account); or
- In an omnibus “exempt” account (“X” account);

or for:

Non-exempt investors in another “non-exempt” account (“N” account).

This split is not possible if any of the securities held in an omnibus account on behalf of exempt beneficial owners are to be used in Clearstream's Securities Lending and Borrowing Program. Such securities must be held in separate accounts segregated by beneficial owner. This is to enable accurate identification of the beneficial owner, as required by the Italian Tax Authorities.

2. Send to Clearstream a Master Instruction for each exempt account

Since 1 January 1997, in order to ensure exemption from Italian withholding tax, the client must first complete a Master Instruction for each account in which the securities are held. By doing so, the client certifies, among other things, that the debt securities held in the account specified and subject to the withholding tax regime are held exclusively for exempt beneficial owners, whose names and Tax Identification Numbers are listed in Section II and with respect to whom the client has provided the requested valid documentation of residence.

The Master Instruction is a one-time declaration that remains binding for the client and can be relied upon by Clearstream until it is revoked by the client; if any change occurs that renders any of the details in the Master Instruction untrue, a new Master Instruction must be forwarded to Clearstream and the existing one must be revoked.

Before adding to an exempt omnibus account debt securities of an exempt beneficial owner that is not identified in the existing Master Instruction relating to the account concerned, the client must provide Clearstream with a new Master Instruction that includes the additional beneficial owner in addition to the Self Certification (or other documentation of exemption, if appropriate) relating to that additional beneficial owner.

Note: Clients that are Italian resident corporations must provide Clearstream with a Letter of Indemnity from an Italian Client - Italian Bonds (referred to as Letter of Indemnity #1) instead of the Master Instruction. The Letter of Indemnity is a one-time certificate, valid until revoked by the client.

3. Send to Clearstream the appropriate documentation per beneficial owner whose securities are held in the account specified in the Master Instruction

The following documentation must be sent per beneficial owner (including the client if applicable):

Either:

A Self Certification; and
A Side Declaration, if applicable;

or:

A Letter of Indemnity from an Italian Beneficial Owner - Italian Bonds (referred to as Letter of Indemnity #2).

Note: Clients that are Italian resident corporations that have provided Clearstream with a Letter of Indemnity #1 do not have to provide this documentation.

4. Notify Clearstream of the beneficial owner's Tax Identification Number for each transfer of securities related to an exempt omnibus account

In addition to providing the appropriate documentation, clients must enter the Tax Identification Number (TIN) of the beneficial owner for an exempt omnibus account (X account) in order to secure exemption at source.

The TIN is mandatory. It must be specified in the narrative field of the instruction. It must be one of the TINs specified both in the Master Instruction for the relevant account and either in a valid Self Certification or in the other valid documentation that is required concerning an Italian company or partnership.

If any other TIN is used or if the exact format has not been respected, the instruction will be rejected and the client will be asked to re-instruct.

Details regarding the exact format of the TIN instruction to be input can be found in the Creation Link Guide (Italy).

5. Report, to Clearstream, transfers per beneficial owner for an exempt omnibus account

In order to secure exemption at source from Italian withholding tax on debt securities, Clearstream clients are required to fulfil certain reporting requirements. These reports are not required either for exempt single beneficial owner accounts or for non-exempt accounts.

The required reports must be sent to Clearstream at the time of, or shortly after, the relevant exempt transaction, as indicated below.

The reports to be submitted to Clearstream are as follows:

A breakdown for each beneficial owner of each coupon payment and of each redemption payment including any issue discount on debt securities held in an exempt omnibus account on record date of the said payment. This report must be provided for each account and for each security code no later than the 25th of each month following the month of payment.
Daily report of all transfers of debt securities held within one exempt omnibus account from one beneficial owner to another that occurred without settlement instructions being forwarded to Clearstream. This report must be provided for each account on the effective settlement date of the transfers.

Service for reporting beneficial ownership information

Clearstream offers a service to assist clients in reporting information on beneficial ownership in order to secure exemption at source from Italian substitutive tax.

This service is available to clients holding Italian debt securities that are subject to Italian substitutive tax in an exempt omnibus account (an account with more than one exempt beneficial owner).

N.B.: This service covers the beneficial ownership reporting requirement as described in 5.a above. It is the client’s reponsibility to provide the two remaining reports within the indicated deadlines.

The purpose of the service is to reduce the time and effort needed by clients to collect the required information:

Clearstream will provide a report containing a breakdown, by beneficial owner, of each coupon payment, and of each payment of redemption proceeds that includes an issue discount, when credited to an exempt omnibus account;
The client verifies the content of the report, signs it, and returns it to Clearstream within a given time limit.¹
Clearstream then reports the information to the Italian Tax Authorities, as required under the Legislative Decree 239/1996 (as amended).

Subscription to the service

Clients who want to subscribe to this service should send a request via an authenticated means of communication or an original letter to Clearstream at:

Clearstream Banking Luxembourg
Attn: OTL - Italian Tax Services
42, avenue JF Kennedy
L-1855 Luxembourg

with the following information:

The account number of the client’s exempt omnibus account with Clearstream; and
The name, contact details and address of the person in the client’s organisation to whom Clearstream should return the report.

Description of the process

A beneficial ownership report will be sent to the client for each coupon payment and redemption with an issue discount on (or close to) the 5th of each month following the month in which the income was paid to the client’s account.

The report will include details of the payment(s), tax identification number of each beneficial owner, and the nominal value of securities held by beneficial owner on each record date.

Upon receipt of the report, the client² will:

Check that the data is correct;
Print the report on headed paper;
Sign it; and
Return it to Clearstream, preferably by registered mail, for receipt by Clearstream at the latest on the 25th of the month following the month of the payment.

Upon receipt of the beneficial ownership report, Clearstream will verify that it fulfils all the necessary requirements and will report the information to the Italian Tax Authorities as required under the Legislative Decree 239/1996, as amended.

Important notes:

Clients that do not subscribe for this new service must continue to report beneficial ownership information to Clearstream by the 25th of the month following the month in which the income was paid to the client’s account.
Clearstream will no longer issue reminders to clients that hold exempt omnibus accounts of the reporting requirements with respect to the beneficial ownership.
If no breakdown is received by the mentioned deadline, Clearstream will report to the Italian Tax Authorities the information available in its books at the moment of the reporting.

Client agreement

Clients must warrant the completeness and accuracy of the information they supply to Clearstream. Clearstream is under no obligation to carry out any investigation in respect of such information.

Service fee

In accordance with Clearstream’s Fee Schedule, a fee of EUR 30 is charged for each monthly report per client account.

Specific rules applicable to changes of account tax status

When the tax status of an account changes, the Italian tax rules assimilate such a change to a transfer, for tax purposes, of the securities held in the account at that time from a non-exempt investor or investors to an exempt investor or investors, or vice versa. For example, if a non-exempt account holding securities that are subject to the withholding tax regime becomes exempt (for example, upon receipt by Clearstream of all the requisite documentation), tax on the accrued coupon and/or issuance discount on each such security must be debited from the client's account, and a receipt of each beneficial owner's holding of each such security must be included in Clearstream's reporting of transactions for each beneficial owner, and the client will be requested to provide Clearstream with a detailed list of holdings of each such security for each beneficial owner.

Circular 20/2003 confirms the clarifications contained in the Circular 23/2002 and clarifies the relevant criteria to be applied in case securities have been bought and sold at different times before the Self Declaration is provided. As far as the reversal of the credit mentioned above is concerned, if the securities that are present in the securities safekeeping account at the moment of the receipt of the Self Declaration are securities that have been bought and sold at different times before the moment of the receipt of the Self Declaration, the so-called “LIFO” method (last in, first out) will be applied.

Consequences if the prerequisites for exemption are not fulfilled

Any account for which Clearstream has not received a duly completed and executed Master Instruction and the required valid Self Certification or other valid documentation, as applicable, for every beneficial owner whose debt securities are held in the account concerned, will be considered non-exempt for Italian withholding tax purposes. All debt securities held in such an account will be non-exempt. Any transfers of securities, coupon payments and payments of redemption proceeds that include an issue discount will be taxed.

The exempt status of an account may be withdrawn if the client does not report to Clearstream, when required by the latter, the breakdown, for each beneficial owner, of a coupon payment or of a payment of redemption proceeds including a discount, or the breakdown, for each beneficial owner, of the holding of each debt security held in the exempt account at the time of a change of status of the account.

Instructions on an omnibus exempt account for transfers of securities that are subject to the withholding tax regime at the time of the requested settlement or by the time when the actual settlement could occur will be rejected or cancelled by Clearstream if they do not include the TIN of a beneficial owner for whom Clearstream has in its possession a valid Self Certification or other valid documentation, as appropriate, indicating the instructing client as the first level bank.

How Italian withholding tax is applied to non-exempt accounts (credit-debit mechanism)

For all non-exempt accounts the withholding tax is applied on:

Transfer of securities;
Coupon payment;
Redemption proceeds that include issued discount (except BOTs).

Note: The calculation method applicable to the security as defined in the prospectus or pricing supplement (for example, ISMA rule actual number of days) must be taken into consideration when calculating the amount of accrued interest, coupon and issue discount subject to withholding tax.

Transfer of securities

Withholding tax is applied on each transfer of securities, including securities transfers for corporate event purposes and for securities lending and borrowing.

When securities are received in a non-exempt account, that account will be credited with the tax on the income (coupon and/or issuance discount³) accrued (that is, as from the last coupon date or closing date) up to the contractual settlement date, for value actual settlement date.

When securities are delivered from a non-exempt account, that account will be debited with the tax on the income (coupon and/or issuance discount³) accrued (that is, as from the last coupon date or closing date) up to the contractual settlement date, for value actual settlement date.

Clients are not allowed to use delivery without matching instructions for transfers of securities subject to Italian tax; Clearstream cannot guarantee correct tax processing and reporting on transfers instructed in this way.

Coupon payment

Withholding tax is applied on each coupon payment. When a coupon payment is credited to a non-exempt account, the account is credited net of tax on the total coupon amount.

Redemption proceeds that include issue discount

Withholding tax is applied on redemption proceeds that include issue discount. When redemption proceeds are credited to a non-exempt account, the account is credited net of tax on the issuance discount amount.

As a result, the beneficial owner will only have paid Italian withholding tax on the number of days he has actually held the securities on his taxable account (that is, the “pro rata” principle).

The tax credits and debits to the client's account will be reported as transactions (type 10 and 90) bearing the following wording: “Italian tax” followed by the reference of the related transaction (type, TRANO, common code and nominal amount).

Exceptions with regard to redemption proceeds that include issue discount

1. Treasury bills (Buoni Ordinari del Tesoro - BOTs) issued on or after 1 January 1997

For these types of debt security, withholding tax is applied as follows:

Initial subscription
- At the time of the initial subscription by a non-exempt investor, tax will be applied on the entire issuance discount;
Transfers of securities
- When BOTs are received in a non-exempt account, that account will be debited with the tax on the income (coupon and/or issuance discount1) remaining to be accrued (that is, as from the last coupon date or closing date) from the contractual settlement date to maturity, for value the actual settlement date;
- When BOTs are delivered from a non-exempt account, that account will be credited with the tax on the income (coupon and/or issuance discount1) remaining to be accrued (that is, as from the last coupon date or closing date) from the contractual settlement date to maturity, for value the actual settlement date;
Redemption proceeds that include issue discount
- On redemption date, redemption proceeds are credited gross.

As a result, the beneficial owner will only have paid Italian withholding tax on the number of days he has actually held the securities on his taxable account (that is, the “pro rata” principle).

2. Debt securities that do not have part or all of the interest or issue discount determined at the start of the relevant income accrual period

Certain debt securities are subject to Italian withholding tax but do not have part or all of the interest or issue discount determined at the start of the relevant income accrual period. Such securities, when held on a taxable account, are subject to the “pro rata temporise” principle as follows:

When a trade takes place between the last payment date (or closing date) and the income determination date, no Italian withholding tax is applied.
When a trade takes place between the income determination date and the payment date (or redemption date), Italian withholding tax on interest and issue discount (if applicable) is applied as from the start of the accrual period.

Example A: A security for which the interest rate cannot be determined at the start of the income accrual period is treated as follows when held on taxable accounts:

When a trade takes place between the last payment date (or closing date) and the income determination date, no Italian withholding tax is applied.
When a trade takes place between the income determination date and the payment date (or redemption date), Italian withholding tax on interest and issue discount (if applicable) is applied as from the start of the accrual period (debit of the seller and credit of the purchaser).
On payment date, Italian withholding tax on interest and issue discount (if applicable) is applied as from the start of the accrual period (debit of the holder).

Example B: A security for which the interest rate is twofold, that is:

A minimum fixed rate; and
An additional rate that cannot be determined at the start of the income accrual period;

is treated as follows when held on taxable accounts:

When a trade takes place between the last payment date (or closing date) and the income determination date, Italian withholding tax is applied on the accrued interest related to the fixed rate as from the start of the accrual period (debit of the seller and credit of the purchaser).
When a trade takes place between the income determination date and the payment date (or redemption date), Italian withholding tax is applied on the accrued interest related to both the fixed rate and the additional rate as from the start of the accrual period (debit of the seller and credit of the purchaser).
On payment date, Italian withholding tax is applied on the accrued interest related to both the fixed rate and the additional rate as from the start of the accrual period (debit of the holder).

3. BTP Italia indexed to Italian inflation

The tax on the accrued interest and on the potential revaluation of the principal is applied, for taxable bondholders, on the basis of the following rules:

The accrued interest, calculated on the nominal revalued face value basis, is always subject to the taxation according to Decree Law 239/96 (12.50% tax rate).
Any capital revaluation is considered as follows:
- Transactions with settlement date from the first business day of the month of coupon payment are considered subject to Decree Law 239/96.
- Transactions with settlement date up to the last business day of the month before coupon payment are considered subject to Legislative Decree 461/97 and treated as capital gains and, in such cases, the revaluation is added to the clean price of the trade.

Example: First issue BTP Italia indexed to Italian Inflation with “special” ISIN IT0004806896 and regular ISIN IT0004806888:

Settlement activity from 03/09/2012 until 25/09/2012: capital revaluation subject to DL 239/96;
Settlement activity up to 31/08/2012: any gain accrued is considered subject to LD 461/97.

Note: The website of the Department of the Treasury related to the Indexation coefficients for BTP. Calculation of the coupon under accrual and capital revaluation

The amount of the coupon under accrual is calculated by multiplying the annual interest rate by the number of days from issue date/date of last coupon payment to settlement date and by the revalued principal face value, applying the indexation coefficient at the same date.

The calculation of the principal revaluation under accrual is defined as follows:

(Nominal Amount*Price/100)*(Indexation coefficient-1)

Note: The Indexation coefficient is considered only if less than 1; if this coefficient results in less than or equal to 1, the calculation of the coupon under accrual is made on the nominal face value only.

The website of the of the Department of the Treasury related to the official documents for every issue.

The above rules will be applied to the following two government BTP Italia bonds currently on the market and for any future issues of similar securities:

BTP Italia - first issue BTP Italia indexed to Italian Inflation with “special” ISIN IT0004806896 and regular ISIN IT0004806888 - for trades settled within the month of each coupon payment (first coupon - from 3/9/2012 to 25/9/2012);
BTP Italia - second issue BTP Italia indexed to Italian Inflation with “special” ISIN IT0004821424 and regular ISIN IT0004821432 - for trades settled within the month of each coupon payment (first coupon - from 3/12/2012 to 10/12/2012).

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1. if no validated information about beneficial ownership is received from the client within the given time limit, Clearstream will consider the information included in its books as valid and will use it as a basis for its reporting to the Italian Tax Authorities.
2. Clients must warrant the completeness and accuracy of the information they supply to Clearstream. Clearstream is under no obligation to carry out any investigation in respect of such information.
3. The issuance discount represents the difference between the issue price of the bonds and their nominal value repaid upon maturity.

Overall process for tax calculation/exemption from withholding tax - Italian debt securities