Executive summary

On 22 October 2025 the Draft 2026 Budget Law was officially published. It contains several tax measures, some specifically designed for banks, others apply to financial intermediaries and insurance companies, and still others extend to a larger set of taxpayers.

The key tax measures for banks, other financial intermediaries and insurance companies are the following:

1. An exemption from the Italian regional tax on productive activities (IRAP) is provided for banks and other financial intermediaries (other than fund management companies and investment companies) and insurance companies of 95% of intra-EU dividends that (a) qualify for the tax-exemption regime under the Italian rules implementing the Parent-Subsidiary Directive (PSD) and (b) are nondeductible at the level of the EU-subsidiary paying them. Currently these dividends are included in the IRAP tax base for 50% of the relevant amount. The new IRAP exemption regime applies starting from fiscal year 2025; however, before the expiry of the 48-months statute of limitations term, banks, other financial intermediaries (other than fund management companies and investment companies) and insurance companies may request a refund of any IRAP paid in past fiscal years that exceeds the 95% exemption threshold. Upon specific request, banks may offset the refundable IRAP amounts (without any limit) against the substitute tax due to unlock non-distributable reserves booked under the Italian 2023 windfall tax regime (see point 4, below) — the rules applicable to the IRAP reclaim and offsetting procedure will be supplemented via a tax measure to be issued by the director of the Italian Tax Authorities.
2. The existing exemption from corporate income tax (IRES) for up to 95% of dividends, which generally applies to banks, other financial intermediaries and insurance companies, as well as other IRES taxpayers, becomes conditional upon the parent entity's holding a minimum 10% participation threshold, taking into account both direct and indirect participations, with appropriate adjustments for dilution effects in participation chains. The new IRES exemption regime applies to dividends with distribution resolutions occurring from 1 January 2026.
3. The IRAP rates for banks, other financial intermediaries and insurance companies are increased by two percentage points for three subsequent fiscal years.
4. A temporary substitute tax is introduced to unlock the non-distributable reserves (N-DR) that banks booked under the 2023 windfall tax regime. The new tax applies (a) at 27.5% for N-DR existing as of 31 December 2025 and (b) at 33% for N-DR existing as of 31 December 2026. Once the substitute tax is paid, the N-DR can be distributed to shareholders with no Italian windfall tax charge.
5. The compulsory carryforward mechanism that suspends the tax deduction of selected items of income giving rise to DTAs, already introduced by the Italian 2025 Budget Law, is renewed by the Draft 2026 Budget Law.
6. New temporary rules apply for the timing of the tax deduction of debt provision for expected losses.
7. The introduction for banks and other financial intermediaries of a limited deduction of interest expenses at differentiated rates from 96% to 99% for fiscal years 2026 to 2029; this law change also affects the computation of the IRES advance payments due for fiscal years 2027—2030.
8. Limitations are added to the tax deduction of write-downs on bonds booked as fixed financial assets.

Other tax measures, targeting a larger set of taxpayers (e.g., natural persons and entities other than banks, other financial intermediaries and insurance companies) include:

• The flat substitute tax due from high-net-worth individuals (HNWIs) who elect the Italian favorable tax regime is increased from €200k to €300k; also, the flat substitute tax for the HNWI's relatives increases from €25k to €50k.
• Capital gains derived from euro-denominated stablecoin tokens by a person who is not engaged in business activities will be subject to substitute tax at a 26% rate, rather than the 33% rate generally applicable to crypto assets, effective from 1 January 2026.
• An optional 8% substitute tax regime (10.5% for companies that were dormant in two out of three reference fiscal years) is provided for the assignment of nonbusiness assets to shareholders. The taxable basis is equal to the positive difference between the fair market value and the recognized tax cost of the nonbusiness assets. Tax incentives are intended to be granted for assignments of real estate, also for Italian indirect tax purposes.
• The step-up-in-value regime for reserves under the tax-suspension regime, introduced by Article 14 of the Legislative Decree dated 13 December 2024, No. 192, is renewed.
• Taxation is deferred for capital gains arising from the sale of selected assets and can be spread over (i) three fiscal years (instead of the five fiscal years under current rules), if the sold assets were owned for at least five years (three fiscal years under current rules), or (ii) five fiscal years if the sold assets qualified as the transfer of a going concern and were owned for at least three years.

It should be noted that the Draft 2026 Budget Law may incur significant changes during the parliamentary approval process, which should conclude by 31 December 2025.

Detailed discussion

Dividends taxation for IRES and IRAP purposes (Articles 17 and 18)

On 1 August 2025, the European Union Court of Justice (EUCJ) ruled that IRAP currently applicable to 50% of dividends received by an Italian tax resident bank from its EU subsidiaries conflicts with Article 4 of the PSD, as the taxation applicable on 5% of dividends is already covered by IRES. (For background, see EY Global Tax Alert, Italy | EUCJ rules regional taxation of dividends infringes on EU law, dated 4 August 2025.) Other financial intermediaries and insurance companies also encounter the same issue.

In light of the EUCJ decision, the Italian Government proposes to amend the dividends taxation regime as follows.

For IRAP purposes, a 95% exemption is introduced for intra-EU dividends — received by banks, other financial intermediaries (other than fund management companies and investment companies) and insurance companies — that (a) fall in scope of the PSD and (b) are nondeductible in the hands of the EU subsidiary paying them. The tax treatment of the intra-EU dividends is therefore equalized between IRES and IRAP.

Although the new IRAP exemption regime applies starting from fiscal year 2025, banks, other financial intermediaries (other than fund management companies and investment companies) and insurance companies may request — before the expiry of the 48-months statute of limitations term — a refund of the IRAP paid in past fiscal years that exceeds the 95% exemption threshold. This refund claim must be submitted to the Italian Tax Authorities.

Under the new IRAP-exemption regime, the double-taxation phenomenon (in contrast with Article 4 of the PSD), as explained in the EUCJ decision, would be significantly reduced but not completely eliminated. Based on the current draft version of the law, intra-EU dividends would still be subject not only to IRES (as per the current rules) but also to IRAP up to 5% of their amount.

Banks making refund claims may opt to offset the refundable IRAP amounts against the substitute tax due to unlock the non-distributable reserves under the Italian 2023 windfall-tax regime; in such a case, the general offsetting limitations rules would not apply. The option should ordinarily become available starting from the tenth day of the month following the month in which the refund claim is submitted to the Italian Tax Authorities.

The rules applicable to the IRAP reclaim and offsetting procedure will be supplemented via a tax measure to be issued by the director of the Italian Tax Authorities.

For IRES purposes, the existing 95% exemption regime on dividends continues to apply to banks, other financial intermediaries and insurance companies, as well as other IRES taxpayers. However, it becomes conditional upon the Italian parent entity's holding a minimum 10% participation threshold in the Italian or foreign subsidiary that pays the dividends, taking into account both direct and indirect participations, with appropriate adjustments for dilution effects in participation chains.

The new IRES exemption regime, which aims to align the Italian domestic rules and those implementing the PSD, applies to dividends for which distribution resolution occurs starting from 1 January 2026; it also affects the computation of IRES 2026 advance payments.

Conversely, the new IRES exemption regime does not affect the taxation of dividends an Italian subsidiary pays to its EU parent company, which under Article 27(3-ter) of the Italian Presidential Decree dated 29 September 1973, No. 600 may still benefit from 95% exemption (through the Italian withholding tax at 1.2% reduced rate) regardless of whether the EU parent company would meet the minimum 10% participation threshold.

Starting from 2026, any dividends received by an Italian parent company that do not qualify for the 95% exemption should be entirely subject to IRES in its hands; however, the double taxation of the same profits in the hands of either the subsidiary and the parent company is prohibited under Article 163 of the Italian Presidential Decree dated 22 December 1986, No. 917; furthermore, the Italian parent company would be discriminated against an EU parent company receiving this kind of dividends from its Italian subsidiary (i.e., full IRES taxation versus 1.2% Italian withholding tax).

IRAP rates increase (Article 21)

For banks, other financial intermediaries and insurance companies, IRAP rates are increased by two percentage points for fiscal year 2026 and the two subsequent fiscal years. For banks based in Lombardy, the increase should lead to an IRAP tax rate of 7.57%.

Italian windfall tax reserve unlocking (Article 20)

Starting from 2029, any distributions of profits or reserves made by banks is presumed to be drawn from the non-distributable reserves (N-DR) booked in connection with the 2023 Italian windfall tax (i.e., for an amount equal to 250% of the Italian windfall tax otherwise payable). This means that such distributions will eventually trigger the application of the 2023 Italian windfall tax. (See EY Global Tax Alert, Italian Parliament passes Italian Windfall Tax for banks, dated 9 October 2023.)

In this context, by the end of fiscal year 2028 banks may opt to unlock their N-DR by paying a substitute tax (in lieu of the 2023 Italian windfall tax) which would apply:

• At a 27.5% rate on N-DR existing as of 31 December 2025
• At a 33% rate on N-DR existing as of 31 December 2026

The substitute tax must be paid by the deadline for IRES and IRAP balance tax payments and is nondeductible.

Suspension of DTA-related tax deductions and limitation in use of tax losses and excess of Notional Interest Deduction (Article 22)

Article 22 of the Draft 2026 Budget Law, which essentially replicates the provisions in Article 1(14-20) of the Italian 2025 Budget Law (Law No. 207, dated 30 December 2024), suspends certain DTA-related deductions for fiscal year 2027, deferring them to 2028 and 2029 in equal installments:

• 3.80% quota under Article 16 of Law Decree No. 83/2015 (Provisions and losses on customer loans)
• 12.36% quota under Article 1(1079) of Law No. 145/2018 (Tax amortization quotas of goodwill and other intangible assets that have resulted in the recognition of DTAs)
• 9.50% quota under Article 1(1067—1068) of Law No. 145/2018 (Tax amortization quotas of the income components derived from expected credit losses under IFRS 9 )

Additionally, the use of tax losses and ACE (Notional Interest Deduction) benefits for fiscal year 2026 is capped at 45% of the incremental taxable income resulting from deferred deduction carryforwards under Article 1(14-17) of the Italian 2025 Budget Law. For fiscal year 2027, the cap increases to 54%.

This limitation in the use of tax losses and ACE benefits also applies to losses resulting from the fiscal unit. As a result, the overall income of the fiscal unit for FY26 and FY27 is deemed to be primarily formed with the incremental taxable income resulting from deferred deduction carryforwards under Article 1(14-17) of the Italian 2025 Budget Law and under the deferral mechanism introduced by the draft decree in comment.

Specific provisions have also been introduced for the computation of IRES 2026, 2027 and 2028 advanced payments.

New temporary tax deduction rules for credit impairment losses (Article 19)

From fiscal year 2026 to 2029, for credits classified as Stage 1 and Stage 2 under the IFRS 9 expected-loss model, write-downs are deductible in equal installments over the year in which they are recognized in the financial statements and the following four years. This change, which also affects the computation of IRES 2026 advance payments, will lead to the recognition of DTAs on the deferred deduction. These DTAs, however, are not eligible for the conversion into tax credits regime introduced by Articles 55-56-ter of Law Decree No. 225/2010. As a consequence, the relevant amount should not be computed within the Common Equity Tier 1 (CET1).

Interest expenses deduction limitation (Article 33)

Under the current rules, interest expenses incurred by banks and other financial intermediaries other than fund management companies and investment companies are fully deductible, as the limitations set forth by Article 96 of the Italian Presidential Decree dated 22 December 1986, No. 917 do not apply.

Under Article 33 of the Draft 2026 Budget Law the deductibility of said interest expenses would be capped at 96% of the relevant amount for fiscal year 2026. For fiscal years 2027, 2028 and 2029 such cap will increase 1% each year. Starting from fiscal year 2030 interest expenses will become fully deductible again.

New rules for the deduction of write-offs of bonds and similar securities that are deemed to represent fixed financial assets (Article 31)

According to the current tax provisions, banks and other financial intermediaries adopting International Financial Reporting Standards (IFRS) can claim depreciation deductions for bonds and similar securities representing fixed financial assets up to the amount that has been entered into profits and losses account based on the proper application of IFRS.

Based on the new draft rules these depreciations will be deductible for an amount not exceeding the difference between their recognized tax value and the value determined based on the overall performance of the electronic bond market over the past six months.

Other tax measures

The Draft 2026 Budget Law also features other tax measures aimed at reaching a larger set of taxpayers (e.g., natural persons and entities other than banks, other financial intermediaries and insurance companies). These tax measures are summarized below.

The flat substitute tax due from HNWIs who elect the Italian favorable tax regime increases from €200k to €300k; also, the flat substitute tax for the HNWI's relatives increases from €25k to €50k.

Capital gains derived from euro-denominated stablecoin tokens by a person who is not engaged in business activities will be subject to substitute tax at a 26% rate, rather than the 33% rate generally applicable to crypto assets effective from 1 January 2026. A new permanent monitoring committee on crypto-assets and innovative finance is also being established.

An optional 8% substitute tax regime (10.5% rate for companies that were dormant in two out of three reference fiscal years) is provided for the assignment of nonbusiness assets to shareholders. The taxable basis is equal to the positive difference between the fair market value and the recognized tax cost of the nonbusiness assets. Tax incentives are intended to be granted for the assignment of real estate, also for Italian indirect tax purposes.

The step-up-in-value regime for reserves under tax-suspension regime formerly introduced by Article 14 of the Legislative Decree dated 13 December 2024, No. 192 is renewed. In particular, taxpayers may achieve tax recognition of the accounting value of reserves under the tax-suspension regime existing as of 31 December 2024 and 2025 upon the payment of a 10% substitute tax, payable in four annual installments.

Taxation is deferred for capital gains arising from the sale of selected assets and can be spread over (i) three fiscal years (instead of the five fiscal years under current rules), if the sold assets were owned for at least five years (three fiscal years under current rules), or (ii) five fiscal years if the sold assets qualified as the transfer of a going concern and were owned for at least three years. The new provisions also affect the computation of the IRES 2026 advance payments.

Implications

Keeping in mind that the Draft 2026 Budget Law could incur significant changes during the parliamentary approval process expected to conclude by 31 December 2025, entities in the financial sector should nonetheless prepare for the proposed changes, particularly regarding compliance with new participation thresholds and the implications of the temporary substitute tax.