Frequently Asked Questions on the Italian Financial Transaction Tax. Publication Date: 12 July 2013

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1 Page 1 Frequently Asked Questions on the Italian Financial Transaction Tax Publication Date: 12 July 2013 General: Hong Kong Exchanges and Clearing Limited ( HKEx ) notes that since the Italian financial transaction tax ( IFTT ) law came into force on 1 January 2013, there has been considerable uncertainty as to the application of certain aspects of the tax as it relates to Hong Kong investors and market participants. HKEx has been in contact with the Italian Ministry of Economy and Finance and is actively working with the Hong Kong Financial Services and the Treasury Bureau to obtain further clarification. HKEx has also obtained external tax advice with the view to clarifying some of the issues. The answers to the frequently asked questions set out below (the FAQ ) aim to provide information based on HKEx s findings, focusing on the implications for transactions involving securities currently listed and traded on The Stock Exchange of Hong Kong Limited ( SEHK ). While due care has been taken to provide accurate information based on the unofficial translation of the relevant IFTT provisions and advice received as of today s date, the FAQ is for information only and should not be relied upon as legal or tax advice. HKEx accepts no responsibility for reliance on the FAQ. Investors and market participants should also note that the relevant laws on IFTT may be subject to change and different interpretations. Investors and market participants are encouraged to seek professional advice on the implications of IFTT. 1. What is IFTT and why is it relevant to investors in Hong Kong? On 29 December 2012, the Italian government published a law on IFTT in its Budget Law 1, which entered into force on 1 January It is supplemented by the Italian Ministry of Economy and Finance s ministerial decree relating to the implementation of the IFTT (the Ministerial Decree 2 ) and the Italian Inland Revenue Office s official provisions 3 (together, the IFTT Law ). As IFTT is payable on transactions relating to issuers whose registered office is in Italy, investors who deal in or have dealt in shares and derivative warrants of Prada S.p.A. ( Prada ) and financial intermediaries 4 involved in such transactions would be subject to the IFTT Article 1, paragraphs 491 to 500, of the Budget Law n. 228 dated 24 December 2012, published on the Italian Official Bulletin n. 302 on 29 December 2012 and entered into force on 1 January 2013 and subsequently amended by Law Decree n. 69 published on 21 June The gazetted ministerial decree dated 21 February 2013 relating to the implementation of the IFTT published by the Ministry of Economy and Finance on 28 February One of the official provisions according to the IFTT Law issued by the Director of the Italian Inland Revenue Office on 1 March 2013, as subsequently updated with the amending revenue measure on 29 March Financial intermediaries is not defined in the IFTT Law. Based on external tax advice, HKEx understands that the term generally covers banks, trusts and investment companies, and should cover Hong Kong brokers.

2 Page 2 2. What transactions are subject to IFTT? The IFTT is imposed on transactions (whether traded on exchange or over-the-counter), involving the following: (a) the transfer of ownership of shares, and of securities representing Italian equity investments (such as depository receipts) issued by companies which have their registered office in Italy. The tax so imposed is defined for the purpose of these FAQ as Equity IFTT ; and (b) derivative contracts, which have as their underlying the shares/securities described in (a), or which are related to the value of such shares/securities, including options, warrants, covered warrants and certificates. The tax so imposed is defined for the purpose of these FAQ as Derivative IFTT. Please refer to Appendix 1 for further details on the two types of IFTT. 3. Which securities traded on the SEHK will be subject to IFTT? Based on the information available to date: (a) dealings in Prada shares (stock code 1913) are subject to the Equity IFTT; and (b) dealings in the following derivative contracts will be subject to Derivative IFTT: Stock Name (Stock Code) J P Morgan SP BV - Prada European Warrants Sep 2015 A (18065) BNP Paribas Arbit Issu B.V. - Prada European Wts Oct 2015 A (19526) BNP Paribas Arbit Issu B.V. - Prada European Wts Nov 2015 A (22233) J P Morgan SP BV - Prada European Warrants Sep 2013 A (23824) Please refer to Question 6 for the relevant due date of payment. 4. Which party is liable for IFTT? In the Equity IFTT context, the person(s) to whom the ownership of the shares or securities representing equity investments are transferred is liable, regardless of his place of residence, or the place where the transactions are concluded. In the Derivative IFTT context, both counterparties to the transaction are liable, regardless of their place of residence or the place where the transactions are concluded.

3 Page 3 5. Who will be responsible for making the IFTT payment, how should the payment be made and what are the penalties for failure to pay IFTT? Persons responsible for payment The IFTT Law distinguishes between (i) the person who is liable for the IFTT, and (ii) the person who is responsible for arranging payment of the IFTT due to the Italian Inland Revenue Office. Generally, a financial intermediary involved in the execution of the transactions 5 should be responsible for collecting the IFTT from the investor and paying it to the Italian Inland Revenue Office. For example, when an investor instructs a broker to execute a purchase order, the broker should be responsible for arranging payment of the IFTT. Where more than one financial intermediary is involved, the responsibility to arrange for payment of Equity IFTT should fall on the financial intermediary who receives the instruction to execute the transaction from the investor. For instance, in a situation where an investor instructs a broker to execute a purchase order and the order is further routed to a second broker for execution, the first broker should be responsible for arranging payment of the IFTT. For transactions subject to the Derivative IFTT, the financial intermediaries that receive the instructions from each of the counterparties to the trade are responsible for arranging payment. Where financial intermediaries are not involved, the investor (i.e. the person who is liable to pay the IFTT) should be required to arrange for the payment of the IFTT due directly with the Italian Inland Revenue Office. Uncertainty in the IFTT Law However it should be noted that in the Hong Kong context, it is not entirely clear who should be responsible for arranging payment of the IFTT under the IFTT Law. For instance, where the transaction is executed on the SEHK involving financial intermediaries outside of Hong Kong, the obligations to arrange for payment of the IFTT and to file the annual tax return may fall on non-hong Kong financial intermediaries. It is also unclear what is meant by involved in the execution of the transaction under the IFTT Law. Further guidance/clarification on these points is expected from the Italian government. Intra-day trading In the context of the Equity IFTT, if a person carries out a number of transactions on the same trading day through several financial intermediaries, a single balance may be calculated by reference to all those trades, and that person may nominate one financial intermediary to arrange for payment of the IFTT (subject to the financial intermediary s agreement). 5 As set out in Article 19(1) of the Ministerial Decree.

4 Page 4 Annual tax return In addition, the Italian Inland Revenue Office requires the person responsible for arranging payment of the IFTT to file an annual tax return with it setting out details of the transactions subject to IFTT in respect of the previous fiscal year. However, the filing requirement does not apply if the amount of IFTT due for the relevant fiscal year is less than 50. Penalties for breach In case of late payment or failure to pay, the person responsible for arranging payment of the IFTT will incur a 30% penalty on the IFTT payment due but unpaid. Interest on the late payment will also be charged, and the current rate is 4% per annum. In case of failure to file the annual tax return, a penalty ranging from 120% to 240% of the IFTT due will apply; and in case of an incorrect filing (meaning the amount of IFTT stated in the filing is lower than the amount eventually assessed), a penalty ranging from 100% to 200% of the correct IFTT due will apply. Further guidance to be issued The detailed procedures for payment and the annual tax return filing requirements have not yet been announced by the Italian Inland Revenue Office. HKEx will update this FAQ when further information is available. 6. What is the timing for making payment of any applicable IFTT? In the context of Prada shares, liability to Equity IFTT arises in respect of transactions which are traded on or after 1 March For transactions in Prada shares which are traded on or after 1 March 2013 and settled on or before the end of September 2013, payment of Equity IFTT is due on 16 October For transactions settled in October 2013 and every other months onwards, Equity IFTT is payable monthly on the 16 th day of the month following the month in which the transaction is settled. This means that for any transactions settled in October 2013, Equity IFTT is payable on 16 November In the context of Prada derivative warrants, liability to Derivative IFTT arises at the time when the ownership of the derivative contract is transferred, if that transfer occurs on or after 1 September For transactions in respect of which the transfer of ownership occurs in September 2013, payment of the Derivative IFTT is due on 16 October For transactions in respect of which the transfer of ownership occurs in October 2013 and every other months onwards, Derivative IFTT is payable monthly on the 16 th day of the month following the month in which the derivative contract is transferred. 7. What is the rate of the IFTT and how is the total amount payable calculated? Equity IFTT The Equity IFTT rate applicable to Hong Kong is 0.22% on the value of the

5 Page 5 transaction involved (note that this rate will decrease to 0.2% from 1 January 2014). The Equity IFTT is calculated on the value of the net balance of the transactions settled daily by each investor in respect of each share or security representing equity investment. Please refer to Appendix 2 for an example of how the Equity IFTT is calculated. As the payment currency is the Euro, transactions denominated in currencies other than the Euro (e.g. HKD in the case of Prada shares), must be converted using the exchange rate published on the European Central Bank ( ECB ) website ( on the date of purchase. However it is unclear under the IFTT Law what is meant by the date of purchase. Further clarification is expected from the Italian government. Derivative IFTT The relevant transactions conducted in Hong Kong are subject to a fixed charge per contract depending on the type of derivative and the notional value of the contract. For example, the transfer of a derivative warrant over Prada shares, having a notional (or trading) value of 9,000, would be subject to the tax rate of 0.5, to be paid by both counterparties, i.e. the total amount of Derivative IFTT payable on the transaction would be 1. Please note that no netting is permitted in the context of Derivative IFTT, i.e. the Derivative IFTT payable by each investor should be calculated on the gross notional value of all relevant transactions (buy or sell). Again, as the payment currency is the Euro, for derivative transactions denominated in currencies other than the Euro, the exchange rate published on the ECB website on the date the transaction is concluded. However, it is unclear under the IFTT Law what is meant by the date the transaction is concluded. Further clarification is expected from the Italian government. Please refer to Appendix 3 for the applicable tax rate and notional value calculation for transactions involving derivative warrants over Prada shares. 8. Where can further information on IFTT be found? Please refer to the following resources for further information:

6 Page 6 Italian Ministry of Economy and Finance website: Para of the Budget Law n. 228 dated 24 December 2012 published on the Italian Official Bulletin n. 302, dated 29 December 2012 The subsequent amendment to the Budget Law by Law Decree n. 69 published on 21 June 2013: atto.datapubblicazionegazzetta= &atto.codiceredazionale=13g0011 6&elenco30giorni=true Ministerial Decree and Explanatory Memorandum: Prada s announcements on IFTT: pdf pdf pdf Please contact HKEx via the designated (FTT@hkex.com.hk) for further enquiries on the IFTT.

7 Page 7 Appendix 1 Comparison of Equity IFTT and Derivative IFTT Affected Securities traded on SEHK Equity IFTT Derivative IFTT 1913 (shares) 18065, 19526, 22233, (derivative warrants) Applicable Tax Rate / Amount Persons Liable 0.22% for 2013; 0.20% from 1 January 2014 Person to whom the ownership is transferred Fixed amount per contract based on the notional value of the contract, ranging from to 200. Both counterparties to the transaction Persons Responsible for Payment Generally, the financial intermediary that receives the instruction from the purchaser. See Question 5 for further details. Generally, the financial intermediary who receives the buy/sale instructions from the purchaser/seller. See Question 5 for further details. Effective Date 1 March September 2013 Payment Due Date For transactions traded on or after 1 March 2013 and settled on or before end of September 2013: 16 October For transaction settled in October 2013 and every other month onwards: Payable monthly on the 16 th day of the month following the month in which the transaction is settled. For transactions where the ownership of the derivative contracts is transferred in September 2013: 16 October For transactions where the ownership of the derivative contracts is transferred in October 2013 and every other month onwards: Payable monthly on the 16 th day of the month following the month in which the transfer of ownership occurs. FX Rate Exchange Rate listed on the ECB s website on the date of purchase. Exchange Rate listed on the ECB s website on the date the

8 Page 8 Netting Please note the definition of date of purchase is subject to further clarification by the Italian government. See Question 7 for further details IFTT calculated on net buy basis, i.e. intra-day netting permitted transaction is concluded. Please note the definition of date the transaction is concluded is subject to further clarification by the Italian government. See Question 7 for further details IFTT calculated on gross notional value of all transactions entered into, i.e.no netting permitted

9 Page 9 Appendix 2 Examples of the Calculation of Equity IFTT on Transactions Involving Prada Shares The Equity IFTT is levied on the value of the transaction which is defined as "the value of the net balance of the transactions settled on a daily basis in relation to the same financial instrument and traded on the same business day by the same person. Only purchase transactions are subject to the Equity IFTT and intra-day netting of trades is permitted. Where transactions are executed by different brokers for the same investor, a single net balance across all such transactions may be calculated. The calculation of the net balance should be made by brokers involved in the execution of the transactions in the relevant financial instruments. Investors should check with their brokers for the specific arrangement with regard to intra-day netting. The following is an example of the Equity IFTT calculation on the trading of Prada shares. Buy 1000 Shares at HKD70.00 Sell 600 Shares at HKD70.50 Buy 600 Shares at HKD70.50 Sell 200 Shares at HKD70.80 EUR/HKD Exchange Rate on Transaction Date= 10.3 Weighted Average Price of Shares Purchased = ((1000 x 70) + (600 x 70.5)) / 1600 = HKD Net Purchase = = 800 Shares Tax Basis = 800 (x) HKD = HKD 56,150 = 5,451 Equity IFTT = 5,451 x 0.22% = 12

10 Page 10 Appendix 3: Notional Value Computation and Rate Table for Derivatives Warrants with Italian Registered Company as Underlying Notional Value = Number of derivative warrants purchased, subscribed or sold (x) purchase or selling price Rate Table: Notional Value ( ) Value of Tax ( ) 0-2,500-5,000-10,000-50, , ,000-1,000,000+ 2,500 5,000 10,000 50, , ,000 1,000,