The taxation of interest earned on current accounts may seem straightforward at first glance, but it often hinges on a fundamental principle in tax law: when and how income is “possessed” by a taxpayer. Understanding the moment in which interest becomes taxable — particularly whether it must be declared upon maturity, crediting, or availability — is crucial for both individuals and financial institutions.
This article explores the legal concept of “possession of income”, how it applies to interest on bank accounts, and how tax authorities interpret and enforce rules surrounding the taxation of accrued versus received interest.
What Is “Possession of Income”?
The term “possession of income” refers to the moment when income is considered legally available to a taxpayer — that is, when it is received or made available in such a way that the taxpayer can use or dispose of it, even if no actual withdrawal has taken place.
In most legal systems, including the Italian Tax Code and other European jurisdictions, this principle helps determine when income must be reported and taxed, especially for income types like interest, dividends, royalties, and capital gains.
There are two main income recognition methods:
Cash Basis: Income is taxed when actually received or credited to the account.
Accrual Basis: Income is taxed when earned, even if payment is deferred.
Interest Earned in Current Accounts
Definition and Features
A current account (conto corrente) is primarily a deposit account used for daily transactions, with funds available on demand. While typically not intended as an investment vehicle, these accounts may earn interest, albeit at modest rates.
The interest earned on such accounts can be:
Periodically credited (e.g., monthly, quarterly, or annually)
Capitalized annually (i.e., added to the account balance at the end of the year)
Subject to withholding tax at source (e.g., 26% in Italy)
The taxation of this interest depends largely on when the interest is considered “possessed”, which is linked to the moment of crediting or effective availability.
Italian Tax Treatment: When Is Interest Taxed?
In Italy, under Article 44 and 45 of the TUIR (Consolidated Income Tax Act), interest income from current accounts is classified as capital income (redditi di capitale). These are subject to taxation when they become available, not necessarily when they are withdrawn or used.
Key Principles:
Crediting Date Is Decisive:
Interest is considered “possessed” — and thus taxable — on the date it is credited to the account or made available, not when it is accrued or earned.
Withholding Tax at Source:
For resident individuals, Italian banks apply a 26% substitute withholding tax (imposta sostitutiva) when crediting interest. This satisfies the tax obligation, and the interest does not need to be declared in the annual income tax return.
Capitalization Without Availability:
If interest is accrued but not credited (e.g., capitalized at the end of the year without being available to the account holder), it is not yet “possessed” and thus not taxable until credited.
Non-Resident Taxpayers:
Different rules may apply. Non-residents may be subject to exemption or reduced rates under double tax treaties (DTTs), but the “possession” concept still governs timing.
European and International Perspective
Across the EU and in OECD tax frameworks, similar principles apply:
Interest is taxed upon constructive receipt, meaning when it is credited to an account or otherwise placed at the disposal of the taxpayer.
Accrued but not available income (e.g., in time deposits or multi-year bonds) is typically taxed only upon maturity or early redemption, unless otherwise specified.
This ensures consistency in tax treatment and prevents taxation of income that the taxpayer cannot yet access or control, which would be both economically and legally problematic.
Practical Examples
✅ Taxable Interest
Example 1: A current account earns €50 in interest, credited on 31 December 2024. The amount is taxable in the 2024 tax period, regardless of whether the funds are withdrawn.
Example 2: A savings account pays quarterly interest. Each quarter’s interest is taxed when credited, even if left in the account.
❌ Not Yet Taxable
Example 3: A bank reports that €70 in interest has accrued between October and December but will only credit it on 2 January. It is taxed in 2025, not 2024.
Example 4: A time deposit with interest accrued yearly but payable at maturity in 2026 is not taxable until actual payment.
Implications for Taxpayers and Banks
For Taxpayers:
No need to declare current account interest if subject to withholding tax in Italy.
Keep track of interest credited near year-end to verify correct tax reporting.
Understand different rules for foreign accounts, where interest may be untaxed at source but subject to IVAFE (wealth tax) and self-assessed tax under the RW form.
For Financial Institutions:
Must ensure timely withholding and remittance of substitute tax on interest.
Provide annual tax certifications (certificazione unica or rendiconto) to customers.
Distinguish clearly between accrued and credited interest in reporting.
Anti-Avoidance Considerations
Tax authorities monitor for practices that attempt to defer possession artificially (e.g., delaying interest crediting until after year-end to reduce taxable income). Compliance audits may review:
Date of contractual interest credit
Consistency of banking records
Suspicious timing or manipulation of transactions
To mitigate risk, institutions are encouraged to standardize interest crediting schedules and maintain transparent client communication.
Conclusion
The principle of “possession of income” plays a central role in determining when interest earned on current accounts becomes taxable. In general, income is not taxable when merely accrued, but only when credited or made available to the account holder.
In Italy and other European jurisdictions, this means that current account interest is taxed at the time of credit, usually via a final withholding tax. For taxpayers and financial institutions alike, respecting this timing — and ensuring clear documentation — is essential to remain compliant and avoid disputes with tax authorities.
As digital banking and cross-border accounts increase, understanding and applying the possession principle will remain a cornerstone of effective tax management in the financial system.
