Italy to refund banks through extra borrowing, following EU ruling, sources say

ROME (Reuters) -Italy will refund its domestic banks for part of the IRAP regional corporate tax they have paid, following a European Union ruling, two government officials with knowledge of the matter said on Thursday.

An EU ruling in August required Italy to partially reimburse banks for IRAP tax paid on dividends collected from foreign units.

The government sources said they expected the total cost of the ruling would be worth up to 1.5 billion euros ($1.74 billion). They asked not to be named.

Economy Minister Giancarlo Giorgetti told lawmakers late on Wednesday that the state would use extra borrowing in next year's budget to meet its obligations in court rulings where it is required to make payouts, but he did not refer directly to the ruling on IRAP refunds.

Rome has leeway built into the 2026 budget which allows for some extra borrowing while still meeting the fiscal deficit target of 2.8% of output.

The deficit is currently on course for 2.7% of GDP in 2026, slightly below the 2.8% goal, giving the government potential room to borrow about 2.3 billion extra euros ($2.67 billion), budget data shows.

Giorgetti said on Wednesday that Italian banks, however, will be called upon to help the government fund tax cuts and spending hikes to be included in the 2026 budget.

He said banks had made huge profits thanks to the European Central Bank's interest rate hikes and public guarantees on loans granted during the COVID-pandemic by past administrations.

"It bothers me that banks only grant credit if they are backed by public guarantees," he said.

Giorgetti's League party said banks should contribute some 5 billion euros to the budget.

The sources, however, said the total amount could in the end be reduced to 2 or 3 billion euros.

($1 = 0.8613 euros)

(Reporting by Giuseppe Fonte; Editing by Susan Fenton)