Key tax factors for efficient cross-border business and investment involving Italy.
|Bosnia||Indonesia||Norway||Trinidad & Tobago|
|Herzegovina(b)||Rep. of Ireland||Oman||Tunisia|
|Congo||Rep. of Korea||San Marino||Uzbekistan|
Notes: from the Italy Ministry of Finance's website, updated on January 27, 2015
(a) Treaty signed with former USSR applies.
(b) Treaty signed with former Yugoslavia applies.
Joint-stock company (S.p.A.) and Limited liability company (S.r.l).
Minimum capital requirement of EUR 50,000 for S.p.A. and EUR 10,000 for S.r.l (an S.r.l. may have capital of less than EUR 10,000, and more than EUR 1, provided that contributions are made only in cash and fully paid up).
A company or entity, including a trust, is resident in Italy if, for the greater part of the fiscal year, its registered office, place of management, or main business purpose is in Italy.
Foreign companies owning a controlling interest in Italian companies are
deemed to be resident in Italy, unless otherwise proven, if they are controlled by an Italian resident company or individual, or, alternatively, if they are managed by a board of directors the majority of which are Italian resident individuals.
Resident companies are taxed on their worldwide income, while non-residents are only taxed on their Italian source income, as provided in the domestic tax law.
A non-resident company is also deemed to be resident in Italy (unless evidence to the contrary is provided) if its assets are mainly comprise units of Italian closed-end real estate investment funds and it is directly or indirectly controlled (subject to relevant influence) by an Italian resident person (company or individual).
Undertakings for collective investment (CIVS) set up in Italy are resident in Italy for tax purposes and are liable to corporate income tax (IRES). Under certain conditions, however, they are exempt.
The fiscal year consists of the year or management period of the company,
determined by Law or by the article of association; if there are no specific
provisions then the fiscal year is equal to the calendar year.
Tax return has to be filed within the last day of the ninth month following the
end of the fiscal year.
Two advance payments have to be made by June 16 and November 30; the
balance must be paid by June 16 of the following year.
The standard corporate income tax rate is 27.5 percent + 3.9 percent for
Regional Income Tax. The standard rate can be increased for financial/insurance companies (i.e. 4.65 percent for banks and 5.9 percent for insurance companies). Regions may vary such rates.
26 percent (1.375 percent for dividends to EU companies, 0 percent if EU
Parent-Subsidiary Directive applies).
26 percent (0 percent if EU directive applies).
30 percent (applied to 75 percent of royalties paid if the beneficial owner is the author or if it acquired the patent by paying).
No WHT if EU directive applies.
No, in general.
However, a 30 percent WHT applies to professional services if the recipient is a non-resident (including a non-resident company), unless the professional services are carried out abroad.
Exemption (95 percent). Exemption does not apply if the dividends derive from blacklisted entities (unless the CFC rule applies or the resident shareholder is able to demonstrate, for instance through an advance ruling request, that, since the beginning of the holding period, the income derived from the shareholding investment has been taxed at least to the extent of 75% in a non-black list jurisdiction).
Capital gains realized by resident companies on the sale of shares are included in the taxable income. However, exemption (95 percent) is applicable if participation exemption applies (subject to conditions).
Capital gains on the transfer − by a non-resident company with no permanent establishment in Italy − of shares in Italian companies are taxable in Italy. If the shares sold during a 12-month period are not listed and represent more than 20 percent of the voting rights or 25 percent of the stated capital ('qualifying' shares), only 49.72 percent of the gain is included in taxable income and taxed at the general 27.5 percentage rate (50.28 percent is exempt). The same percentage of capital losses is deductible. If the resident company is not listed and the shares sold during a 12-month period do not represent more than 20 percent of the voting rights or 25 percent of the stated capital ('non-qualifying' shares), the capital gains are subject to a 26 percent final substitute tax. Residents of white-list countries are exempt from taxation on these capital gains.
If the resident company is listed and the amount of shares sold during a 12- month period does not represent more than 2 percent of the voting rights or 5 percent of the stated capital ('non-qualifying' shares), the capital gain is not regarded as Italian-source income. By contrast, if the shares are listed and 'qualifying', 49.72 percent of the capital gain is included in taxable income and taxed at the general 27.5 percentage rate (50.28 percent is exempt). If a double tax treaty applies, capital gains are usually taxable only in the seller's country of residence.
Tax losses can be carried forward and offset up to an amount equal to 80 percent of taxable income of each of the following fiscal years. However, the 80 percent limit does not apply to tax losses incurred in the first 3 years of business, which can be offset against 100 percent of the taxable income. Carry forward is not allowed when both of the following apply. (i) The majority of the shares carrying voting rights at ordinary shareholders’ meetings are, even temporarily, transferred to third parties. (ii) The company's main activity is no longer the actual business that it pursued in the tax years when it incurred the losses (this change is significant if it occurs in the tax year of the transfer or the two previous or subsequent years). There are, however, certain safe harborrules (i.e., business vitality tests).
There may also be specific limits on loss carry forwards (i.e. (i) up to the net asset value of the company and (ii) conditional upon a business vitality test) when a company has been involved in a merger or demerger.
There is no limit on the amount of tax losses that can be transferred to the parent of a tax group and offset with the income of other group entities, if losses originate during the consolidation period (and not before). The parent can carry forward group losses in accordance with the general rules (up to 80 percent of the taxable income of each year, or up to 100 percent if incurred in the first 3 years).
EUR 200 (flat amount).
Financial transaction tax (0.2 percent), usually applicable to purchase of shares issued by resident entities; is not applicable if the transaction occurs between related entities (parties are in a control relation or under common control).
In addition, mortgage and cadastral taxes (imposte ipotecarie e catastali),
currently levied at a total rate of 3% (4% in the case of commercial property), will be levied at a lump sum of EUR 50 each. However, if the transaction is subject to VAT (even though exempt), registration, mortgage and cadastral taxes are levied at a lump sum of EUR 200.
Stamp duties (imposta di bollo) are levied on certain documents, contracts and registers (e.g. bank cheques, statements of accounts, bills, written contracts, judicial acts, accountancy books). No stamp duty is payable on the transfer of shares.
Resident companies are subject to IMU (Imposta municipale propria) in respect of their immovable property (buildings, developable land, rural land) located in Italy. IMU is based on the cadastral value of the immovable property, which is confirmed by the tax authority. The standard IMU rate is 0.76 percent.
However, each Municipality has the right to make upward or downward
adjustments to the base rate by a maximum of 0.3 percent. A Municipality can also decide to reduce the base rate down to 0.4 percent where an immovable
property is owned by taxpayers subject to IRES.
Since 2016, due to amendments of the Budget Law for 2016 and of the decree on growth and internationalization, Italian legislation provides for a CFC rule applicable to controlled companies established in a tax haven and, under certain conditions, also to controlled companies established in the other countries. There is no longer a 'black list' of States contained in a specific Decree.
CFC regime applies if a resident person controls a non-resident entity and the non-resident entity is resident in a low-tax jurisdiction (i.e. a State whose ordinary or special regime provides for a nominal tax rate lower than 50 percent of the Italian rate - currently 27.5 percent), unless safe harbor rules apply (i.e. (i) ‘business vitality test’ or (ii) ‘subject to tax test’).
CFCs can also be a resident of a non-low-tax jurisdiction (including an EU
Member State), thus triggering CFC income to the Italian controlling
shareholder, if (i) the CFC’s effective tax rate is lower than half of the effective tax rate that would apply if the CFC was resident in Italy and (ii) its revenues are mainly passive (e.g. interest, royalties, dividends and intragroup services). In this case, the resident taxpayer can avoid the CFC rule if it can prove that the CFC is not an artificial structure.
The CFC income is computed according to domestic rules on business income and taxed upon the resident controlling shareholder; taxation is levied separately from other income of the shareholder and is subject to the Italian standard corporate income tax rate.
Related party transactions must be at arm's length. Transfer pricing
documentation is not mandatory; in case of a tax audit, penalties can be
avoided if the taxpayer has drafted transfer pricing documentation in
accordance with the required standards, and has communicated this to the tax authority. Further, the taxpayer needs to make such documentation available to the tax auditors within 10 days of the request. A unilateral Advance Pricing Agreement (“APA”) procedure is provided for by Italian law. Transfer pricing rules are relevant both for IRES and IRAP purposes.
Transfer pricing documentation is not mandatory; in case of a tax audit, penalties can be avoided if the taxpayer has drafted transfer pricing
documentation in accordance with the required standards, has communicated
this to the tax authority and makes such documentation available to the tax
auditors within 10 days of the request. Ministerial Guidelines were issued in
Italian thin cap rule was repealed and since 2008 Italian tax law only provides an earnings stripping rule. Under applicable earnings stripping rules, the deductibility of net interest expenses is allowed up to 30 percent of the borrower's Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). The excess can be carried forward (subject to the above conditions) with no time limitation. Any excess of EBITDA capacity can be used to increase the EBITDA capacity of the future tax periods. For banks and financial companies interest expenses are deductible up to 96 percent of their amount, and no other limitations apply.
Within a tax group the EBITDA of all the members can be pooled for deduction purposes.
In 2015, the former 'wide-scope' anti-avoidance rule contained in article 37-bis of Decree no. 600/73, which contained a ‘list’ of transactions potentially suspect of avoidance, was repealed and replaced by a new definition of 'abuse of law', effective from October 2015. The concepts of 'abuse of law' and 'tax avoidance' were merged and a definition of 'abuse of law' was given in the Taxpayers' Charter (i.e. Law no. 212/2000). Previously, the concept of 'tax avoidance' was defined by article 37-bis, while 'abuse of law' was defined only by case law, without any legal definition.
This new definition is a broad one and no longer lists the transactions that are subject to the anti-avoidance rule. It applies to all income taxes and indirect taxes, except customs duties. Abuse of law arises when all the following factors are in play.
(i) The transaction (or series of interconnected transactions) has no economic substance (i.e. though valid on paper, it is an inappropriate way of achieving the stated business goal).
(ii) An undue tax advantage is obtained, even without breaking any tax rule.
(iii) The tax advantage is the essential effect of the transaction.
The concept of abuse of law is ‘residual’, i.e. applies only when a transaction cannot be assessed under a specific anti-avoidance measure. If an abusive transaction is discovered by the Italian Revenue Agency, it will be disallowed for tax purposes and the tax benefits will be denied. Transactions cannot be defined as abusive if they are justified by ‘non marginal’ sound business reasons; these reasons include shake-ups or management decisions to improve the structure or operations of a business or professional activity. It is up to the Italian Revenue Agency to prove that a transaction is abusive, while the taxpayer has to demonstrate that there is a sound business purpose. If a transaction is found abusive, no criminal penalties can be applied – just administrative sanctions.
There are anti-avoidance rules specifically applicable to cross-border
transactions (i.e. full taxation of dividends arising in a "black-list" country; CFC rules; TP rules; beneficial ownership clause; deemed residency rule). The former anti-avoidance rule on non-deductibility of expenses from transactions with "black-list" taxpayers has been repealed since fiscal year 2016.
According to art. 44 (2) a) of IITC, a financial instrument issued by a nonresident entity is deemed to be similar to shares for domestic tax purposes, and therefore deserves equal treatment (dividends are 95 percent exempt), if two conditions are fulfilled:
- remuneration is wholly represented by a portion of profits of the issuer;
- remuneration is not deductible in the State of residence of the issuer, and
non-deductibility results from a declaration of the issuer or other certain and
Ordinary ruling and specific advance rulings (e.g. APAs). Since 2016,
amendments have been introduced to the legal provisions regarding 'ordinary' rulings and international rulings. Moreover, a new form of ruling on substantial investments has been introduced.
Finance Law for 2015 has replaced the previous R&D incentive and introduced the following system.
From 2015 to 2019 an R&D tax credit will be available to any enterprise
irrespective of its legal form, business sector, accounting standards and size.
The R&D tax credit will generally be 25 percent of the enterprise’s extra
spending on R&D, measured against its average spending of the three tax
periods preceding that in progress on December 31, 2015 (i.e. 2012, 2013 and 2014 for calendar-year taxpayers).
The R&D tax credit will be 50 percent for some types of spending.
There is a minimum spending requirement of at least EUR 30,000 per year and a maximum credit of EUR 5,000,000 per year (previously the thresholds were EUR 50,000 and EUR 2,500,000 respectively). Eligible activities include fundamental research, industrial research and experimental development, according to the classification found in the ‘Community Framework for State Aid for Research and Development and Innovation’.
With effect from the 2015 tax year resident taxpayers deriving business income and foreign entities resident in a treaty country that allows an adequate exchange of information may opt for a new patent box regime if carrying on R&D activities. Under the new regime, 50 percent of income deriving from the exploitation or the direct use of a qualifying IP (software protected by copyrights, patents, trademarks, designs, models, processes, secret formulas and industrial, commercial or scientific knowledge) will not be included in taxable income for corporate income tax (IRES) and IRAP purposes. However, the exemption will be reduced to 30 percent for tax year 2015 and to 40 percent for tax year 2016. Capital gains arising from the sale of IPs not included in taxable income if at least 90 percent of the proceeds reinvested within the following two tax years in R&D activities. The election applies, irrevocably, for 5 years and is renewable. When income is attributable to direct use of the intangibles, its amount will have to be agreed with the tax authorities through the international tax ruling procedure. The eligible portion of the tax base is given by the ratio of the R&D costs incurred in maintaining and developing the intangible asset to the total costs of producing that asset (in compliance with the OECD "nexus approach").
The 2016 Budget Law clarified that if two or more qualifying intangibles
belonging to the same taxpayer (even if not in the same IP category, e.g. a
patent and software) are complementary, so that the realization of a product or process depends on their joint use, these intangibles represent one individual asset for Patent Box purposes.
ACE (Allowance for Corporate Equity). Starting from fiscal year 2011
companies will be entitled to a reduction from their taxable profit of an amount equal to the notional return of the new equity.
The notional return of the new equity is set on an annual basis by the Ministry. Thereafter, the notional return rate will be set by a decree prior to January 31 of each year, which will take account of the return on sovereigns bonds increased up to 3 percent.
The notional return rate was equal to 3 percent for tax periods 2011-2013. The notional return has been increased to 4.00 percent in 2014; 4.50 percent in 2015 and 4.75 percent in 2016.
“New equity” is defined as the equity increase resulting from the comparisonbetween the equity at year-end with that resulting from the 2010 financialstatements, net of the annual profits for 2010.
The new equity only counts if derived from capital contributions in cash, as well as by profits allocated into distributable reserves, and may be decreased by distributions of equity and profit. The notional return exceeding the taxable income may be carried forward for use in subsequent tax periods.
Therefore, if the notional yield is higher in a given year than the company’s net taxable income, the company will declare no income in that year and will carry forward the excess of notional yield to the following years (without time limitations). Alternatively, the company may obtain a tax credit equal to the IRES rate multiplied by the amount of the excess; such credit can be used to offset the IRAP due in five equal annual installments.
The standard rate is 22 percent. Reduced rates are 10 and 4 percent. Since
2016, a new 5 percent rate has been introduced.
During the course of 2015, due to the decrees implementing the Delegation
Law no. 23 of March 2014 and to the 2016 Budget Law, new important
measures were introduced. These include:
- a reform of tax rulings;
- a reform of administrative and criminal penalties for violations of tax duties;
- introduction of the new 'abuse of law'/tax avoidance definition;
- amendments to the tax group regime;
- introduction of the foreign 'branch exemption' regime;
- amendments to the CFC rule and repeal of the 'black list';
- repeal of the rule on non-deductibility of expenses with black-list taxpayers;
- introduction of the 'country by contry' reporting obligations.
Some of these provisions (e.g., branch exemption) are still not effective,
however, as the implementation rules have not yet been issued.
Source: Italian tax law and local tax administration guidelines, updated 2016.
KPMG in Italy
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