The Italian corporate tax system is mostly aligned with that of other major European countries. In the past two years, driven by EU obligations and the base erosion and profit shifting project, the Italian parliament has laid down some new pieces of legislation that have introduced significant amendments to the tax system, which on the one hand have settled certain past inconsistencies and will provide greater certainty to foreign investors, and on the other will probably give rise to new doubts and potential litigation.
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
Businesses normally adopt a corporate form. The most commonly used corporate entities are the joint-stock company (SpA) and the limited liability company (Srl). SpAs require a minimum share capital of €50,000, and provide for the mandatory appointment of a board of auditors or supervisory board. SpAs may issue different classes of shares, with specific governance and economic rights (preference shares, tracking shares, etc.). Srls generally have a minimum capital requirement of €10,000 (to encourage new business initiatives, as from 2012 Srls meeting some specific requirements may have a minimum share capital of €1). Srls provide for a higher degree of flexibility as regards the relationships among members, as most of the governance provisions may be incorporated in the by-laws, including certain matters normally covered by shareholders’ agreements. A third type of corporate entity is the partnership limited by shares (SApA), whose main feature is the distinction between unlimited liability partners and limited partners, who are only liable within the limits of their capital contributions. SApAs are normally used as family holdings.
Corporate entities are autonomous taxable persons; however, subject to certain conditions, companies may elect for a tax transparency regime for corporate income tax (IRES) purposes.
Italian corporate law provides for three types of partnership: the simple partnership (Ss), which cannot perform business activities; the general partnership (Snc); and the limited partnership (Sas).
Partnerships do not have legal personality and their partners are subject to unlimited liability, with the exception of limited partners in an Sas. Partnerships are normally adopted for small family businesses. Partnerships are fiscally transparent (i.e., their income is allocated for tax purposes to the partners). In the private equity and real estate sectors, closed-end funds are frequently used. Legally speaking, said funds are pools of assets without separate legal personality, which are managed by special regulated entities. Private equity and real estate investment funds are generally exempt from income taxes (however, such exemption regime does not apply with reference to investment funds that are not subject to the supervision by a regulatory authority). Taxation only occurs upon distribution or redemption of the units.
In 2014, Italy implemented the AIFM Directive,2 which introduces specific rules aimed at creating an European market of operators in alternative investment funds (AIFs). According to the Directive, AIFs can be freely established and managed throughout the European Union through the ‘EU marketing passport’, thus without having a fixed place in the country of establishment of the fund. Moreover, investment companies with fixed capital have also been regulated in the Italian legal system.
III DIRECT TAXATION OF BUSINESSES
i Tax on profits
Determination of taxable profit
IRES applies to both resident and non-resident entities. Resident entities are taxed on their worldwide income, while non-resident entities are subject to tax on Italian-source income only. The taxable base for IRES purposes is the accounting result determined in the profit and loss account, as adjusted according to the provisions of the Italian Tax Code (ITC). The main adjustments relate to limits to tax deductibility of depreciation, amortisation, write-offs and interest expenses. Taxation applies on an accrual basis. Based on the allowance for corporate equity (ACE), enacted in 2011, a ‘notional deduction’ is allowed in the case of new equity injections in the form of cash contributions or the allocation of profits to reserves. The deductible amount under the ACE regime has varied over the last years, in particular: for fiscal year 2017, the notional deduction amounts to 1.6 per cent of the equity injection, and, starting from 2018, it will amount to 1.5 per cent, while for 2016 such deduction amounted to 4.75 per cent. Any excess deductions may be carried forward without time limitations or converted into a tax credit used to decrease the regional income tax. Moreover, starting from 2017, the provision according to which companies admitted to be listed in the Stock Exchange after 25 June 2014 that meet specific requirements could benefit from an increase of 40 per cent of the ACE benefit for the tax period of admittance and for the subsequent two tax periods is no longer in force.
If a company does not reach a certain threshold of activity (in terms of earnings) it can be qualified as ‘dormant’; in these circumstances, a minimum deemed taxable income is calculated as a percentage of the book value of its fixed assets. Further, starting from 2012, an Italian company is deemed as dormant also when it has made tax losses for five consecutive years.
For fiscal years 2016 and 2017, with the purpose of reducing the number of dormant companies, specific legislation has been enacted to ease the assignment of company assets to their shareholders by reducing the tax burden on such assignments. Although certain limitations applied, in principle this piece of legislation provides for an 8 per cent substitute tax (increased to 10.5 per cent if the assigning company qualifies as dormant) on the value of the assets to be assigned to the shareholders. The assignment has to be performed by September 2017.
Capital and income
Capital gains are normally included in the overall taxable income. Subject to certain conditions, capital gains realised upon disposal of assets held for more than three years may be split into up to five annual instalments. Under the participation exemption regime, capital gains on qualifying shareholdings are subject to tax on only 5 per cent of their amount (95 per cent exemption).
Since 2011, tax losses can be carried forward indefinitely and offset up to 80 per cent of the taxable income of subsequent years; however, subject to certain conditions, losses incurred in the first three years from incorporation can be carried forward indefinitely and offset without limitations. Certain limits of losses carried forward apply in the case of a change of control, when a change in the main activity also occurs and certain ‘vitality tests’ are not met; losses carried forward are also limited in the case of a merger or demerger.
Pursuant to a new regime of transfer of losses introduced by Budget Law for fiscal year 2017, a company is allowed to ‘sell’ – against a consideration equal to the nominal corporate tax rate – losses realised in the first three fiscal years from establishment, if certain conditions are met, in particular: (1) among the ‘seller’ and the ‘buyer’ of the losses there shall be a shareholding granting the right to 20 per cent of the profits and 20 per cent voting rights; (2) the ‘buyer’ (or the company that directly or indirectly controls the ‘buyer’) shall be listed; (3) the ‘seller’ shall not be a real estate company; and (4) the losses must refer to a new business activity.
Starting from 2017, the corporate income tax rate is set at 24 per cent, save for banks and other financial institutions, to which a special 3.5 per cent surcharge will apply for an overall 27.5 per cent rate. Note that until 2016, the corporate income tax was 27.5 per cent.
The tax rate is increased by 10.5 per cent if a company qualifies as dormant.
Corporate taxpayers must file a tax return within nine months of the end of the financial year. The tax year for corporate income tax purposes is the financial year of the company, as determined by the law or the by-laws, or if it is not specified, the calendar year (so filing usually by 30 September).
Corporate income tax is due in advance, with a final balance payment. The advance payment, which is due in two instalments, is usually based on a percentage of the tax paid for the previous tax year. The balance payment is due by the 30th day of the sixth month after the end of the financial year (for taxpayers with a financial year corresponding to the calendar year, the balance is due by 30 June), and any excess tax paid may either be carried forward or refunded.
There is no regular audit cycle for corporate entities, except for certain large taxpayers with turnover, revenues or earnings exceeding €100 million, who are audited once every two years.
In the event of uncertainty regarding the correct interpretation of tax provisions, the taxpayer may ask for a ruling by filing a written request with the tax authorities, which must issue a written and motivated reply (see Section IX.iv).
The tax litigation trial encompasses two degrees of judgment before a provincial tax court and a regional tax court, and a third degree before the Cassation Court, which deals only with issues on points of law. Various pre-litigation and composition procedures are available, aimed at reaching settlements with the tax authorities by virtue of significant reductions in penalties.
Both a domestic and a worldwide consolidation regime are available under the Italian tax system, as outlined below.
Election for domestic tax consolidation may be made jointly by the resident controlling company and each resident controlled company (also indirectly controlled, if intermediate controlled companies are resident in foreign white-listed countries). A company is controlled by another company if the latter directly or indirectly has the majority of the voting rights (i.e., more than 50 per cent) in the general shareholders’ meeting of the former. Under domestic tax consolidation, the taxable income of each consolidated company is aggregated and taxed at the level of the controlling company, regardless of the percentage of shareholding. Only losses incurred after the election can be offset against the profits of other group companies; losses incurred before such option may only be used at company level. Once the option is exercised, it is irrevocable for three tax years and can be renewed. Special rules apply in the case of a change of control during the tax grouping period.
Following one of the amendments mentioned at the outset, the Italian tax system has adopted a new form of domestic consolidation, namely the possibility of horizontal consolidation (i.e., in essence, consolidation of resident sister companies with a common parent resident in EU or EEA Member States): the amendment at hand followed the delivering of the European Court of Justice decision in SCA Group.3
The option for worldwide consolidation may be exercised by a resident controlling company with respect to all controlled foreign companies provided that certain conditions are met. Under this regime, the income of the controlled companies (adjusted according to Italian tax provisions) is allocated to the controlling company in proportion to its profits entitlement. Losses incurred before the exercise of the option cannot be used in the consolidation; foreign tax credit relating to taxes paid abroad is normally available. Once the option is exercised, it is irrevocable for five tax years and is subject to renewal for periods of three years. Certain specific rules apply in the case of election for the worldwide consolidation regime, or for the interruption of the election and in the case of reduction of the participation of the holding in the controlled companies.
ii Other relevant taxes
Regional income tax
Corporate entities are also subject to a regional income tax, IRAP, which is levied on the net value of the production derived in each Italian region. In particular, for commercial and manufacturing enterprises the tax base is equal to the difference between the operating income and the costs of production; in general, labour costs (other than employee-related, from 2015), bad debts and financial expenses are not deductible. For dormant companies, the tax base is equal to the minimum income determined for IRES purposes increased by employment costs and interest expenses. Special rules are provided for industrial holding companies, banks and financial entities, and insurance companies.
The standard rate is 3.9 per cent, but the Italian regions are entitled to increase or decrease this rate by up to 0.92 per cent. IRAP is partially deductible from the IRES tax base. The partial IRAP deduction reflects the interest expenses that are not deductible for IRAP purposes. As from tax year 2012, IRAP levied on the cost of personnel (for the amount that is not deductible from the IRAP tax base) has been fully deductible from the IRES tax base.
Value added tax
VAT is levied on the supply of goods and services made in the course of a business, artistic or professional activity. VAT is also levied on any individuals or legal entities that import goods from outside the European Union. According to the ‘territoriality’ principle, the sale of goods is deemed to have occurred in Italy if the goods are located in Italy at the time of transfer. Services are deemed to be supplied in Italy when the service is supplied to a taxable person for VAT purposes that has established its business in Italy; or the service is supplied to a non-taxable person for VAT purposes by a taxable person that has established its business in Italy. Special provisions apply to services relating to cultural, artistic, sport, scientific, educational, entertainment or similar activities: in general, these services are considered to have been rendered in Italy if the activities carried out in relation to them physically take place therein.
VAT is ordinarily due upon the transfer of ownership of goods or, in any event, when an invoice is issued or the payment received; however, taxpayers with turnover not exceeding €2 million can elect for the VAT cash-basis regime, under which the VAT payment obligation is deferred at the moment of collection of VAT from the client. Similarly, the deduction right on input VAT arises upon the payment of purchase invoices.
The deduction of input VAT is subject to the condition that goods and services purchased are used for taxable transactions (according to the pro rata deduction). VAT on certain goods and services is always non-deductible (e.g., food and drinks, hotels).
As of October 2013, the ordinary VAT rate is 22 per cent. Reduced rates, namely 10, 4 and zero per cent (i.e., exemption), apply to specific categories of goods and services.
Pursuant to Budget Law for fiscal year 2017, Italy has exercised the option for enacting VAT group legislation (Article 11 of Directive 2006/112/EC). Starting from fiscal year 2018, VAT taxable persons established in Italy, subject to certain requirements – for example, a ‘close connection’ among the applicants through certain financial (i.e., corporate control is required), economic and organisational links – may elect for being treated as a single taxable person for VAT purposes; accordingly, dealings among members of the VAT group are not taxable for VAT purposes.
The election for the VAT group is binding for three years, unless eligibility requirements cease to apply, and is automatically renewed for each following year until it is revoked. The VAT group legislation has to be implemented by a Ministerial Decree and by a Regulation of Tax Authorities, whose issuance is still pending.
VAT financial consolidation
The VAT financial consolidation is an elective regime, according to which, subject to certain requirements, the VAT periodical payments due by the companies belonging to the same group (i.e., corporate control is required) may be made by the controlling entity on a consolidated basis. The election for VAT financial consolidation has effect until it is revoked, unless eligibility requirements cease to apply.
Registration tax is due on deeds and agreements executed in Italy subject to mandatory registration in public registers (e.g., transfer of real estate, transfer of a business as a going concern) or voluntarily filed in such registers.
As of January 2014, the indirect tax regime applicable to real estate transfers has changed. In particular, real estate transfers that do not fall within the scope of VAT will ordinarily be subject to proportional registration tax at a rate of 9 per cent, and mortgage and cadastral taxes apply at a fixed amount of €50 each. Further, registration tax rates may vary according to the nature of the deed or contract from 0.5 to 9 per cent (12 per cent on the sale of farm land).
As a general rule, if a transaction is subject to VAT, registration, mortgage and cadastral taxes are applicable at a fixed rate of €200 each.
As a final note, registration tax is reduced to half if the transfer of real estate assets is made within the scope of the special legislation for the assignment of assets to the shareholders.
Local property tax
The Budget Law for 2014 enacted a reform of local taxes whereby a new ‘service tax’, aimed at funding all local services and to be called IUC (the unified local tax), will be formed of an urban waste and disposal service tax (TARI), a tax related to community services provided by the municipalities (TASI) and a local property tax (IMU).
TARI applies to all properties. It is assessed on the occupant to fully cover the costs of urban waste and disposal. Although the tax is initially based on property size, municipalities may refine the tax to reflect property-specific waste production.
TASI is used to finance public services targeted to the entire community (e.g., street maintenance, street lights). Its purpose is to tax the ownership or possession of any kind of real estate, excluding rural lands and first dwelling other than premium properties, as defined for the purposes of local property tax. The TASI standard rate is 0.1 per cent, which can be increased or reduced by the municipalities.
IMU is the local property tax levied on the ownership of immoveable properties (buildings, development land, rural land) located in Italy, and its tax base is determined according to certain cadastral values. IMU standard rates on dwelling places range from 0.46 to 1.06 per cent, depending on the nature of the properties and on the municipality in which the property is located. The municipality, in fact, may decide to reduce or increase the coefficient of 0.76 per cent for an amount of 0.3 per cent. As TASI, IMU is not due in connection with dwelling places that qualify as first dwelling places, except for premium properties.
Net wealth tax
There is no net wealth tax. As of 2014, an annual stamp duty of 0.2 per cent (previously, 0.1 per cent for 2012 and 0.15 per cent for 2013) is due on the value of financial instruments held at a resident bank. With respect to clients other than individuals, stamp duty on financial instruments ranges from €34.20 to €14,000.
IVIE and IVAFE
In 2011, a tax on the value of real estate property located abroad (IVIE) and a tax on financial assets held abroad (IVAFE) were introduced. Both taxes are applicable to individuals resident in Italy.
IVIE applies at a rate of 0.76 per cent on the cadastral value set by the foreign state (EU or EEA Member States) or the arm’s-length value, save for first dwelling places that are either exempt, or taxed at 0.40 per cent in the case of premium properties. A foreign tax credit related to equivalent taxes paid in the country in which the property is located is normally allowed.
IVAFE shall be due on the value of financial instruments, current accounts and savings accounts held abroad. The tax rate is equal to 0.2 per cent on financial instruments (previously, 0.1 per cent for 2012 and 0.15 per cent for 2013) and to €34.20 on bank accounts, postal accounts and savings accounts held abroad. A foreign tax credit related to taxes paid in the country where the above-mentioned assets are held may be allowed.
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
Companies are deemed to be resident in Italy if, for the greater part of the tax year, they have their legal seat, place of management or main business purpose in Italy. The place of management is deemed to be the place where the main decisions regarding the business are taken (usually, where the board meetings are held).
Moreover, pursuant to certain presumptions set out by the ITC, a foreign-incorporated company is deemed as resident in Italy if it controls an Italian-resident company and, at the same time, it is either controlled by an Italian-resident person (company or individual), or managed by a board of directors with a majority of Italian-resident members. The presumption of residence can be rebutted by the taxpayer.
Among amendments the Italian tax system underwent in 2015, a new rule has been laid down to assess the tax basis of the assets of companies that move from another country and take up Italian residence.
In this respect, inbound transfers of residence are to be distinguished depending upon the former country of residence: if the company was a resident of a white-listed country, for Italian tax purposes the entry tax basis of its assets is equal to their arm’s-length value; on the other hand, if the company is exiting a blacklisted country, the entry tax basis of its assets is equal to their arm’s-length value subject to a successful ruling. Where a ruling does not succeed, for Italian tax purposes the tax basis of the company’s assets will be the lowest among their cost basis, book value and arm’s-length value.
In a recent public ruling (Resolution No. 69/E of 5 August 2016), the Italian tax authorities clarified that the entry tax regime is available also to a foreign real estate holding company established in Luxembourg and applies also to the transfers executed by way of a cross-border merger. Further, in that context, the Italian tax authorities also confirmed that the assets of the foreign company that are either booked at a lower value than fair market or are no longer booked in the company’s accounts owing to full depreciation can be booked at their arm’s-length value upon entry in the Italian tax system.
ii Branch or permanent establishment
Under the ITC, a permanent establishment is defined as a fixed place of business through which the business of a non-resident enterprise is wholly or partly carried out in Italy (physical permanent establishment). In addition, a permanent establishment occurs when a person who is not independent from the foreign enterprise has the power to engage the non-resident enterprise and usually does so (agency permanent establishment). A fixed place of business is not considered as a permanent establishment if the activity carried out is of an internal nature (i.e., it is rendered solely in favour of the enterprise owning such fixed place of business), or has a preparatory or ancillary nature in respect of the ordinary activity carried out by the enterprise.
As regards the allocation of profits to permanent establishments, reference is usually made to OECD guidelines and principles; indeed, such principles are also adopted by the Italian tax authorities according to the functionally separate entity approach.
While Italy relieves double taxation through the ordinary credit method (both in its double tax treaties and through domestic rules), a 2015 piece of legislation provides for an alternative relief method for foreign branches of Italian companies (the s.c. branch exemption). Under the branch exemption regime, an Italian company having permanent establishments located in white-listed countries can elect for the application of the exemption method rather than the credit method. The election is irrevocable and follows the ‘all-in, all-out’ approach. The election for the exemption method does not ‘defuse’ the controlled foreign corporation (CFC) legislation, but exemptions can be sought through the ruling procedure.
V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
i Holding company regimes
Italian tax law does not provide for any special holding company tax regimes.
A general participation exemption regime is available under which capital gains realised by an Italian company on the disposal of shares are exempt from corporate income tax for 95 per cent of their amount, if all the following conditions are met:
- a the shares are held, without interruption, from the first day of the 12th month prior to the month in which the sale occurs (shares purchased most recently shall be deemed to have been sold first);
- b the shares are accounted for as ‘financial fixed assets’ (or an equivalent accounting classification) in the first statutory financial statements closed during the period in which the shares are held;
- c the company whose shares are sold is not resident in a state or territory providing for a nominal corporate tax rate that is lower than half of the nominal IRES tax rate (low-tax jurisdictions); and
- d the company whose shares are sold performs an actual business activity (such condition must not be verified for listed companies).
The conditions under points (c) and (d) must be met, at least, from the beginning of the third tax year preceding the date of disposal. Real estate companies (other than those trading in real estate and building companies) are deemed not to perform an actual business activity, and therefore are not able to meet the condition under point (d).
Capital losses realised on the disposal of shares that would benefit from the participation exemption regime on capital gains are not deductible for corporate income tax purposes.
Under the participation exemption regime, dividends flowing from a country with a corporate tax rate higher than half of the IRES rate (non-low-tax jurisdiction) are always exempt from corporate income tax for 95 per cent of their amount. On the contrary, dividends derived from a company resident in a low-tax jurisdiction are taxable in full, unless certain evidence of genuine establishment is provided, possibly through the ruling procedure. It is important to highlight that dividends are also considered to be ‘derived’ from a low-tax jurisdiction if they are distributed by a controlled (even de facto) non-low-tax entity that in turns received dividends from the company located in a low-tax jurisdiction. In the context of the recent changes in the domestic tax system, an indirect foreign tax credit may be available depending upon certain circumstances.
Under the Italian participation exemption regime, qualifying capital gains and dividends are subject to an effective tax rate of 1.2 per cent (i.e., 24 per cent times 5 per cent) starting from 2017. Note that the effective tax rate has been 1.375 per cent until 2016 (i.e., 27.5 per cent times 5 per cent).
ii IP regimes
In 2015, the Italian parliament laid down a new patent box regime by election, according to which certain tax incentives are granted for the exploitation of IP.
The election is effective for five fiscal years, is irrevocable, and is limited to Italian businesses and white-list foreign entities.
The regime covers income derived from the exploitation of IP, such as patents, formulae, models, licences, trademarks and software copyright (qualifying income). The regime is available also for self-exploitation of IP, but in this case the amount of the incentive must be determined through a ruling procedure. Note that, starting from 2017, patent box elections no longer cover the income derived from trademarks.
The tax benefit is calculated by taking into account the portion of the costs that are aimed at the enhancement of intellectual property (qualifying expenditures): if all the costs borne by the business are qualifying expenditures, then all the income derived from IP will benefit from the ‘patent box’ regime.
The regime provides for taxation of the income from IP reduced to 50 per cent (for the 2015 and 2016 tax periods, the incentive was equal to 30 per cent and 40 per cent of the income, respectively).
The incentive at hand is available also in relation to the consideration received upon the sale of IP subject to the fulfilment of certain requirements, such as the reinvestment of the consideration received.
iii State aid
No state aid is available.
iv Start-up companies
A special regime applies for start-up companies that meet certain specific requirements (e.g., turnover not exceeding €5 million, a minimum annual amount of research and development expenditures). Start-up companies are exempt from incorporation fees and stamp duties, and can benefit from the non-application of the dormant company legislation. Starting from 2017, companies investing in start-up companies are able to deduct from their taxable income 30 per cent of the invested amount. Note that for the tax years 2013, 2014, 2015 and 2016, the deduction was equal to 20 per cent of the invested amount. The investment in each innovative start-up company may not exceed €1.8 million per tax year.
The same regime has been extended, if certain requirements are met, to small-medium enterprises as defined by Commission Recommendation 2003/361/EC (enterprises that employ fewer than 250 persons and that have an annual turnover not exceeding €50 million, or an annual balance sheet total not exceeding €43 million).
VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS
i Withholding on outward-bound payments (domestic law)
As from 1 July 2014, the base withholding tax rate applicable to financial income has been increased from 20 to 26 per cent.
Under Italian domestic tax laws, the following withholding taxes apply to outbound payments made by an Italian-resident company.
Dividends paid to non-Italian resident persons without a permanent establishment in Italy are generally subject to a 26 per cent withholding tax. Non-resident shareholders may claim the refund of up to 11/26 of the withholding tax levied in Italy (one-quarter for dividends paid until 30 June 2014) if they provide evidence to the Italian tax authorities that income tax has been paid on the same dividends in the foreign country in an amount at least equal to the total refund claimed (non-residents seeking such refunds have experienced extensive delays).
A reduced 1.2 per cent (1.375 per cent before 2017, as a result of the IRES rate reduction from 27.5 to 24 per cent) withholding tax applies to dividends paid to companies or entities resident for tax purposes in an EU Member State or in a state adhering to the Agreement on the European Economic Area, which allows the exchange of information.
Interest paid to non-Italian resident persons is normally subject to a final 26 per cent withholding tax.
Royalties paid to non-Italian resident persons are subject to a 30 per cent final withholding tax to be levied on 75 per cent of the taxable amount (effective rate equal to 22.5 per cent).
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
Under Italian domestic law, the following exclusions or exemptions from withholding on outbound payments are provided.
Under the Parent–Subsidiary Directive4 as implemented in Italy, no withholding tax applies on dividends paid to a company that:
- a is incorporated under one of the forms listed in Annex I – Part A to the Directive;
- b is resident for tax purposes in an EU Member State;
- c is subject in its state of residence to one of the corporate taxes listed in the Annex I – Part B to the Directive; and
- d has held a 10 per cent minimum shareholding in the distributing company for at least one year at the time of distribution (if the minimum holding period is gained after the dividend distribution, the levied withholding tax may be claimed for refund by the non-resident).
Directive No. 2015/121 dated 27 January 2015, aimed at tackling artificial arrangements potentially put in place to benefit from the advantages of the Parent–Subsidiary Directive, is enacted through the application of the general anti-avoidance clause, which provides for that the burden of proof of artificiality of arrangements, undue tax savings and motive test lies with the tax authorities.
The enactment of Directive No. 2015/121 is limited to dividend payments made starting from January 2016. As to the payments made up to December 2015, a different rule is in place (now repealed), according to which no exemption from Italian withholding tax is granted to EU parent companies controlled directly or indirectly by one or more residents of states that are not EU Member States, unless that legal person provides proof that the principal purpose or one of the principal purposes of the chain of interests is not to take advantage of the Parent–Subsidiary Directive.
Note that a similar provision of the French tax system has been recently deemed incompatible with the freedom of establishment (decision by the Court of Justice of the European Union in case C-6/16 of 7 September 2017).
Under the domestic provisions implementing the Interest and Royalties Directive, interest payments arising in Italy are exempt from any Italian tax imposed on those payments upon condition that the beneficial owner of the interest is an associated company of another EU Member State (or a permanent establishment located in another EU Member State of an associated company of an EU Member State). The exemption applies if both the person paying interest and the beneficial owner have one of the legal forms, and are subject to one of the corporate taxes, listed in the Annexes to the Directive. As to the status of associated companies:
- a the first company directly holds a stake equal to at least 25 per cent of the voting rights in the second company;
- b the second company directly holds a stake equal to at least 25 per cent of the voting rights in the first company; or
- c a third company directly holds a stake equal to at least 25 per cent of the voting rights in both the first and second company.
The relevant shareholding must be held for an uninterrupted period of at least one year.
Under domestic tax law, no withholding tax is levied on interest paid to non-resident persons on deposits or bank accounts. Furthermore, an exemption from withholding tax applies to interest on bonds and similar securities issued by the state, and by banks and listed companies, provided that the recipient is a resident of a country that allows the exchange of information (a white-listed country); to benefit from this exemption, the non-resident shall deposit the bonds with a resident bank or other qualified intermediary. As from 2012, the exemption from withholding tax also applies to interest on bonds issued by non-listed companies, provided that the bonds are listed on an EU regulated market or multilateral trading facilities.
As regards medium long-term loans (i.e., maturity over 18 months), provided the compliance with regulatory financial requirements, an exemption from withholding tax is provided on interest paid by companies to financial institutions established in a EU Member State, insurance companies set up and authorised pursuant to the laws of a EU Member State, and institutional investors supervised in the state when they are set up, to the extent that such state allows for an effective exchange of information.
According to a specific regime applicable to companies whose main activity is the leasing of real estate properties, interest expenses on mortgage bank loans secured by real estate assets held for leasing are fully deductible from the IRES tax base.
Pursuant to the Interest and Royalties Directive as implemented in Italy, royalty payments are exempt from Italian withholding tax under the same conditions mentioned above in respect of interest payments.
iii Double tax treaties
Italy has an extensive double taxation treaty network (more than 90 treaties are currently in force). Double taxation treaties concluded by Italy are generally compliant with the provisions set forth by the OECD Model Convention. Under the treaties, dividend withholding tax rates are reduced to 10 or 15 per cent in most cases, while interest and royalties withholding tax rates are frequently reduced to 10 per cent or less.
Subject to certain formalities, it is normally possible to obtain direct application of the treaty-reduced rates.
iv Taxation on receipt
No tax on gross receipts applies in Italy.
Under the participation exemption regime, both Italian-sourced and foreign-sourced dividends are exempt from corporate income tax for 95 per cent of their amount (except in cases of dividends paid by entities located in low-tax jurisdictions – i.e., providing for a nominal corporate tax rate lower than half of the IRES rate – which are fully included in the taxable income). No imputation credit is granted in respect of non-local underlying taxes paid at the level of the entity distributing dividends. Subject to certain conditions, a foreign tax credit is usually available (both under domestic law and the treaties) in respect of withholding taxes suffered abroad.
VII TAXATION OF FUNDING STRUCTURES
i Thin capitalisation
Thin capitalisation rules no longer apply. As from 2008, thin capitalisation rules have been replaced by the interest barrier regime mentioned below.
ii Deduction of finance costs
Interest expenses accrued in a given tax year are deductible up to the amount of interest income and similar proceeds accrued in the same tax year. Any excess interest is deductible up to an amount equal to 30 per cent of the earnings before interest, tax, depreciation and amortisation (EBITDA) of the same year. Any interest expenses exceeding the above threshold may be carried forward and deducted in the following tax years (with no time limitation) within the same limit of 30 per cent of the annual EBITDA. Furthermore, any excess EBITDA capacity that is not used in a given tax year to deduct interest expenses may be carried forward and used in the following tax years (with no time limitation). The provision at stake also applies to other finance costs deriving from loans, financial leases, issuance of bonds and similar financial instruments, excluding interest for deferred payments in relation to commercial debts. Certain special rules are provided for entities joining the tax consolidation regime: in principle, it is possible to use the EBITDA capacity of one company joining the tax grouping to deduct interest expenses incurred by another group company.
The above rules do not apply to banks, insurance companies and other financial entities, for which different rules are provided. In particular, interest expenses are: (1) deductible up to 96 per cent of their amount (4 per cent non-deductible) for insurance companies, controlling entities of banking and insurance groups and fund management companies; and (2) fully deductible, starting from 2017, for banks and other financial entities (note that, until 2016, they were deductible up to 96 per cent of their amount).
iii Restrictions on payments
Payment of dividends is subject to approval by an ordinary shareholders’ meeting. Dividends can only be paid out of realised profits and distributable reserves. According to the Italian Civil Code, an amount equal to 5 per cent of the profit of the company for the year must be set aside for the legal reserve until said reserve amounts to at least one-fifth of the share capital; the legal reserve is not available for payment of dividends. The distribution of interim dividends is only allowed for companies that are subject to a mandatory audit (e.g., listed companies), and it is subject to certain formalities and limitations, including approval by the auditors.
iv Return of capital
Distributions of capital reserves (share premiums, informal capital contributions, etc.) are allowed upon approval by the shareholders’ meeting, and they are not subject to specific limitations, while repayment of formal share capital must be resolved by an extraordinary shareholders’ meeting and is subject to certain procedural formalities. In principle, the repayment of capital reserves is tax-neutral; a taxable income may arise if the amount distributed exceeds the tax basis of the shareholding in the distributing company. If a company can dispose of capital reserves and profit reserves, pursuant to a special presumption, for tax purposes profit reserves are always deemed to be distributed first, regardless of the allocation made in the relevant resolution for civil law purposes.
v Financial transaction tax (FTT)
The Budget Law for 2013 introduced the FTT, whose implementing rules were provided by the Ministry of Economy and Finance. FTT applies as of March 2013 to transactions related to the transfer of the ownership of securities and other financial instruments issued by companies having their registered offices in Italy and securities representing equity investment, regardless of the place of residence of the issuer (shares). Specific exclusions from the scope of application of FTT are provided (e.g., transfers of the ownership of the quotas of SICAVs, SRLs and ETFs, as well as the transfer of listed shares of companies with an average capitalisation lower than €500 million).
FTT is calculated with reference to the net balance of the transactions regulated on a daily basis and the tax rate is equal to 0.1 per cent (0.12 per cent for the 2013 tax period) for transactions effected on regulated markets or in multilateral trading facilities; and 0.2 per cent (0.22 per cent for 2013 tax period) for any other transactions. FTT also applies as of September 2013 to transactions relating to financial derivatives having as their main underlying asset one or more shares (or the value of which mainly derives from shares), and transferable securities giving the right to acquire or sell mainly shares or giving rise to a cash settlement determined mainly by reference to shares (derivatives). At the least, FTT applies to ‘high-frequency’ trading activities regarding the foregoing financial instruments (shares and derivatives).
FTT is not deductible for the purposes of IRES and IRAP. Non-resident intermediaries and persons intervening in a transaction with a permanent establishment in Italy must comply with the obligations deriving from FTT through such permanent establishment. In the absence of such, non-resident intermediaries and persons intervening in transactions can appoint Italian tax representatives or, alternatively, can comply with the applicable provisions and procedure directly.
vi Issuance of debt securities by non-listed companies
Law Decree No. 83/2012, as amended and supplemented, introduced significant amendments affecting corporate bonds listed on a regulated market or multilateral trading facilities of an EU Member State or an EEA ‘white-listed’ Member State (the qualified exchanges) issued by non-listed companies; and issued by non-listed companies and subscribed by qualified investors as per Article 100 of the Italian Financial Act, including:
- a the deductibility of interest paid, or interest expenses arising from such bonds, are not subject to limitations ordinarily provided for high-yield bonds;
- b the exemption for non-listed companies issuing corporate bonds listed on a qualified exchange from the limit of issuance of bonds provided by Article 2412 of the Italian Civil Code – equal to twice the value of the share capital and reserves of the issuer available for distribution – thereby granting them the same treatment applicable to Italian-listed companies; and
- c the exemption from withholding tax on interest paid to investors resident in ‘white-listed’ countries. Moreover, interest paid to Italian or EU collective investment funds and to securitisation companies are also exempt from withholding tax subject to specific requirements.
As a consequence, bonds listed on a qualified exchange issued by non-listed companies are now subject to the same withholding tax regime applicable to bonds issued by Italian banks and Italian listed companies, including the exemption regime provided for interest paid to investors resident in a ‘white-listed’ country.
vii Venture capital investment funds (FVCs)
According to a regime enacted in 2013, income from capital arising from participation in FVCs is not subject to income tax. To apply this exemption with specific reference to individuals holding quotas in the course of their business, Italy asked for the approval from the European Commission, which granted it.
Pursuant to the aforementioned rule, FVCs are defined as OICRs (Italian UCITs) that invest at least 75 per cent of the collected capital in unlisted companies as seed financing, start-up financing, early-stage financing or expansion financing.5
The quotas of FVCs may be acquired only by: investors who are considered professional investors according to Section I of Annex II to Directive 2004/39/EC; investors who may, on request, be treated as professional investors according to Section II of Annex II to Directive 2004/39/EC; and other investors if certain requirements are met (e.g., investors declare that they are aware of risks related to the investment, and undertake to invest at least €100,000).
viii Receivables of the shareholders
If a company benefits from a write-off of a receivable in the hands of its shareholders (e.g., shareholders loans), such former company is subject to tax for the amount exceeding the fiscal value of the receivable. The shareholder has to communicate the fiscal value of the receivable to the company; absent this communication, the fiscal value of the receivable is assumed to be zero. The same provision applies also to the conversion of receivables into equity.
The Budget Law for fiscal year 2017 introduced a beneficial tax regime available to a specific kind of investment scheme, known as Individual Plan of Saving (PIR), to be provided by Italian resident financial institutions and Italian branches of foreign financial institutions, for the benefit of non-entrepreneur individuals investing less than €30,000 per year, up to a maximum of €150,000.
According to this regime, capital gains and financial income derived from the PIR-compliant investments are exempt from the 26 per cent substitute tax, which would ordinarily apply on such income.
For a portfolio of investment to be PIR-compliant, certain requirements shall be met, among which: (1) the investment in the PIR must be held for more than five years; (2) at least 70 per cent of the investment portfolio consists of shares or debt securities issued by Italian companies (or EU companies having an Italian branch) or units of UCITS complying with such requirements; (3) 30 per cent of the issuers of such securities are small-medium enterprises; and (4) concentration risk in one single investment is limited to 10 per cent.
VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
Usually, the acquisition of Italian businesses is structured through the incorporation of an Italian-resident acquisition vehicle, which is adequately funded through a mix of equity, shareholder loans and bank debt. In more complex structures, one or more foreign holding companies are normally used to provide for mezzanine or hybrid financing. Deduction of interest on debt is achieved either through the merger of the acquisition vehicle with the target or through a tax grouping: after many years of uncertainty; in 2016 the Italian tax authorities provided guidelines according to which the deduction of interest is, in principle, admitted.
Frequently, the acquisition of business concerns is structured as an initial contribution in kind into a wholly owned subsidiary followed by a sale of shares of the subsidiary; indeed, the contribution is tax-neutral, and the transfer of shares would usually benefit from the participation exemption regime. In recent times, however, the Italian tax authorities have tried to recharacterise similar transactions as sales of going concerns, with the application of higher transfer taxes. The current draft of Budget Law for fiscal 2018 includes an amendment in order to prevent such recharacterisation.
As regards mid to long-term loans (i.e., loans having a final maturity of over 18 months) and the related guarantees and transfer of receivables, it is possible – by election – to benefit from a 0.25 per cent substitute tax instead of applying the ordinary registration, stamp, mortgage and cadastral taxes. Medium-term loans granted by securitisation companies, EU insurance companies and white-listed collective investment funds established in the EU or white-listed countries included in the EEA can also benefit from such regime.
Mergers and demergers are, in principle, tax-neutral transactions, both in a purely domestic scenario as well as in cross-border transactions. Indeed, such corporate reorganisations do not imply the realisation of capital gains or losses on the assets of the participating companies, even when these gains or losses are accounted for in the financial statements; at the same time, no taxation arises for the shareholders of the participating companies. In cross-border mergers, tax-neutrality is achieved provided that the assets of the Italian-resident participating company are allocated to an Italian permanent establishment of the foreign combined entity. A similar, tax-neutral regime normally applies to the contributions of businesses in exchange for shares.
The transfer abroad of the legal seat of an Italian company is allowed under Italian corporate law. For tax purposes, the transfer of tax residence ordinarily triggers realisation of capital gains or losses on the company’s assets (exit tax), unless the said assets are allocated to the Italian permanent establishment of a foreign company. The same regime applies to the transfer of a permanent establishment.
However, in the event that the tax residence of the company or the permanent establishment is transferred to an EU Member State or a white-listed state belonging to the EEA the taxpayer, instead of being subject to the ordinary tax regime, may elect to either defer at the moment of their disposal the exit tax due in relation to the assets that are not transferred to a permanent establishment in Italy; or to pay the exit tax in six annual instalments. The tax authorities may make the deferral or the instalment payment conditional upon the provision of guarantees.
The transfer may also be achieved through the incorporation of the Italian company into a foreign company; in this scenario, tax-neutrality is also achieved provided that the assets of the absorbed company are allocated to an Italian permanent establishment of the merging foreign company. In this regard, starting from the fiscal year that was ongoing on 7 October 2015, the opportunity to defer the possible exit tax due has been extended also to this latter type of transfer.
iv Further remarks
Italian tax authorities have provided certain guidelines on leveraged buyout transactions, also by way of merger (LBOs and MLBOs), aimed at clarifying the tax treatment of fees and the entitlement to EU Directives or double tax conventions.
With reference to fees, the private equity firm charges to the SPV or to the target company for its services (i.e., transaction/arrangement fees and monitoring fees), the deductibility in the hands of the SPV or the target is denied if such fees refer to services that are provided in the exclusive interest of the investment fund and its investors. In all other circumstances (i.e., the cost refers to a service provided in the interest of the target), ordinary transfer pricing rules apply.
In addition, Italian tax authorities clarified that the SPV is not entitled to the deduction or the refund of VAT on the transaction costs (including the above fees), unless the latter actually carries out a commercial activity.
With reference to the exemption or other tax benefits provided by EU Directives or double tax conventions, such benefits are denied if the non-resident shareholders or holding company lacks ‘adequate’ economic substance (e.g., there is a light organisational structure in terms of personnel, equipment and premises; limited decisional powers; and back-to-back financial structures are in place).
IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
In 2015, the Italian parliament enacted a piece of legislation providing for a new general anti-avoidance clause, which replaced the previously existing clause and also has disciplined the ‘abuse of law’ doctrine that was developed in recent years by the tax courts.
This new rule provides that the tax authorities may disallow any tax advantage obtained through acts or transactions carried out without genuine economic reasons for the purposes of circumventing tax obligations or prohibitions, or for obtaining undue tax benefits.
Under this new piece of legislation, the burden of proof lies with the tax authorities, which, in order to apply the general anti-avoidance clause, must issue an ad hoc notice of assessment to be provided with specific grounds in respect of the conduct that is deemed abusive.
It must be noted that, even prior to the enactment of the above general anti-avoidance provision, in recent years the Italian Supreme Court has delivered various decisions on the ‘abuse-of-law’ principle to tax matters, as derived from judgments rendered by the European Court of Justice. The new piece of legislation is aimed at, inter alia, providing a better definition of the boundaries of abusive conducts.
ii Controlled foreign corporations (CFCs)
CFC legislation applies to all resident taxable entities holding a controlling participation in foreign entities located in low-tax jurisdictions (i.e., providing for a nominal corporate tax rate lower than half of the IRES rate) other than EU and EEA Member States.
It should be noted that the criterion for determining the countries falling within the scope of the CFC regime changed in 2015, taking the place of a previous system of black lists based upon the effective level of taxation and the adequacy of exchange of information of such countries.
When CFC rules apply, the Italian-resident shareholder is taxed on its share of the CFC’s profits, regardless of the actual distribution. However, this tax treatment does not apply if the Italian taxpayer is able to demonstrate that the non-resident entity mainly carries out a genuine business activity in the market of the country where it is located, or that the participation in the entity located in a low-tax jurisdiction does not result in any way in the allocation of income in a low-tax jurisdiction. This burden of proof can be waived by way of a ruling.
The CFC regime also applies when a controlled company that is not resident in a low-tax jurisdiction is subject to effective taxation that is lower than half of the effective burden that it would have suffered as an Italian resident, and more than 50 per cent of its revenues derive either from passive income (i.e., dividends, interest, royalties, capital gains) or from intragroup services. In such cases, the CFC rules do not apply if the Italian taxpayer is able to demonstrate, possibly through a ruling concerning proof (on which, see below), that the establishment of the CFC is not an artificial arrangement aimed at achieving an unfair fiscal advantage.
iii Transfer pricing
Transactions between resident and non-resident affiliated entities must be valued at their ‘fair market value’. Adjustments in compliance with such evaluation shall be made either if an increase or a decrease of the taxable income occurs. In this respect, adjustments made by the tax authorities of other countries can be recognised with special procedures and according to specific rules that were recently amended in 2017. The concept of fair value as defined by the ITC has, in principle, the same meaning as the arm’s-length price defined in the OECD guidelines, to which reference is also usually made by the tax authorities in their interpretative instructions.
Specific rules have been issued providing for standard transfer pricing documentation to be prepared; such rules are compliant with the EU Code of Conduct and OECD guidelines. The main effect of providing such documentation is to avoid the possible application of administrative penalties in the case of adjustments by the Italian tax authorities.
Under a special ruling procedure, it is possible to negotiate advance pricing agreements with the Italian tax authorities: the number of advance pricing agreements have been increasing over the past few years, and are likely to continue to do so in light of a recent legislation that further enhanced the international standard ruling.
iv Tax clearances and rulings
Tax clearances and Italian tax laws on rulings have undergone significant restyling, and the recently enacted rules provide for six ruling procedures, namely:
- a ordinary ruling;
- b ruling concerning proof;
- c anti-avoidance ruling;
- d requests for non-application of certain provisions;
- e ruling on new investments; and
- f international standard ruling.
The ordinary ruling procedure relates to the correct interpretation of tax provisions in cases of uncertainty. Following the filing of the ruling request, the tax authorities must issue a written and motivated reply within 90 days (under the former regime, the deadline was 120 days). A positive reply is binding on the tax authorities for the case submitted. If no reply is provided within 90 days, it is assumed that the tax authorities agree with the proposed interpretation.
The procedures under (b), (c) and (d) allow the tax authorities to reply within 120 days, while rulings under (f) are basically an agreement between the authorities and the taxpayer that is valid from the fiscal year it is signed in and throughout the following four years.
Under the international standard ruling, it is possible to define a number of aspects such as assessing the transfer pricing of certain goods and services, determining the value of assets at exit or at entry, agreeing the fair value of intercompany royalties and assessing whether a permanent establishment occurs.
X YEAR IN REVIEW
In 2017, the Italian tax authorities released a number of circular letters aimed at clarifying several new provisions passed in 2016 and in 2017 (e.g., on the qualification of the s.c. ‘carried interest’ as financial income, rather than employment income, if certain requirements are met: an elective flat-tax regime for new resident individuals; reopening of the voluntary disclosure programme; and the settlement procedure of tax collection bills).
Among them, the qualification of the s.c. carried interest as financial income and the elective flat-tax regime for new resident individuals are worth mentioning.
A newly enacted provision, coupled with the guidelines issued by the Italian tax authorities in Circular Letter No. 25/E of 2017, provided that the s.c. carried interest – namely the enhanced economic rights connected to the holding of shares, units or other instruments in companies, funds or investment entities by managers and employees – qualifies as financial income subject to certain requirements, which, in general, are aimed at aligning the risk of investment to that of the ordinary shareholders (i.e., minimum investment, deferral in distribution, minimum holding period). This qualification is beneficial to the managers and employees, given the lighter tax burden on the financial income (generally 26 per cent), compared to that on employment income (up to 43 per cent), and to the paying entity in relation to its obligations as withholding agent.
The elective flat-tax regime for new resident individuals is a lump-sum taxation for individuals who have not been resident in Italy in nine out of the last 10 years and wish to move their tax residence to Italy. In particular, the new resident regime provides for a yearly €100,000 substitute tax on any foreign-source income received by new Italian residents (additional €25,000 substitute tax for each connected family member is available). Italian source income is subject to ordinary rules. The regime is granted for a maximum of 15 tax periods.
XI OUTLOOK AND CONCLUSIONS
In 2017, the Italian economy consolidated certain recent achievements. The government is committed to carry on enacting provisions aimed at easing cross-border business and investments through increased certainty, reducing taxation and simplifying the system.
The Budget Law for 2018, which is pending approval, is not likely to change this trend, as it is aimed at raising additional resources from the reopening of the settlement procedure of tax collection bills and from the tax incentives for individuals (i.e., carried interest and new resident individuals regimes).
Moreover, reduced uncertainties in M&A transactions are expected from the proposed amendment aimed at preventing the application of higher transfer taxes to the sale of wholly owned subsidiaries established through the contribution in kind of a going concern, which – as mentioned – has been recharacterised by the Tax Authorities, so also positively affecting foreign investors willing to acquire or sell Italian businesses.
1 Paolo Giacometti and Giuseppe Andrea Giannantonio are partners at Chiomenti.
2 Directive No. 2011/61/EU of 8 June 2011.
3 SCA Group (C-39/13, C-40/13 and C-41/13).
4 Directive No. 2011/96/EU dated 30 November 2011.
5 To benefit from this exemption, investee companies must meet certain requirements. In particular:
a they must be unlisted;
b they must have their operative seat in Italy;
c their quotas or shares must be held directly, mainly by individuals;
d they must be subject to corporate income tax or similar taxes under local law, without being totally or partly exempted;
e they must have been engaged in business for no longer than 36 months; and
f they must have a turnover not exceeding €50 million, according the latest financial statements approved prior to investment by the FVC).