brochure_DOING_BUSINESS_IN_ITALY.2012.rsm

Doing business in Italy

Foreword This publication was prepared by RSM Tax & Advisory Italy s.r.l., with the contribution of RSM Italy Audit & Assurance s.r.l., for the use of their clients, partners and staff. The guide provides comprehensive coverage of many aspects of setting up and running business operations in Italy, including types of business entities, taxation, accounting and investing in Italy.

It is designed to give some general information to those contemplating business in our country. We therefore advise you to consult one of the RSM Tax & Advisory and/or RSM Italy Audit and Assurance offices listed on the last page before taking further action.

RSM Tax & Advisory Italy and RSM Italy Audit & Assurance cannot be held liable for any business decision taken on the basis of information in this booklet.

This brochure can be downloaded from the web site www.rsmta.it and www.rsmitaly.com.

The information contained herein has been updated to October 2011.

About RSM International RSM International is a worldwide network of independent accounting and consulting firms. RSM International and its member firms are separate and independent legal entities. RSM International does not itself provide accounting or consultancy services.

All such services are provided by member firms practising on their own account.

RSM is represented by independent members in 83 countries and brings together the talents of over 32,500 individuals in over 700 offices worldwide. The network’s total fee income of US$3.9bn places it amongst the top six international accounting organizations worldwide. Member firms are driven by a common vision of providing high quality professional services, both in their domestic markets and in serving the international professional service needs of their client base.

RSM International is a member of the Forum of Firms. The objective of the Forum of Firms is to promote consistent and high quality standards of financial and auditing practices worldwide.

DOING BUSINESS IN ITALY |

About RSM Tax & Advisory Italy S.r.l.

About RSM Italy Audit & Assurance S.r.l.

RSM Tax & Advisory Italy is a company set up by three leading professional firms engaged in tax and corporate consulting, located in the main Italian cities: Studio Palea - Turin, Studio Gerla Associati - Milan and Studio L4C di Lauri, Lombardi, Lonardo & Carlizzi - Rome.

The organization, which counts over 110 people among partners and staff, supplies the following integrated services: • Tax consulting and planning (domestic and international) • Corporate finance: deal structuring, tax and legal due diligence, tax and legal advisory • Tax litigation • Transfer pricing • Outsourcing: tax compliance, bookkeeping and reporting • Financial reporting according to Italian GAAPs • Incorporation of companies and set up of branches • Governance and management consulting • Legal advisory and company secretarial services Many of RSM Tax & Advisory Italy’s partners hold offices as independent directors, statutory auditors and member of surveillance bodies ex L.231/2001 in listed companies and financial institutions.

RSM Italy Audit & Assurance provides audit and assurance services and is a registered audit firm with ISO 9001. It has strong coverage throughout Italy, being located in all the key business centers, with major operations in Milan, Rome, Turin, Brescia and Padua. The firm has more than 70 professionals, the majority having Big 4 experience.

The main services provided by RSM Italy are: • Audit and assurance • Corporate finance: deal origination, financial due diligence, business and financial advisory and valuation • Assistance in capital markets transactions • Fraud investigation and dispute services • IFRS transition • Financial reporting according to IFRS / US GAAPs • Risk management • Internal audit, compliance with L. 262/2005 and D.lgs. 231/2001 • Financial restructuring, insolvency and turnaround The activities of RSM Italy are performed according to the high quality standards imposed by RSM International, Forum of Firms (“FoF”), International Federation of Accountants (“IFAC”).

International Contact Partners Marcello Rabbia - Turin - marcello.rabbia@rsmta.it Francesco Gerla - Milan - francesco.gerla@rsmta.it Mauro Lonardo - Rome - mauro.lonardo@rsmta.it

International Contact Partners Andrea Tuccio - Milan - andrea.tuccio@rsmitaly.com Paolo Franzini - Milan - paolo.franzini@rsmitaly.com RSM Tax & Advisory Italy s.r.l. and RSM Italy Audit & Assurance s.r.l. are separate and independent legal entities.

International Desk Livia Seniuc - Turin - livia.seniuc@rsmta.it

DOING BUSINESS IN ITALY |

DOING BUSINESS IN ITALY |

RSM International is seventh largest network of independent accounting and consulting firms worldwide. RSM is represented in over 83 countries and brings together the talents of 32,500 individuals. RSM firms are driven by a common vision of providing high quality professional services to ambitious and growing organisations.

1

FOREWORD 1 1.1 1.2 1.3

General information Geography and population Political institutions Economy

2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8

Types of business organisations Introduction Formation of a company Legal, accounting and audit requirements Formation of a branch in Italy Accounting and company measures Dissolution and liquidation of business entities Incorporation of business entities The trust in Italy

6 6 7

9 12 14 17 18 19 21 22

3 3.1 3.2

3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13

Taxation General structure Company income tax and income tax payable by other legal institutions (IRES) Personal income tax (IRPEF) Tax on income of non-residents Withholding taxes Regional tax on productive activities (IRAP) Value added tax (VAT) Immovable property investments Municipal tax on property (ICI) and other local taxes Registration tax Inheritance and gift tax Navigation system Tax obligations

24 33 34 35 39 39 42 45 46 47 48 50

4 4.1 4.2 4.3

Accounting Accounting regulations and standards Adoption of IFRS in Italy New accounting standards (Italian GAAP)

52 52 53

5 5.1 5.2 5.3

Legal aspects The Joint Venture Agreement The Antitrust Law Distinguishing the trademarks

55 56 57

6

Contact

58

24

Contents

In a world of different cultures, it’s good to have advisors who are consistent everywhere.

DOING BUSINESS IN ITALY |

1 General information 1.1 Geography and population Italy is a peninsula (1.300 kilometres from North to South) situated in Southern Europe, in the centre of the Mediterranean Sea, bordering France, Switzerland, Austria and Slovenia to the North, while the rest of the State is surrounded by sea. Italian territory includes numerous islands, the largest of which are Sicily and Sardinia.

Italy has a total area of 301.338 square kilometre, a population of 60.6 million in 2010 and an average density of 200 inhabitants per square kilometre.

The climate is mild and temperate, with well-defined seasons, owing to the Alps that constitute a natural barrier from Northern Europe.

Northern Italy has a fairly harsh winter and warm summer climate, while the South and the islands have a drier and hotter climate, with mild winters.

Italian is the official language. However, there are there are bilingual regions, where German, French and Slovenian are spoken. The religion most widely practised is Catholicism.

The capital of Italy is Rome; other major cities include Milan, Turin, Naples, Bologna, Florence, Catania, Palermo and Genoa.

As part of the Eurozone, Italy’s currency is the Euro.

The National Holidays are: • 1 January - New Year’s Day • 6 January - Epiphany • Variable Date - Easter and Easter Monday • 25 April - Liberation Day • 1 May - Labour Day • 2 June - National Day • 15 August - Assumption • 1 November - All Saints’ Day • 8 December - Immaculate Conception • 25 December - Christmas • 26 December - St. Stephen’s Day In general, the opening and closing hours of public offices are: 8.30/8.45-12.30/12.45 from Monday to Friday. Several public offices may also open on Tuesday and Thursday from 14.15 to 15.35. Banks are currently open from Monday to Friday, as follows: 8.3013.30, 14.30-15.30.

1.2 Political institutions Italy is a Parliamentary Republic, subdivided administratively into 20 regions, 110 provinces and over 8,100 municipalities.

The President of the Republic is the Head of State and is elected by the Parliament. He remains in office for 7 years. His duties include calling elections, enacting laws, ratifying international Treaties and maintaining command of the Armed Forces.

The national legislative power is assigned to a Parliament, consisting of two Chambers

DOING BUSINESS IN ITALY |

(Chamber of Deputies and Senate) elected by universal suffrage every 5 years; the Government may legislate directly only in exceptional cases.

The local bodies of the State may legislate within the scope of the powers assigned by the Constitution and within the limits of national regulations.

Executive power is granted to a Government, consisting of a Council of Ministers, a Vice President and a President of Council (elected by the Parliament and appointed by the President of the Republic).

The judicial power is shared between: • ordinary jurisdiction, exercised by ordinary civil and criminal law magistrates; • administrative jurisdiction, exercised by the regional administrative courts (TAR) • and by the Council of State; • tax jurisdiction, exercised by provincial and regional Tax Commissions; • accounting jurisdiction, exercised by the Audit Office on public accounts; • military jurisdiction.

The highest level of judgment of the judicial power is the Court of Cassation, which acts as judge on legal issues and not on facts.

Finally, the Constitutional Court gives its opinion on any conflict between the laws and the Italian Constitution.

At an international level, Italy is a founder country and member of the European Community, now the European Union (EU), and of the North Atlantic Treaty Organization (NATO). Italy was admitted to the United Nations in 1955, and it is a member and strong supporter of a wide number of international organizations, such as the Organisation for Economic Co-operation and Development (OECD), the General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO), the Organization for Security and Co-operation in Europe (OSCE), the Council of Europe, and the Central European Initiative.

1.3 Economy In 2010, Italy’s gross domestic product amounted to 1,54 billion Euros; the per capita income amounted to approximately 24.700 Euros.

The most developed sectors of Italian industry include: manufacturing, mechanical, construction, chemical and transport. A significant contribution to the national wealth is mostly generated by products “made in Italy” (textile products, production of clothing and footwear, agri-foodstuffs and design), known and appreciated throughout the world.

The role played by tourism is also of prime importance: Unesco has declared that Italy has the greatest cultural heritage in the world.

One salient feature of the Italian economy is the high propensity to entrepreneurship, as compared to other industrialized countries, given the very high number of small and medium-sized businesses: 98% of the over 4 million businesses have less than 19 employees (the average is 4.07 employees per company).

Another significant feature of the Italian economy is the development of the so-called “industrial districts”, geographical areas in which numerous companies belonging to the same sector are concentrated, each one specializing in a specific stage of the production line: today there are over 200 districts on Italian territory.

Thanks to these associations, the sectors concerned maintain considerable flexibility

DOING BUSINESS IN ITALY |

and a high level of specialization and innovation.

The favourable geographical position at the centre of the Mediterranean and the infrastructural links with other European countries turn Italy into a crossroads for international trade and a natural bridge between Europe and Africa.

Investment is favoured by the marked industrialization present in the North and by the existing concessions, intended to favour the economic development of the South.

Finally, membership of the European Community provides for the freedom of movement of citizens, goods, services and capital between Italy and the other 26 Member States, thus creating a single continental market.

2 Types of business organizations 2.1 Introduction Italy offers a wide range of choice of legal forms for setting up companies. Therefore, one has to identify the most suitable type of company from an organizational point of view, taking also into account the objects to be pursued, the capital to be committed, the level of liability each legal type involves, the various tax implications and, finally, the complexity of the accounting and organizational compliance.

Sole Trader A sole trader is a business set up by a single holder.

The businessman conducting business is also financially responsible for it, i.e. he/she is liable for the debts contracted by the firm with his/her own present and future personal wealth.

If relatives (members of the family of the company holder up to the 3rd degree and relatives up to the 2nd degree) work in the business, it is regarded as a family business, for which the sole holder remains liable, receiving at least 51% of the business income (family workers do not share the losses).

This legal form is very suitable for small businesses and allows access to forms of concessionary funding.

Partnerships Simple partnerships A simple partnership is the most elementary form of partnership.

Its main feature is that it can only be set up to perform non-commercial profit-making activities.

The scope of simple partnerships may therefore be extended to the management of property assets, to conducting professional activities in the form of an association and agricultural activities, with several limitations. In particular, the partnership cannot be merely involved in the use of goods, but in the common and specific exercise of economic activities.

The partners have unlimited liability for the partnerships’ obligations, although the liability of partners with no powers of representation may be excluded by suitable agreement that must be adequately communicated to third parties.

In simple partnerships, the creditor may receive payments from the partnership assets or from the assets of partners with unlimited liability.

Joint-name partnerships (S.n.c.)

The joint-name partnership (S.n.c.) is a type of partnership that can be used to conduct commercial or non-commercial activities.

For this partnership, there is no minimum capital contribution and all the partners have unlimited liability.

The partners hold joint and unlimited liability for the business obligations but, unlike the simple partnership, the partners benefit from the preliminary right of execution on the partnership assets. Any agreement to the contrary has no effect towards third parties.

DOING BUSINESS IN ITALY |

DOING BUSINESS IN ITALY |

Limited partnerships (S.a.s.)

It is possible to set up a partnership with different levels of liability for business obligations by means of a limited partnership (S.a.s.). This partnership is characterized by the presence of two categories of partners: • general partners (it “accomandatari”), who have the responsibility for the administration and management of the partnership and have unlimited and joint liability for the fulfillment of the company obligations; • sleeping partners (it. “accomandanti”), who are liable for the partnership obligations within the limits of the shares they hold, provided they are not involved in the partnership management.

This legal form is suitable for businesses willing to bring in new partners to contribute capital and whose business risk limited to the amount of the capital contributed.

Company with share capital Limited company by shares (S.p.A.) A limited company by shares (S.p.A.) represents the best example of share capital company in regulatory terms and is the type of company most suitable for substantial capital investments.

It is also the compulsory type for companies wishing to be listed on the stock exchange.

Limited companies by shares are characterized by the presence of two fundamental elements: the limited liability of all the shareholders and the division of the capital into shares.

The company has to be set up by a notarial incorporation deed, indicating the parties of the contract, who may be natural or legal persons.

The initial minimum amount of capital for limited companies by shares must not be inferior to 120,000 Euros. Said legal minimum can be higher according to nature, size and effects on the market of the activities which the company chooses to conduct.

The percentage of shares held in the company’s capital does not necessarily correspond to the contributions made by each shareholder. The proportions of capital payments, profits and administrative rights (votes) do not necessarily have to correspond.

The administration of limited companies by shares may be organized according to three different models: • traditional • dualistic • monistic In the traditional model, the directors have the task of managing the company.

The managerial competence is attributed to a sole director or a board of directors and is general and includes all necessary measures for achieving the company’s objectives, that are not expressly provided for by law or by the deed of incorporation for other bodies.

In the dualistic system, management is assigned to a board of management, appointed by the supervisory body which, in turn, is appointed by the general meeting of shareholders.

In the monistic system, the rules of administration are not significantly different, but the supervision is exercised by a committee set up within the board of directors.

With regard to the audit of the accounts, the deed of incorporation must provide for the appointment of a Board of Auditors (it. “Collegio Sindacale”), an audit firm (it. “società di revisione”) or an auditor (it. “revisore”).

DOING BUSINESS IN ITALY | 10

Partnerships limited by shares (S.a.p.a.)

A partnership limited by shares (S.a.p.a.) is a limited company by shares in which the management power is held by directors who, in return for their prominent position, hold unlimited liability, even if subsidiarily, for the company obligations.

• One peculiar feature consists in the coexistence of two different groups of shareholders: general shareholders, de jure directors, with personal and unlimited liability; • sleeping shareholders, not involved in the management, whose liability is limited to their contributions.

Private limited company (S.r.l.)

A private limited company (S.r.l.) is a company form intended for businesses smaller than the limited companies by shares and whose shareholding is denoted by a personal profile.

The shares are generally held by a limited number of shareholders, who are not personally liable for the company obligations, even if they have acted for and on behalf of the company.

The minimum share capital to be subscribed is 10,000 Euros and companies must be set up by a notarial deed, indicating the parties to the deed of partnership, who may be natural or legal persons.

The shares in the company need not be proportional to the contributions made by the shareholders.

The transfer of shares may be limited and even prohibited; in this case, each shareholder will be entitled to withdraw from the company, obtaining a reimbursement for his/her share.

The management benefits from the same flexibility; it is, in fact, possible to provide for a sole director or a board of directors, with joint or separate management.

It is also possible for a shareholder to hold special personal management rights.

According to art. 2477 of the Italian Civil Code, a board of auditors must be appointed if the share capital is equal to or higher than 120,000 Euros or other size parameters provided by law are exceeded. It is also compulsory for S.r.l. to appoint a board of auditors when the company is required to draw up Consolidated Financial Statements or when it controls companies subject, by law, to statutory audit.

Finally, private limited companies may issue debt instruments similar to bonds (which remain the sole prerogative of limited companies by shares and partnerships limited by shares).

Unlike bonds, these instruments may only be subscribed for by professional investors.

Other types of companies It is also possible to set up other types of companies, in the form of limited liability cooperative societies, and mutual insurance societies, all for mutual purposes. This means that they are intended to provide goods, services or work for members directly, under more advantageous conditions than those that members would obtain on the market.

Finally, all companies, except for simple partnerships, may form a consortium to coordinate economic activities similar or related to those of several businesses or conduct certain stages of production of the respective companies.

Finally, mention must be made of the European Company (S.E.), set up and governed

by EC regulations 2157/2001 and by the Direct 2001/86/EC implemented in Italy by the Legislative Decree nr. 188 dated 19/98/2005, which allows multinational enterprises to operate in the European Union through companies limited by shares that have an

DOING BUSINESS IN ITALY | 11

identical basic legislation and a referral to local legislation, limited to the aspects not governed by the regulations.

The European Company, made up of legal persons and with a minimum capital of 120,000 Euro, may be set up in different ways: The company must be based within the European Union, in the same member state where the administrative body resides and if transferred to another member state, it must not be dissolved and a new legal entity cannot be set up.

A final requisite for the SE is the special involvement of the employees in the EC business that includes any mechanism including information, consultation and participation by means of which the employees’ representatives may exercise influence on company decisions.

The European Company structure includes a general shareholders’ assembly and, according to the choice adopted in the articles of association, a management body that works alongside a supervisory body (dualistic system) or an administrative body (monistic system) that includes a management control committee.

Characteristics of the main company forms S.p.A.

S.r.l.

S.n.c.

S.a.s.

Type of company

Medium - sized and large companies / listed companies

Small and medium - sized companies with a limited number of shareholders

Partnerships set up to conduct commercial and non-commercial activities

Partnerships set up to conduct commercial and non-commercial activities

Minimum share capital

Euro 120,000

Euro 10,000

No limit

No limit

Liability for company obligations

Limited to the company assets

Limited to the company assets

Unlimited for all shareholders

Unlimited for general partners Limited for sleeping partners

Board of Statutory auditors/Audit

Compulsory

Optional / Compulsory according to art.

2477 c.c.

Not provided for

Not provided for

2.2 Formation of a company 2.2.1 Formalities for company set up and commencement of activities Companies with share capital Private limited companies (S.r.l.) and limited companies by shares (S.p.A.) may be set up by means of a contract between two or more persons, (whether natural or legal persons), or by means of a unilateral agreement (S.r.l. or S.p.A. unipersonale).

In both cases, the deed of incorporation shall be drawn up by a notarial deed.

As a general rule, the process of setting up a company with share capital is composed of the following stages:

DOING BUSINESS IN ITALY | 12

• •

preparation of the Articles of Association; payment of at least 25% of the share capital (100% in the case of a unipersonal S.r.l. or unipersonal S.p.A.) in a linked bank current account; only for S.r.l., the payment may be replaced by arranging an insurance policy or a bank guarantee for the corresponding amount; • valuation of any contributions of goods in kind or credits by an expert entered in the register of auditors (the shares corresponding to these contributions shall be fully paid-up); • subscription of the entire share capital and preparation of the notarial deed; • submission of the deed of incorporation and the articles of association to the register of companies office by the notary; • registration of the company with the register of companies; • any government authorizations required for particular activities.

The company will acquire legal status on registration with the register of companies.

For operations carried out beforehand, those taking measures and shareholders deciding, authorizing or allowing measures to be taken have unlimited and joint liability.

The deed of incorporation must report, among other items, the following: • the surname and forename or company name, date and place of birth or the state of formation, domicile or registered office, the citizenship of each shareholder and, in particular in the case of an S.p.A., the number of shares assigned to each shareholder; • the place in which the company’s registered office and any secondary office is situated; • the company purpose; • the amount of the subscribed and paid-up share capital; • the contributions and participation of each shareholder in the S.r.l.; the number, nominal value, characteristics and procedure for the issue and the circulation of shares in the S.p.A.; • the value attributed to the credits and goods in kind assigned; • the rules on the functioning of the company, administration and representation and any persons responsible for inspecting the accounts in the S.r.l.; the system of administration selected, the number of directors and auditors, the powers of the directors and the identification of powers held by the directors and representatives, the appointment of the first directors and auditors or the members of the supervisory body and any person responsible for the audit of the S.p.A.; • the duration of the company.

• the benefit of limited liability is also extended to unipersonal companies with share capital provided that: • during the formation stage, the entire subscribed share capital has been paid up; • in case the plurality of shareholders ceases during the life of the company, the payments still outstanding are made within 90 days; • a declaration containing the details of the sole shareholder is filed with the register of companies by the directors or sole shareholder within 30 days of its entry in the appropriate register.

Partnerships Partnerships shall be set up by a notarial deed or by a private agreement authenticated by a notary. The deed of incorporation has to be entered in the register of companies as a condition of the company’s legal acknowledgement.

DOING BUSINESS IN ITALY | 13

2.2.2 Company books Companies with share capital Companies with share capital must keep the following books: • The shareholders book, bearing the name of all the shareholders, the share and stake transfers and all relating constrictions, as well as the payments performed.

This book is compulsory for companies limited by shares (S.p.A.), but not for private limited companies (S.r.l.).

• The book of meetings and resolutions of the General Meetings (for S.p.A.) or the book of shareholders’ resolutions (for S.r.l.), which also reports the minutes drawn up by notarized instrument; • The book of meetings and resolutions of the Board of Directors or the Management Board (for S.p.A.) or the book of directors’ resolutions (for S.r.l.); • The book of meetings and decisions of the board of auditors and/or the book kept by the person responsible for auditing the accounts (for S.p.A.) or the book of decisions of the board of auditors or auditor (for S.r.l.); • The book of meetings and decisions of the Executive Committee (only for S.p.A.), if any; If bonds are issued, the following must be kept: the book of bonds and the book of meetings and resolutions of the General Meetings of Bond Holders.

If an S.p.A. has issued special financial instruments other than shares, a book must be kept indicating their characteristics, the amount of those issued and those cancelled, particulars of the holders of registered bonds and the transfers and constraints relating thereto.

Before being put to use, the company books must be stamped and numbered consecutively at the register of companies or by a notary public.

keep books and records of accounts and to keep in order original documents sent and received for each concern. The accounting documents shall be kept for ten years.

Companies with share capital are also required to prepare their annual Financial Statements and to file them with the register of companies, within 30 days from its approval by the shareholders. Partnerships are required to draw up an annual report indicating profit and loss, subject to minor formalities, for tax purposes, without filing obligation to the Register of Companies.

Accounting standards are described in the following Chapter 4.

2.3.3 Audit requirements Auditing is required for: 1.

S.p.A.; 2. S.r.l. with a share capital equal to or higher than 120,000 euros (the minimum amount required for an S.p.A.) or exceeding two of the following limits in two consecutive years: • total assets of: 4,400,000 euros; • sales and services revenues of: 8,800,000 euros; • average number of employees during the year: 50.

Or if the S.r.l. controls a company subject to statutory audit; 3. All companies preparing consolidated Financial Statements; 4. Listed companies; 5. Banks, stock broking companies, fund management companies, regulated financial institutions.

Partnerships Partnerships are not required to keep company books. In practice, however, a book of meetings and decisions of the General Meeting is certified and the approval of the annual report and most important decisions are recorded in it.

The statutory audit (it. “revisione legale dei conti”) shall be performed in accordance to the Italian Law (Art. 2409 bis of the Italian Civil Code) and the auditing standards issued by the Italian Institute of Chartered Accountant (CNDCEC) which are basically in line with the ISAs issued by IFAC. In addition, before becoming applicable, the Italian auditing standards need to be approved by CONSOB (the Italian Stock Exchange Authority).

2.3 Legal, accounting and audit requirements

2.3.4 Conduct of the audit

2.3.1 Legal requirements All companies and individual businesses must be registered with the Register of Companies based in its main place of business.

In company documents and correspondence, details of registration with the register of companies must be indicated.

A suitable section shall also be provided in the company register, containing details of companies conducting management and coordination activities (parent companies) and those subject thereto. In particular, the companies shall indicate in their documents and correspondence the details of the body which performs the management and coordination activity on the company itself.

2.3.2 Accounting requirements All companies, whether companies with share capital or partnerships, are required to

DOING BUSINESS IN ITALY | 14

In Italy statutory audit can be performed by the Board of Statutory Auditors (it. “Collegio Sindacale”) which can be in charge of both supervision on the compliance with the law and the Company Articles and the statutory audit of the Financial Statements.

The two tasks can be split and allocated to two different bodies: the supervision can be given to the Collegio Sindacale and the Statutory audit (it. “revisione legale”) of the Financial Statements (including the quarterly checks on the accounts) can be given to an audit firm or an auditor. The separation of the aforementioned two tasks is compulsory for listed companies and companies required to prepare the Consolidated Financial Statements. It is also recommended for independence requirements.

1) S.p.A. The audit is conducted by: • an audit firm registered with the CONSOB, if the S.p.A. is a listed company or controlled by a listed company; • an audit firm entered in the register of auditors, but to which the regulations on companies registered with the CONSOB apply, solely with regard to that assign-

DOING BUSINESS IN ITALY | 15

•

ment, if the S.p.A. has recourse to venture capital; an audit firm entered in the register of auditors or an auditor, in other cases.

2) S.p.A. not listed or not controlled by listed companies The audit may be assigned to the Board of Statutory Auditors (Collegio Sindacale). In this case, all the members of the board of auditors must be enrolled in the register of auditors. If the SpA is required to prepare the consolidated financial statements the audit cannot be assigned to the Board of Statutory Auditors but it needs to be performed by an audit firm.

3) S.r.l.

When the audit is compulsory or when it is voluntarily opted for by the company, it may be conducted by the Board of Auditors, by an audit firm or an auditor. If not otherwise provided for by the Articles of Association, the audit may be conducted by the Board of Auditors.

4) Listed companies or subsidiaries of listed companies.

The supervision on the operating activities is performed by the Collegio Sindacale and the statutory audit of the Financial Statements, including the quarterly checks, is performed by an audit firm registered with CONSOB (the Italian Stock Exchange Authority).

5) Banks, stock broking companies, fund management companies, regulated financial institutions.

The supervision of the operating activities is performed by the Collegio Sindacale and the statutory audit of the Financial Statements, including the quarterly checks, by an audit firm registered with CONSOB (the Italian Stock Exchange Authority).

2.3.5 Term of the audit engagement The auditors are appointed for a 3 year-term for non-listed companies and for a 9 year-term for listed companies. The audit firm cannot be appointed for a second 9-year term.

Timetable of approval and audit of financial statements S.p.A. Approval of the Financial Statement by the board of directors and notification thereof to the auditors, together with the management report

Not less than 30 days before the date of the General Meeting

Deposit of the Financial Statements, management report and auditors’ report at the Company registered office

Not less than 15 days before the date of the General Meeting

DOING BUSINESS IN ITALY | 16

S.r.l. (with no board of auditors) Approval of the Financial Statements by the board of the directors and deposit of the financial statements and management report (if any) at the registered office

Not less than 15 days before the date of the General Meeting

General Meeting held to approve the Financial Statements

Within 120-180 days of financial year end

General Meeting held for the approval of the Financial Statements

Within 120-180 days of financial year end

Filing of the Financial statements and other documents to the register of companies

Within 30 days of the General Meeting of Shareholders

Filing of the Financial Statements and other documents to the register of companies

Within 30 days of the General Meeting of Shareholders

2.4 Formation of a branch in Italy A secondary office in Italy of a foreign company, which is not a legal entity, is characterized by two main factors: • The permanence of the establishment: a permanent establishment must be set up with means intended to conduct the activities of a company or a company branch; • Permanent representation: a person must be appointed to represent the secondary establishment vis-à-vis third parties. If such offices exist, they must be entered in the ordinary section of the Register of Companies, attaching the following documents: • authenticated copy of the deed of incorporation of the secondary office, registered with the Registry Office; if the information on the appointment of the representative in Italy is not contained in the deed of incorporation of the secondary office, an authenticated copy of the relevant deed of appointment shall also be filed and registered with the registry office; • authenticated copy of the articles of association of the foreign company. In the case of a company domiciled in a EU member state, the articles may be replaced by a certificate issued by the body in the foreign State performing the duties corresponding to the register of companies in Italy. After this registration, the secondary office of a foreign company is subject to the same measures as an Italian company with regard to the periods of the filing of the Financial Statements and other company documents.

2.4.1 Tax aspects Permanent establishment Pursuant to the Italian tax regulations, a secondary office is considered a permanent establishment if: • there is a permanent business office in Italy; • the company is not resident; • use is made of the permanent office in Italy by the non-resident company for the purposes of its activities.

The overall income of a permanent establishment in Italy of a company resident abroad is determined unitarily according to the rules governing the determination of the company income, as if it had contributed to the formation of a company domiciled in the Italian territory.

DOING BUSINESS IN ITALY | 17

Representative office If the business office is used solely for the following purposes: • Storage, display or delivery of goods belonging to the foreign company; • Purchasing goods or obtaining information for the foreign company; or conducting preliminary activities assisting the business activities of the foreign company; • Permanent establishment does not exist for tax purposes.

Consequently, a non-resident company will be taxed, in the event of taxable income, according to the rules applicable to natural persons and non-commercial bodies, i.e. by determining the individual income independently, based on the regulatory provisions for the individual categories to which they belong.

2.5 Accounting and company measures 2.5.1 Preparation and keeping of accounting records Accounting records may be kept directly by the business, at their premises, or by other persons at their offices.

Two main compulsory accounting systems are established, (according to the characteristics of the company and the amount of income declared in the previous year): one ordinary and one simplified and suitable for small subjects with a simple organization.

2.5.2 Keeping books and accounting records The businessperson (whether an individual or a company) is required to keep the books and records of accounts according to the provisions of the Italian Civil Code and the tax regulations. Accounting books can also be kept electronically.

2.5.3 Annual Chamber of Commerce fee The annual fee is a tax payable by all companies registered or entered in the Register of Companies (including permanent establishments) each year to the local Chamber of Commerce.

Companies with share capital pay an amount commensurate with their overall annual turnover.

Book of accounts

Records of accounts

Ledger: contains all the transactions conducted by the business, in chronological order.

The accounting records must be updated within 60 days from the date of the operation.

The ledger must be printed within three months from the income tax return deadline.

Record of depreciable assets: contains a detailed record of the instrumental assets relating to the company. It may be included in the inventory and journal. The records of depreciable assets must be updated and printed within the date of the income tax return deadline.

Inventory: should list the company property and a valuation of the assets and liabilities and the financial statements. The inventory must be updated and printed within three months from the date of the income tax return deadline.

Auxiliary warehouse documents: indicate the warehouse and stock movements and variations at the end of the year. They are compulsory for companies presenting an income in excess of EUR 5,164,568.99 and stocks in excess of EUR 1,032,913.80 for two consecutive years. The auxiliary warehouse documents must be updated within 60 days.

Record of VAT on invoices issued: contains a record of invoices issued relating to all the company’s credit transactions. The records of VAT on invoices issued must be updated within 60 days from the date of the operation.

The records of VAT on invoices issued must be printed within three months from the income tax return deadline.

Record of VAT on sales: is drawn up for retail traders and contains a record of the credit transactions conducted. The records of VAT on sales must be updated within 60 days.

The records of VAT on sales must be printed within three months from the income tax return deadline.

Record of VAT on purchases: invoices for purchases relevant for VAT purposes should be entered. The records of VAT on purchases should be updated frequently in order to deduct the VAT on purchases and must be printed within three months from the income tax return deadline.

2.6 Dissolution and liquidation of business entities The dissolution of a company limited by shares follows a precise procedure that is split into three stages as follows: a) identification of a reason for winding up the company. b) carrying out of the liquidation activities. c) cancellation of the company from the Register of Companies.

Reasons for winding up that are common to all types of companies are the expiry of the legal duration of the company, the full and final achievement of the company’s objectives or the impossibility of achieving them, the will of the shareholders to do so. Other reasons for winding up that are provided for in the incorporation deed and in the articles of association.

Furthermore, there are some reasons that are particular to individual company types. For companies limited by shares winding up can be brought about: • due to the company’s impossibility to function, • by the repeated lack of action by its shareholders’ meeting,

DOING BUSINESS IN ITALY | 18

DOING BUSINESS IN ITALY | 19

• • •

by the declaration of nullity by the company itself, by the reduction of its share capital below the legal minimum, by being unable to pay off the holding of a shareholder who has withdrawn from the company, following a resolution passed in this sense by the shareholders’ meeting, and • for all those other reasons that are laid down in the incorporation deed and in the articles of association.

The effects of the winding up take place, except for situations when the winding up of the company before its natural expiry date and for the reasons laid down in its incorporation deed, from the date of the publication in the Register of Companies of the declaration with which the directors ascertain the reasons for the liquidation, or from the date of the publication of the resolution passed by the shareholders’ meeting for the liquidation of the company.

At this stage the directors keep management in order so to safeguard the company’s equity and assets, until the company’s books are handed over and the statement of account are drawn up and handed to the liquidators. In the case of any actions or omissions in violation of these tasks, which damage the company, the directors are personally and jointly liable towards the shareholders, the company’s creditors and third parties.

Furthermore, it is the responsibility of the directors to call the shareholders’ meeting to pass the resolutions regarding the liquidation.

The liquidators, who are appointed by the shareholders’ meeting, with the majority votes established for the amendment of the articles of association, or by the Court, are responsible for the drawing up of the yearly financial statements for presentation for approval to the shareholders’ meeting. A progress report and documents relating to the liquidation and the criteria that have been used regarding it are also enclosed.

The liquidators are responsible for any damages caused to the company, as a result of their activities , to the same extent as the one provided for the directors.

After having made the required payment for the company’s creditors available, the liquidators divide of the remaining assets of the company among its shareholders. A final set of liquidation financial statements is drawn up in which the parts due to each shareholder are established. These financial statements are signed by the liquidators and the report of the Board of Statutory Auditors and of external Auditor , are enclosed and deposited to the Register of Companies.

Failure to receive complaints in respect of the financial statements within 90 days is to be interpreted as approval and the liquidators may distribute the relating assets . This is where the tasks and duties of the liquidators stop. As final task, after the approval of the financial statements, the liquidator must apply for the company’s cancellation with the Register of Companies.

At any time, the company, with a resolution of its shareholders’ meeting duly passed with the number votes necessary for amending the articles of association, can resolve to revoke the state of liquidation, after having removed the cause that has brought about the winding up of the company. This decision becomes valid after sixty days from the date of the recording of such resolution with the Register of Companies, but only upon prior agreement of the company’s creditors.

DOING BUSINESS IN ITALY | 20

2.7 Incorporation of business entities Incorporation of a S.r.l.

A private limited company (S.r.l.), whose minimum capital is 10.000 euros, can be established through a contract between two or more individuals or legal persons, or through a unilateral act (one-person S.r.l.). In both cases, the incorporation deed must be drawn up by a notary as a public deed.

The process of establishing a S.r.l. consists of: • drafting of the articles of association (although this document is no longer strictly necessary, the practice is to express the will of the members in the incorporation deed while reporting the rules of the company in an enclosed document); • payment of at least 25% of the capital (100% in the case of a one-person S.r.l.) into a deposit account or through the stipulation for a corresponding amount of an insurance policy or bank guarantee; • valuation of any contributions in kind or credits by an expert registered in the Register of Auditors (the stakes corresponding to these contributions must be fully paid in); • incorporation act by public deed and full subscription of the capital; • delivery of the incorporation deed and articles of association to the Register of Companies by the notary; • registration of the company with the Register of Companies; • any government authorizations required for particular activities (in some cases the authorizations may have to be obtained by the date of incorporation).

The company acquires legal status with the registration with the Register of Companies. For operations conducted before registration, responsibility is held jointly and without limit by those who took such actions and by the members that decided, authorized or allowed these actions to be taken.

Following registration with the Register of Companies, the company may ask to transfer the capital paid in from the deposit account to an ordinary bank account and to acquire access to the money.

Foreign individuals or foreign legal entities who want to set up a company might not be able to express their intention directly. In such cases, it could be possible to use a power of attorney granted to another person, thus granting him/her the power to undertake a legal act on their behalf.

Furthermore, the power of attorney is a foreign document that must be officially translated into Italian. In addition, for it to be used in Italy, it requires legalization or apostillation.

Finally, foreign individuals or foreign legal persons who want to become a shareholder of an Italian S.r.l. must use a service called “SWIFT” to transfer money from abroad and to subscribe to the capital.

Incorporation of a S.p.A. Just like the S.r.l., a company limited by shares (S.p.A.), whose minimum capital is 120.000 euros, may be established through a contract between two or more individuals or legal entities, or through a unilateral act (one-person S.p.A.).

The process of establishing a S.p.A. is the same as for a S.r.l.. On this issue, it should only be noted that: • the articles of association must be drawn up in any case; • it is not possible to substitute the payment of share capital by an insurance policy or a bank guarantee.

DOING BUSINESS IN ITALY | 21

2.8 The trust in Italy Trusts have been recognized in the Italian legal regulations since the entry into force in 1992 of Law nr. 364 of 16/10/1989, ratifying the Hague Convention of the 1st of July, 1985, governing the law applicable to Trusts and their legal recognition.

The main effect of the ratification is the possibility of setting up “internal� Trusts in Italy falling under national regulations with regard to all characteristic factors, except for the governing law, which may be the one of any state issuing its own regulations on the subject.

As Italy does not have any specific laws governing Trusts, greater freedom of choice is granted with regard to the governing law.

Trusts set up to avoid irrevocable rules or principles of public order in force in Italy, such as rules on inheritance, deeds of trust or the protection of injured parties, will be prohibited and unlawful.

The disposing party, trustee and beneficiary may be natural or legal persons, public bodies or associations.

Only relations established voluntarily, or with the specific intention of setting up a Trust, may be established as Trusts, and the deed of formation should be drawn up in writing, observing any compulsory forms laid down by law for specific contracts.

There are no limits to the property submitted to Trusts and to the nationality of the persons involved in the relationship.

The Trust may also be formed by citizens of a state not recognizing the Trust institution, without prejudice to the obligation to refer to a law governing Trusts in a country where such laws exist.

The Trust is a liable tax subject and if it carries out commercial business, it is obliged to keep accounts books. There are two types of Trust: with identified beneficiaries, whose income is attributed transparently to the beneficiaries themselves; without identified beneficiaries, whose income is taxed directly to the Trust.

There are also specific laws concerning the Trust’s residence, transfer of assets into the Trust and the indirect taxation of the charter, the disposition and transfer of assets to beneficiaries.

The creation of a trust, if realized through public deed or private deed authenticated by a notary public, is subject to registration tax in a fixed amount (Euro 168.00).

The funding of a trust is subject to inheritance and gift tax. Furthermore, mortgage and land taxes apply if real properties are transferred.

According to revenue authorities, inheritance and gift tax exemptions and reduced rates are applicable only if the beneficiaries are identified. Therefore, funding of discretionary trusts, charitable and purpose trusts are subject to inheritance and gift tax at 8%.

The subsequent transfer of assets from the trust to the beneficiaries is not subject again to inheritance and gift tax, as the tax has already been applied at the time of the funding. Mortgage and land taxes apply again if real properties are transferred.

If the settler is an entrepreneur the funding is subject to VAT and income taxes: the transfer to the trust is subject to VAT and constitute realization of revenues and capital gains.

Income produced by resident trusts is subject to tax on a world-wide basis.

Income produced by non-resident trusts is subject to tax on a territorial basis: only income produced in Italy is subject to tax in Italy.

Residency is determined according to the rules applicable to companies: trusts are

DOING BUSINESS IN ITALY | 22

deemed to be resident on the national territory if, for most of the tax period, they established within the national territory: their registered office; their administrative office; or their main object of the activities.

Trusts set up in black list countries are deemed to be resident in the national territory if at least one settler or one beneficiary are tax resident in Italy, or if Italian residents fund the trust with real properties.

Trusts without a defined beneficiary (discretionary or purpose trusts) are opaque and are taxed directly.

Trusts with a defined beneficiary (non-discretionary trust) are transparent, and the beneficiary is taxed on the income produced by the trust.

DOING BUSINESS IN ITALY | 23

3 Taxation 3.1 General structure The Italian tax system is based on the following main taxes: • Company income tax and tax on other legal institutions (IRES); • Natural persons’ income tax (IRPEF); • Regional tax on production activities (IRAP); • Value Added Tax (IVA); • Inheritance and gift tax; • Local taxes: communal property tax (ICI), etc.; • Registration tax and other indirect taxes on property transfers.

3.2 Company income tax and income tax payable by other legal institutions (IRES) As from January 1st 2004, income produced by companies and institutions is subject to legal persons’ income tax known as IRES (company income tax).

IRES is payable on all income produced within the scope of the company’s activities.

The tax, charged at a rate of 27.5%, is applied to taxable income (tax assessment basis) and is payable for each tax period by 2 payments on account and a final balance payment .

For maritime companies, specific provisions exist to establish the tax assessment basis.

The tax period generally consists of 12 months and corresponds to the calendar year.

Any withholdings are deducted from the tax established in the tax return.

If the sum of the payments on account made and the withholdings borne exceeds the tax payable, the excess may be deducted from the tax payable for the subsequent tax period, reimbursed or used to offset any other tax and social security debts, at the taxpayer’s option.

3.2.1 Persons liable for tax The following companies and institutions are liable for IRES: • Companies with share capital, cooperative societies and mutual insurance companies resident in the country; • Public and private commercial institutions other than companies and trusts resident in the country; • Public and private non-commercial institutions other than companies and trusts resident in the country; • Non-resident companies and institutions, including trusts, with or without legal personality for income produced in the Country or in case of a branch located in the Country.

Companies and institutions are considered to be resident when one of the following condition is met for most of the tax period:

DOING BUSINESS IN ITALY | 24

• • •

the registered office is in Italy; the administrative office in Italy; the main object of the activities is in Italy.

3.2.2 Tax assessment basis The profit taxable to corporation tax (PCTCT) is determined on a worldwide basis by applying increases and reductions to the profit as per statutory financial statements or annual accounts, prepared in accordance to Italian accounting standards.

As from 2011, tax losses may in principle be carried forward for an indefinite period of time but may be used to offset only 80% of PCTCT. Income produced abroad contributes to the formation of the PCTCT; however, in order to avoid double taxation any foreign tax withheld at source on a definite basis may be deducted from the net Italian tax with specific limitations.

There is no tax relief for foreign underlying tax.

Specific anti-abuse rules are laid down.

3.2.3 Deductibility of expenses In determining the taxable income, there is a wide range of expenses that can be deducted from the profit as it results from the profit and loss statement.

Some of the expenses above mentioned are 100% deductible, some of them are deductible according to a certain percentage, some other are not deductible at all.

As a general principle, all the expenses made in order to carry on the company are eligible to be deducted from the profit. However, if some of these costs are incurred both for company reasons and for private reasons, the percentage of deductibility is less than 100%.

Since January 1st 2008, only the costs indicated in the P&L statement can be deducted for tax purposes. The following list, gives some examples of deductible costs and of the percentage of their deductibility: • Depreciation: they are deductible pursuant to a decree (D.M. 31.12.1988) which states, for the different assets, the different percentages of annual deductible depreciation; • Telephone costs: they are deductible for 80% of their amount; • Costs related to cars: if the car is used exclusively for the company needs, they are entirely deductible, otherwise, they can be deducted in different percentages depending on the user and the condition for the use; • Cost of labour: all the costs related to wages, social and health contributions paid by the company are deductible; • Other taxes: apart from I.R.A.P. that is deductible only for 10% of the amount paid, other taxes are deductible in the fiscal year they have been paid; • Provision: most provisions cannot be deducted for tax purposes they are not relevant from a fiscal point of view; • Gift: entirely deductible if represented by goods of value below Euro 50 each (gross VAT); • Entertainment expenses: deductible within the following limits: a. 1,3% of the annual sales (for annual sales below Euro 10 million) b. 0,5% of the annual sales (for annual sales within Euro 10 million and Euro 50 million)

DOING BUSINESS IN ITALY | 25

•

c. 0,1% of the annual sales (for annual sales of more than Euro 10 million) Cost for goods and services purchased from companies resident in tax havens are deductible only if certain conditions are met. In any case the relating amounts have to be indicated in the annual tax return.

3.2.4 Controlled Foreign Company (CFC) The income produced by a business, company or other entity, resident or established in a black list country, controlled directly or indirectly by a resident person (individual, company, etc.), is attributed directly to the resident person, in proportion to the participation held.

These rules also apply if the subsidiary has a permanent establishment in one of the previously mentioned countries.

The above rules also apply to associated foreign companies, i.e. to companies participations higher than 20% (10% if the company is quoted). In this case taxable income is determined according to specific rules.

CFC rules do not apply in the event of a positive advance ruling given by the revenue authorities, intended to prove specific conditions are satisfied.

CFC rules also apply to controlled entities established in non-blacklist countries if: they are subject to an effective tax rates lower than 50% of the Italian effective tax rate; and more than 50% of the income earned is passive income (i.e. interests, dividends, royalties and services provided to related parties).

Advanced ruling for exemption is available.

3.2.5 Transfer pricing Transfer pricing rules, that are in line with OECD Guidelines, are applicable in Italy.

In particular, the rule applies to: a) foreign company which controls an Italian enterprise it makes transactions with; b) Italian enterprise which controls a foreign company it makes transactions with; c) Italian or foreign company which controls both entities (Italian enterprise and foreign company) involved in the transaction.

The Italian practice defines “foreign companies” as every kind of business entity, legally recognized in the foreign country, even if it has only one partner. By “Italian company”, the Italian practice means companies with share capital, partnerships, sole traders and permanent establishments of foreign companies set up in Italy.

The intercompany transactions are to be performed at arm’s length, which is the principle recommended by OECD Guidelines, according to which the price is negotiated by independent entities.

The Italian practice recommends seven different methods to determine a price in accordance with the arm’s length principle: 1.

Comparable uncontrolled price method; 2. Resale price method; 3. Cost plus method.

The above mentioned are the “traditional” methods, since they are based on the analysis of each transaction. There are also four “alternative” methods, based on the profit earned with the analysed transaction: 4. Global profit sharing method;

DOING BUSINESS IN ITALY | 26

5. Comparable profit method; 6. Return on invested capital method; 7.

Market gross margin method.

There are no legal obligation to arrange documentation regarding the price policy used within the business group, however, it is recommended to arrange documentation to prove the transfer pricing method adopted within the group.

It also possible to avoid transfer pricing issues, by using one of the means provided by the fiscal authorities, such as: • advanced pricing agreement (A.P.A.); • safe harbours; • international standard ruling.

In the annual tax return the following must be indicated : • the kind of control (see the above point a) b) c)) applicable to the company; • the amount of the transaction relating to the operation subject to the Transfer pricing rules; • if the company owns the documentation to prove the transfer pricing method adopted within the group.

In relation to the above documents, the Italian regulations make explicit reference to the OECD Guidelines (namely, to the recent edition approved by the OECD Council on 22 July 2010), and the documentation requirements broadly replicate the recommendations of the EU Code of Conduct on transfer pricing documentation for associated enterprises in the EU (so called “European Union Transfer Pricing Documentation” o “EU TPD”, including the Master File and Country File concepts), although with some differentiations, some of which are noteworthy, toward a more comprehensive informative package (please see the table at the end for a detailed list of the documentation requirements). The regulations distinguish the businesses by their situation in respect to the rest of the multinational group they belong to, and require different sets of documentation for each category: • Italian holdings and sub-holdings: they are requested to have both a Master File and the relevant domestic documentation (as a matter of fact, the “Country File” under the “EU TPD”).

• Italian subsidiaries of foreign MNEs: they are required to maintain only domestic documentation.

• Permanent establishments of foreign enterprises: they are requested to maintain either the Master File and the domestic documentation or just the domestic documentation depending on the foreign enterprise’s qualification either as holding / sub-holding or as a simple subsidiary.

• The documentation will have to be very detailed, and must include information additional to that indicated in the Code of Conduct, such as, for instance: • The economic and legal reasons behind the inter-company transactions scheme adopted by the group; • A precise mapping of any inter-company transactions not pertaining to the taxpayer’s ordinary business; • A description - and not just the list - of any advance pricing agreements concluded with other EU countries’ tax authorities; • The illustration of any (significant) change in the functions performed, the risks borne and the assets used by the enterprises carrying out the inter-company transactions in respect to the previous fiscal year’s situation;

DOING BUSINESS IN ITALY | 27

•

The reasons behind the exclusion, if applicable, of the use of the traditional transactional methods (with particular reference to the “Comparable Uncontrolled Price” method) for the purpose of applying the arm’s length principle.

The documentation must also: • be in Italian language, with the only exception allowed for Master File prepared abroad for foreign holdings, if they are applicable also to an Italian sub-holding, provided the Master File includes or is integrated with all the information required by the regulations; • cover all inter-company transactions undertaken by the enterprise, including those not relevant to the taxpayer’s ordinary business activity; • be updated annually, except for “small and medium sized enterprises” (enterprises with an annual turnover of less than Euro50 million) which are free to update the economic analyses (e.g. the benchmark studies) included in the documentation every 3 years, if no significant modifications have occurred; • be signed by the taxpayer’s legal representative on every page and, in full, in the last page; • be made available to the Tax Authorities in electronic format, within 10 days of a request being made.

The documentation will not be considered “suitable” to support the arm’s length nature of inter-company transactions, and therefore unable to offer penalty protection to the taxpayer that has prepared it, if jointly or severally: • the information provided is not complete and compliant with the regulations, regardless of whether the documentation meets the formal requirements set forth in the regulations; • the information provided in the documentation is partially true or completely untrue.

3.2.6 International ruling Businesses with international activities may implement a suitable international standard ruling procedure, mainly with regard to the system of transfer prices, interest, dividends and royalties, in order to reach an agreement with the inland revenue, valid for three tax periods, without prejudice to any changes in the “de facto” and “de jure” circumstances resulting from the agreement signed.

3.2.7 International agreements Italy has established over 90 international treaties to avoid the double taxation of income produced in different States, as follows:

Country

Enforcement Law

Applicable From

Albania Algeria Argentina Armenia

L. 21.05.1998, n.175 L. 14.12.1994, n.711 L. 27.04.1982, n.282 L. 25.10.2007, n.190

21.12.1999 30.06.1995 15.12.1983 05.05.2008

DOING BUSINESS IN ITALY | 28

Australia Austria Azerbaijan Bangladesh Belarus Belgium Brazil Bulgaria Canada China Croatia Cyprus (1) Czech Republic Denmark Ecuador Egypt Estonia Ethiopia Finland France Georgia Germany Ghana Greece Hungary Iceland India Indonesia Ireland Israel Ivory Coast Japan Jordan Kazakhstan Kuwait Latvia Lebanon Lithuania Luxembourg Malaysia Malta (2) Mauritius Mexico Moldavia Morocco Mozambique Netherlands New Zealand

L. 27.05.1985, n.292 L. 18.10.1984, n.762 L. 03.02.2011, n.6 L. 05.07.1995, n.301 L.29.05.2009, n.74 L. 03.04.1989, n.148 L. 29.11.1980, n.844 L. 29.11.1990, n.389 L. 24.03.2011, n.42 L. 31.10.1989, n.376 L. 29.05.2009, n.75 L. 10.07.1982, n.564 L. 02.05.1983, n.303 L. 11.07.2002, n.170 L. 31.10.1989, n.377 L. 25.05.1981, n.387 L.19.10.1999, n.427 L. 19.08.2003, n.242 L. 25.01.1983, n.38 L. 07.01.1992, n.20 L. 11.07.2003, n.205 L. 24.11.1992, n.459 L. 06.02.2006, n.48 L.30.12.1989, n.445 L. 23.07.1980, n.509 L. 04.08.2008, n.138 L. 14.07.1995, n.319 L. 14.12.1994, n.707 L. 09.10.1974, n.583 L. 09.10.1997, n.371 L. 27.05.1985, n.293 L. 18.12.1972, n.855 L. 23.10.2009, n.160 L. 12.03.1996, n.17 L. 07.01.1992, n.53 L. 18.03.2008, n.73 L. 03.06.2011, n. 87 L.09.02.1999, n.31 L.14.08.1982, n.747 L. 14.10.1985, n.697 L. 02.05.1983, n.304 L. 14.12.1994, n.712 L. 14.12.1994, n.710 L.03.02.2011, n.8 L. 05.08.1981, n.504 L.23.04.2003, n.110 L. 26.07.1993, n.305 L. 10.07.1982, n.566

05.11.1985 06.04.1985 25.02.2011 07.07.1996 30.11.2009 29.07.1989 24.04.1981 10.06.1991 14.04.2011 13.12.1990 15.12.2010 09.06.1983 26.06.1984 27.01.2003 01.02.1990 28.04.1982 22.02.2000 09.08.2005 23.10.1983 01.05.1992 19.02.2004 26.12.1992 05.07.2006 20.09.1991 01.12.1980 14.10.2008 23.11.1995 02.09.1995 14.02.1975 06.08.1998 15.05.1987 17.03.1973 10.05.2010 26.02.1997 11.01.1993 16.04.2008 21.06.2011 03.06.1999 04.02.1983 18.04.1986 08.05.1985 28.04.1995 12.03.1995 14.07.2011 10.03.1983 06.08.2004 03.10.1993 23.03.1983

DOING BUSINESS IN ITALY | 29

Norway Oman Pakistan Philippines Poland Portugal Qatar Republic of Macedonia Romania Russia Saudi Arabia Senegal Singapore Slovakia Slovenia South Africa South Korea Ex-Soviet Union (3) Spain Sri Lanka Sweden Switzerland Syria Tanzania Thailand Trinidad and Tobago Tunisia Turkey Uganda UK Ukraine United Arab Emirates USA Uzbekistan Venezuela Vietnam Ex-Yugoslavia (4) Zambia

L. 02.03.1987, n.108 L. 11.03.2002, n.50 L. 28.08.1989, n.313 L. 28.08.1989, n.312 L. 21.02.1989, n.97 L. 10.07.1982, n.562 L. 02.07.2010, n .118 L. 19.10.1999, n.482 L. 18.10.1978, n.680 L. 09.10.1997, n.370 L. 23.10.2009, n.159 L. 20.12.2000, n.417 L. 26.07.1978, n.575 L. 02.05.1983, n.303 L. 29.05.2009, n.76 L. 15.12.1998, n.473 L. 10.02.1992, n.199 L. 19.07.1988, n.311 L. 29.09.1980, n.663 L. 28.08.1989, n.314 L. 04.06.1982, n.439 L. 23.12.1978, n.943 L. 28.04.2004, n.130 L. 07.10.1981, n.667 L. 02.04.1980, n.202 L. 20.03.1973, n.167 L. 25.05.1981, n.388 L. 07.06.1993, n.195 L. 10.02.2005, n.18 L. 05.11.1990, n.329 L. 11.07.2002, n.169 L.28.08.1997, n.309 L.20.03.2009, n.20 L.10.01.2004, n.22 L. 10.02.1992, n.200 L. 15.12.1998, n.474 L. 18.12.1984, n.974 L. 27.04.1982, n.286

25.05.1987 22.10.2002 27.02.1992 15.06.1990 26.09.1989 15.01.1983 29.06.2010 08.06.2000 06.02.1979 30.11.1998 13.11.2009 24.10.2001 12.01.1979 26.06.1984 12.01.2010 02.03.1999 14.07.1992 30.07.1989 24.11.1980 09.05.1991 05.07.1983 27.03.1979 15.01.2007 06.05.1983 31.05.1980 19.04.1974 17.09.1981 01.12.1993 18.11.2005 31.12.1990 25.02.2003 05.11.1997 01.01.2010 26.05.2004 14.09.1993 22.02.1999 03.07.1985 30.03.1990

(1) Modified by L. 03.05.210, n.70 applicable from November 23, 2010 (2) Modified by L. 03.05.210, n.77 applicable from November 24, 2010 (3) The countries emerging from the dissolution of the Soviet Union apply the Treaty, unless a specific national convention has been stipulated and enforced. The Italy-Soviet Union treaty currently applies to the following countries: Kyrgyzstan, Tajikistan and Turkmenistan.

(4) The treaty stipulated with Yugoslavia currently applies to the following countries: Bosnia Herzegovina, Serbia and Montenegro.

DOING BUSINESS IN ITALY | 30

3.2.8 Dividends Income of companies and associations subject to IRES tax is only taxed when produced; the later distribution of profit to shareholders does not envisage further taxation.

The company therefore pays IRES permanently and shareholders are not entitled to any tax credit on profits received.

Dividends received by Italian entities are taxed as follows: • dividend received by resident companies are taxed only at 5% of the amount; • dividend received by companies located in States with a preferential tax system are fully taxable Dividends paid to companies based in member states of the European Union (EU) and in the States signatories of the European Economic Space Agreement (EES) that allow a suitable exchange of information with Italy, are taxed at source at the rate of 1,375% of the total.

3.2.9 Participation exemption Capital gains made on the transfer of company holdings, under certain conditions, are 95% exempt from taxation.

Any capital losses are not deductible.

The conditions laid down by law are as follows: a) uninterrupted holding as from the first day of the twelfth month preceding that of transfer; holdings acquired more recently will be deemed to be transferred first (LIFO); b) classification of holdings as investments as from the first balance sheet closed during the period of ownership; c) tax residence of the subsidiary in a State or territory other than those with a preferential tax system; d) exercise by the subsidiary of actual commercial activities; “real estate” companies are excluded.

The requirements set out in letters c) and d) must exist from commencement of the tax period prior to realization.

3.2.10 Deducibility of interest payable Interest payable and assimilated charges other than capitalised costs can be deducted in each tax period, up to the limit of the interest receivable and assimilated revenue.

Any excess can be deducted up to 30% of the EBITDA plus cost of financial leases.

Any further excess cannot be deducted during the taxation period, but can be deducted, without any limit on time, in later periods, on the condition that the 30% of the Gross Earning relevant to each financial year is higher than the difference between the total of interest payable and assimilated costs and the total of interest receivable and assimilated revenue.

In order to apply the system described, interest payable and interest receivable, assimilated costs and revenue from the following are taken into consideration: • Mortgage contract • Financial lease contracts • Issue of bonds and similar • Any other contract for financial reasons

DOING BUSINESS IN ITALY | 31

Implied interest coming from debts are however excluded, while interest receivable from payments of the same nature can be included.

3.2.11 Tax transparency option The tax transparency is a system in which the company’s taxable income is not taxed in respect of the company itself, but attributed to each shareholder, irrespective of its actual distribution, in proportion to their share in the profits.

The system is optional and the option has to be exercised by all the shareholders.

The requirements for exercising the option are as follows: • The shareholders must all be companies with share capital, cooperative societies or mutual insurance societies resident on Italian territory; • Each shareholder must hold a percentage of voting rights at the general meeting and profit-sharing of not less than 10% and not more than 50%.

These requirements must exist from the first day of the tax period of the subsidiary in which the option is exercised and remain uninterrupted until the end of the option period.

The option period is a three-year period.

Under certain conditions, this system may also be opted for if one or more shareholders are not resident.

In the event of the distribution of dividends, consisting of profits acquired during the periods included in the period of validity of the option, dividends will not be taxed.

This system is also applicable to S.r.l. or cooperatives, provided that: • All the shareholders are natural persons only, counting not more than ten for an S.r.l., or 20 for cooperative societies; • The subsidiary has a volume of income not exceeding 7,500,000 euro; • The company does not have participations with the participation exemption requirements.

who takes part in the consolidated balance sheet can be deducted from the group’s overall income if and within the limits in which the other participating subjects submit a declaration of large-scale gross earnings for the same taxation period that is not fully used for deduction.

These rules can be applied with reference to excesses carried forward, excluding any formed prior to entering the national consolidated balance sheet.

The option is exercised by forwarding suitable notification to the inland revenue.

Companies belonging to the group and using reductions in the rate of IRES may not exercise the option.

The following requirements must also be met: • Residence in the State of all companies participating in the “fiscal unit”; • Identity of tax period; • Election of domicile by each subsidiary with the controlling company.

World tax consolidation World tax consolidation is an optional system with a five-year period, based on which a controlling company resident in Italy may consolidate the income made by all non-resident subsidiaries proportionately, for which the control requirement exists as defined by the law based on the percentage of participation held in the subsidiaries.

The following requirements must be met: • Residence of the controlling company in Italy; • Identity of tax period, unless not permitted by foreign legislation; • Inspection of the balance sheets of the controlling and subsidiary companies; • Compulsory consolidation of all foreign subsidiary companies; • Certification by non-resident subsidiaries of their consent to the audit of the balance sheet and undertaking to provide any collaboration required to establish the tax assessment basis and to comply with the requests of the inland revenue.

A suitable appeal should be made to the inland revenue to check the existence of the requirements needed for valid exercise of the option.

3.2.12 National and world tax consolidation Companies belonging to the same group may opt for the consolidation of their company income.

National tax consolidation National tax consolidation is an optional system arranged for a three-year period, to which company groups may have access. To exercise the option, the law provides for the controlling company to participate directly or indirectly in an amount exceeding 50% of the share capital and profits of the subsidiary for the year.

The system consists of the consolidation of the taxable income, calculated separately by each company, which is totalled algebraically, irrespective of the percentages of participation of the different companies.

For this purpose, the holding company must: • Submit the consolidated earnings declaration, calculating the overall global income based on the algebraic sum of the overall net income declared by each of the companies participating in the system, without making any consolidation adjustment; • Proceed with payment of the group taxation (IRES).

Any excess interest payable and non-deductible assimilated costs formed by a subject

DOING BUSINESS IN ITALY | 32

3.3 Personal income tax (IRPEF) This tax is personal and progressive.

The requirement for this tax is the possession of income, in cash or in kind, falling into one of the categories laid down by law. The tax period corresponds to the solar year.

Persons liable for tax The following persons are liable for the tax: • Natural persons resident on Italian territory for all income owned; • Natural persons not resident on Italian territory solely for income produced in the Italian State. Residents in Italy are deemed to comprise natural persons who, for most of the tax period, meet at least one of the following requirements: • They are registered in the registers of the population resident in the State; • They are domiciled in Italy (domicile is deemed to mean the principal office for business and interests, including moral and company interests); • They are resident in Italy (normal residence).

DOING BUSINESS IN ITALY | 33

Tax assessment basis Tax is applied to the overall income, i.e. the sum of the income of each category, less any losses deriving from the practice of arts or professions and/or commercial businesses.

The categories contributing to the formation of the overall income are as follows: • Land income, relating to land and buildings situated in the Italian territory; • Capital income, with no specific definition but listed by the legislator and relating to; • Income from employment; • Income from self-employed work; • Company income; • Sundry income, not acquired from the exercise of business, arts or professions.

Establishment of overall income and calculation of tax Once the gross overall income has been determined, any deductions laid down by law are applied. The gross tax is calculated by applying the increasing rates by income increments to the net overall income.

The rates currently in force (year 2011) are as follows: Income increments

Rates

Up to € 15,000 From € 15,000 to € 28,000 From € 28,000 to € 55,000 From € 55,000 to € 75,000 Over € 75,000

23% 27% 38% 41% 43%

For tax calculation purposes, tax deductions are provided for on overall income, which allow a reduction of the taxable income, and deductions, are usually equal to 19% of the charge borne, reducing the gross taxation as calculated.

For 2011, 2012 and 2013 an additional 3% tax will apply to income exceeding Euro 300,000.

Regional and communal IRPEF surcharges In addition to the tax calculated, two additional payments have to be made to the local authorities (Region and Municipality) in which the taxpayer is resident: • A regional surcharge whose rate, decided annually by the relevant Region, falls between a minimum of 0.9% and a maximum of 1.4% (more than 1.4% if a Region does not reach pre-agreed target of its financial statements); • A municipal surcharge composed of a first rate, equal throughout the national territory, fixed annually by the state, and a second rate, established by the individual municipality at a rate not exceeding 0.8% per annum (under some circumstances the rate could rise further to 0.3%).

3.4 Tax on income of non-residents Individual Income Tax (IRPEF, Imposta sul Reddito delle Persone Fisiche) applies to resident and non-resident individuals.

Resident individuals are taxed on a world-wide basis, while non-resident individuals are

DOING BUSINESS IN ITALY | 34

taxed on a territorial basis on the income produced in Italy.

The following incomes are deemed to be produced in Italy: income from land and buildings; income from capital paid by the State, by resident persons (entities or individuals) or by permanent establishment in Italy of foreign entities, excepts interest and other income derived from bank/post deposits and current accounts; income from employment produced in Italy; income from independent work derived from activities performed in Italy; business income derived from activities performed in Italy through a permanent establishment; other income derived from activities performed/assets located in Italy and capital gains derived from the sale of participation in resident entities (exclusions apply, e.g. for non-substantial participations in listed companies); income from participation in transparent Italian entities (e.g. partnerships).

Tax is assessed on the aggregate amount of the incomes indicated above (deductions and tax reductions may apply).

Non-resident companies and other entities, including trusts, with or without legal personality are subject to corporation tax (IRES, Imposta sul Reddito delle Società).

Tax is assessed on the income produced in Italy, excepts exempt incomes and incomes subject to final withholding tax or substitutive tax.

Also for corporation tax purposes (IRES) the incomes indicated above are deemed to be produced in Italy; for non-resident companies and other entities business income include capital gains and capital losses relating to assets utilized in commercial activities performed in Italy (even if not realized through permanent establishments), dividends derived from resident entities, other income derived from activities performed/assets located in Italy and capital gains derived from the sale of participation in resident entities.

Tax treaties, where more favourable to the tax-payer, override statutory provisions.

3.5 Withholding taxes Withholding taxes are applied to various payments. The following are the most important.

Tax treaties, where more favourable to the tax-payer, override statutory provisions.

Independent work Income from independent work usually is subject to a 20%, withholding tax unless otherwise stated by fiscal law for special tax regimes.

Remuneration of independent work (including royalties) to non-residents is subject to a 30% final withholding tax unless the payment qualifies for exemption under the EC Interest or Royalties Directive.

Dividends Dividend income received by partnerships or by individuals in relation to business activities is subject to tax for the 49.72% of its amount.

Dividend income received by individuals not related to business activities is subject to:

DOING BUSINESS IN ITALY | 35

• •

ordinary tax for the 49.72% of its amount, if related to qualified participations (20% advance withholding tax also applies to foreign source dividends ); substitutive final tax withheld at source at 20% for the total amount, if related to non-qualified participations.

Qualified participations are participations entitling to: • more than 2% of voting rights in an ordinary meeting or 5% of capital or corporate assets of quoted companies; • more than 20% of voting rights in an ordinary meeting or 25% of capital or corporate assets of other companies.

Dividends of foreign source from black list Countries are subject to ordinary tax on 100% of their amount. 20% advance withholding tax applies.

Dividend paid to non-residents (other than EU companies) are subject to a 20% final withholding tax. Subject to conditions, reduced rates and reimbursement may apply (leading to a 15% effective tax rate).

Dividend paid to EU companies are subject to a 1.375% final withholding tax.

Subject to conditions, payment to a qualifying EU parent company are exempt from withholding tax under the Parent-Subsidiary Directive.

Interests Interest on bank deposits and current accounts is subject to a 20% substitutive final tax withheld at source. Other interest on loan, deposits and current accounts is also subject to a 20% advance withholding tax.

Interest on bonds and other financial assets is subject to 20% advance or final withholding tax according to various conditions.

Special regimes applying a 20% substitutive final withholding tax also apply to income from financial instruments (it. “risparmio gestito” and “risparmio amministrato”).

Interest from state securities (and similar securities), from foreign state securities (only white list countries), from other special securities and gains from complementary pension plans is subject to a 12.5% withholding tax.

Interest paid to non-residents is subject to the same rates applied to resident individuals; the withholding tax is applied on a final basis.

Interest paid to non-residents on deposit accounts with banks and post offices is exempt. Also interest on bonds issued by the state, banks or listed companies if paid to residents of states or territories that allow adequate exchange of information is exempt.

Subject to conditions, payments to associated EU Companies are exempt under the EC Interest and Royalties Directive.

Tax Treaties The following scheme indicates the withholding taxes applied, on the basis of tax treaties, on payments of dividends, interests and royalties made by an Italian taxpayer.

DOING BUSINESS IN ITALY | 36

Dividends

Country

Individuals, companies

Qualifying, companies

Albania Algeria Argentina Armenia Australia Austria Bangladesh Belarus Belgium Bosnia and Herzegovina Brazil Bulgaria Canada China (People’s Rep.) Croatia Cyprus Czech Republic Denmark Ecuador Egypt Estonia Finland France Georgia Germany Ghana Greece Hungary Iceland India Indonesia Ireland Israel Ivory Coast Japan Kazakhstan Kyrgyzstan Korea (Rep.) Kuwait Latvia Lithuania Luxembourg Macedonia (FYR) Malaysia Malta

10 15 15 10 15 15 15 15 15 10 15 10 15 10 15 15 15 15 15 – 15 15 15 10 15 15 15 10 15 25 15 15 15 15 15 15 15 15 0/5 15 15 15 15 10 15

10 15 15 5 15 15 10 5 15 10 15 10 15 10 15 15 15 0 15 – 5 10 5 5 10 5 15 10 5 15 10 15 10 15 10 5 15 10 0/5 5 5 15 5 10 15

Interests

Royalties

0/5 0/15 0/20 0/10 10 0/10 0/10/15 0/8 15 10 15 0 0/15 0/10 0/10 10 0/5 0/10 0/10 0/25 0/10 0/15 0/10 0 0/10 10 0/10 0 0 0/15 0/10 10 10 0/15 10 0/10 0 0/10 0 10 0/10 0/10 0/10 0/15 0/10

5 5/15 10/18 7 10 0/10 10 6 5 10 15/25 5 0/10 10 5 0 0/5 0/5 5 15 5/10 –/5 0/5 0 0/5 10 0/5 0 5 20 10/15 0 0/10 10 10 10 0 10 10 5/10 5/10 10 0 15 0/10

DOING BUSINESS IN ITALY | 37

Mauritius Mexico Moldova Montenegro Morocco Mozambique Netherlands New Zealand Norway Oman Pakistan Philippines Poland Portugal Qatar Romania Russia Saudi Arabia Senegal Serbia Singapore Slovak Republic Slovenia South Africa Spain Sri Lanka Sweden Switzerland Syria Tanzania Thailand Trinidad and Tobago Tunisia Turkey Turkmenistan Ukraine United Arab Emirates United Kingdom United States Uzbekistan Venezuela Vietnam Zambia

15 15 15 10 15 15 15 15 15 10 25 15 10 15 15 10 10 10 15 10 10 15 15 15 15 15 15 15 10 10 20 20 15 15 15 15 15 15 15 10 10 15 15

5 15 5 10 10 15 5/10 15 15 5 15 15 10 15 5 10 5 5 15 10 10 15 5 5 15 15 10 15 5 10 15 10 15 15 15 5 5 5 5 10 10 5/10 5

0/– 0/15 5 10 0/10 0/10 0/10 0/10 0/15 0/5 30 0/10/15 0/10 0/15 0/5 0/10 10 0/5 0/15 10 12.5 0 0/10 0/10 0/12 0/10 0/15 12.5 0/10 15 0/10/– 10 0/12 15 15 0/10 0 0/10 0/10 0/5 0/10 0/10 0/10

15 0/15 5 10 5/10 10 5 10 5 10 30 25 10 12 5 10 0 10 15 10 15/20 0/5 10 6 4/8 10/15 5 5 18 15 5/15 0/5 5/12/16 10 10 7 10 8 0/5/8 5 7/10 7.5/10 10

3.6 Regional tax on production activities (IRAP) The regional tax on production activities (IRAP) is a local tax collected by the Region where the production activities, liable for tax, are conducted.

If taxpayers perform their activities in establishments and offices situated in the territory of several regions, the distribution of the taxable income, and, therefore, of IRAP, is done in proportion to the cost of the employees working in the various regional establishments and offices.

3.6.1 Persons subject to IRAP The following persons are subject to IRAP: • Individuals receiving company income; • Individuals receiving income from self-employed work; • Joint-name partnerships, limited partnerships and those equivalent to simple partnerships practising arts and professions and professional associations; • Agricultural producers receiving agricultural income (individuals or groups), except for those exempt from VAT; • Entities subject to IRES: resident commercial companies and institutions, and non-resident companies and institutions of any type with or without legal status; • Public and private non-commercial institutions and public administrations.

IRAP does not apply to mutual investment funds, pension funds, European economic interest groups (EEIG) and door-to-door salesmen.

For persons not resident in Italy, IRAP only applies when the activities are conducted over a period of at least three months through a permanent establishment.

3.6.2 Tax assessment basis and rates In general, IRAP applies to the net production value, which is the difference between positive components, consisting of the income from sales or provision of services, variations in stocks (if positive) and other operating income and revenues, and the negative components, consisting solely of the cost of purchasing goods and services, the cost incurred for using third party goods, variations in stocks (if negative), depreciation, and amortization of fixed assets and sundry management charges. Employment costs, costs deriving from the provision of temporary self-employed work, financial charges and exceptional charges of any kind are not deductible for IRAP purposes.

From 2008 the general rate applied is equal to 3.9%. In some regions higher general rates (i.e. Sicily: 4,87%) are applied.

A fixed deduction is applied, determined by increments with reference to the taxable basis, plus a deduction for employees (subject to a check on certain conditions).

Special rules apply to establish the taxable assessment basis of specific entities (banks, financial institutions and companies and insurance companies) and, in some cases, different rates are applied.

3.7 Value added tax (VAT) VAT is applied on “value added” in the sense that, by means of a system of reimbursement

DOING BUSINESS IN ITALY | 38

DOING BUSINESS IN ITALY | 39

charges and deductions, tax is payable on the increase in value of goods or services in the individual stages of production and trade, until it reaches the final consumer who bears the full cost of the tax.

3.7.1 Operations subject to VAT VAT substantially applies to the following operations: • Transfer of goods made in Italy in running business or in practising arts and professions; • Provision of services in Italy in running business or in practising arts and professions; • Intra-EU purchases of goods from another EU member state in running businesses or in practising arts and professions; • Purchases made by foreign countries of some services carried out in Italy in running businesses or in practising arts and professions; • Imports of goods from non-EU countries, made by anyone.

For VAT purposes, “Italy” is considered to be the territory of the Italian Republic, excluding the Communes of Livigno, Campione di Italia and the waters of Lake of Lugano on Italian territory.

However, VAT does not apply to all the aforesaid operations conducted in the territory of the Italian State.

Some operations are, in fact, tax exempt, while others fall outside the scope of VAT”.

Special agreements apply to goods imported into Italy from the Vatican State and from the Republic of San Marino.

3.7.2 Rates applicable The ordinary rate is 21%.

In addition to the ordinary rate, there are two reduced rates, 10% and 4%, and the “zero” rate which applies to some so-called “non-taxable” operations (exports of goods, provision of some international services or services connected with international trade, transfers of goods to another EU Member State, provision of some services connected to transfers of goods to another EU Member State).

3.7.3 Measures Registration for VAT purposes If a person (individual person, partnership, company with share capital or institution) intends to carry out a relevant operation from the Italian VAT point of view in running a business or in practising an art or profession, it is required to apply for an Italian VAT number before implementing the operation.

From a legal perspective, starting from January 2010, the general rule provided that VAT is applied by applying the reverse charge mechanism by the recipient of the goods or services. If the foreign operator has a permanent establishment in Italy, it should apply for an Italian VAT number and take all necessary measures laid down by law as a national person.

If the foreign operator does not have a permanent establishment in Italy, it may alternatively: • appoint a tax representative for the purposes of Italian VAT, i.e. an individual per-

DOING BUSINESS IN ITALY | 40

son or institution resident in Italy, responsible for fulfilling the obligations and exercising the rights laid down by the regulations on VAT; or • identify itself directly in Italy for VAT purposes, directly fulfilling the obligations and exercising the rights laid down by Italian regulations, if resident in one of the EU countries or in one of the non-EU countries with which Italy has arranged reciprocal assistance agreements with regard to indirect taxation.

The appointment of the tax representative or direct identification should follow a special procedure and should be notified to the other contracting party before making the first relevant operation for the purposes of Italian VAT. In case of supply of good or service rendered directly from abroad, the transaction shall be taxable in Italy through the reverse charge mechanism by the recipient (purchaser) if it is a taxable person in Italy for VAT purposes (so called B2B transactions).

In this case notwithstanding the non-resident has been identified for VAT purposes, all the obligations shall be fulfilled by Italian operator through the above mentioned reverse charge mechanism. This scheme is applicable even if a foreign operator has a permanent establishment in Italy, when the goods or services have been provided by the non-resident entity. In case of supply of good or service rendered directly from abroad to a final consumers (so called B2C transactions) then it shall be necessary to apply for a VAT identification through their Italian VAT number (VAT Rep, Permanent establishment or direct identification).

The VAT position of a person remains valid until the termination of activities.

Taxpayers’ obligations Italian regulations lay down very detailed rules on the following: • Procedure and timing for the issue of invoices • Content of invoices • Procedure for the registration of invoices issued and received • Procedure for the issue of credit and debit notes • Calculation of VAT payable(*) • Periods for of settlements and payments of VAT • Procedure for the completion and submission of VAT returns • Procedure for the completion and submission of VAT communication of transactions with business entities located in countries with privileged tax systems (TAX HAVEN or BLACK LIST COUNTRIES). The subjects whose business is relevant for VAT purposes are obliged to submit a monthly/quarterly VAT declaration which contains the amount of the transactions subject to Italian VAT and not subject to Italian VAT due to lack of territorial scope, relating to: 1. sell of goods or services to business operators established in Black List countries; 2. purchase of goods or services from business operators established in Black List countries.

The Italian Tax Authorities have published the list of the countries that are considered.

Black List or Tax Haven in DD, MM. 4th May 1999 and 21th November 2001.

• Retention and submission of Intrastat lists for operations conducted with other EU persons • Conditions and procedure for requesting the reimbursement of any VAT credits.

A person with an Italian VAT number is required to submit every year the VAT • Synthetic VAT return (it. “comunicazione dati IVA”) and the annual VAT return.

The obligation still remains when no relevant operations for VAT purposes have

DOING BUSINESS IN ITALY | 41

been conducted during the year. There are a few special cases that are exempt from this obligation.

in the absence of specific agreements between the owners, ownership of the main property leads to the acquisition of the secondary property.

(*) The VAT accounting of an operator could be handled under the special regime of “bookkeeping carried out by third parties” – so called “contabilità presso terzi” (according to article 1, paragraph 3, of Presidential Decree nr. 100 of 23 March 1998). Under this special regime, VAT due is calculated having reference to the second preceding month instead of the one of the month immediately preceding (Ministerial Circular no. 29 of 10 June 1991). For example, the VAT paid in February of a given year is based on the VAT Computation made in January in accordance to the documents of [the second preceding month of] December of the preceding year, whereas the VAT paid in February is normally based on the VAT computation made in January, in accordance with the documents [of the month immediately preceding] of January.

Usucaption Acquisition by usucaption arises when a property has been held by a third party in good faith for at least twenty years if not used, during such a period, by the owner.

In these cases, the corresponding right is granted to the possessor (ownership or real right of use), while the right not exercised is extinguished.

3.7.4 Other VAT systems Special VAT systems There are several special VAT systems that apply to anyone operating in particular sectors of activities (e.g. agricultural producers, publishers, travel and tourist agencies, etc.)

Customs and VAT warehouses Special rules establish the conditions to be able to set up and use customs warehouses where products are held without payment of custom duties and VAT until they are removed from the warehouse and VAT warehouses (where products are held without payment of VAT only).

Group VAT settlement Groups of national companies are able to make group VAT payments, offsetting the VAT debits and credits of the various companies. In certain conditions a EU holding is also eligible for the above indicated procedure with reference to his Italian subsidiaries.

3.8 Immovable property investments According to Italian law, immovable property includes buildings, constructions and, in general, everything that is naturally or artificially incorporated into the ground. The Italian Law provides rules for the purchase or sale of property, as well as a special system for advertising the transfer of property.

3.8.1 Ownership of immovable property 3.8.1.1 Methods of acquiring original ownership The original ownership of immovable property may be acquired by accession or by usucaption.

Accession In the case of accession, two or more properties or parts of properties are combined in such a way that they cannot be separated without serious damage; in such a case

DOING BUSINESS IN ITALY | 42

3.8.1.2 Methods of derived acquisition The ownership of immovable property may also be acquired on a derived basis, by arranging instruments that transfer this right, or by succession following death.

Contracts transferring ownership of immovable property must be drawn up either by private instrument authenticated by a notary or directly by notarial deed.

The form of publicity provided for these contracts is the registration, which has the function of settling any disputes between holders of rights, giving priority to the first party that registers his right of acquisition.

The contract may be preceded by an undertaking deed (or preliminary purchase contract).

Succession, by law or by will, may be universal or just for a part of the property.

3.8.2 Income from owning immovable property For natural persons, income deriving from the ownership, use or other real rights to buildings is subject to taxation based on their nominal land income (it. “rendita catastale”), depending on the period of possession during the calendar year, the percentage of possession and the type of use made of the property. The aforesaid income contributes to forming the overall taxable income of the owner, according to the IRPEF (personal income tax) general provisions.

If the property is also the owner’s principal residence, the relating income is not taxed.

Income from buildings/lands belonging to companies or relating to commercial businesses is regarded as business income and contribute to the formation of the overall taxable income.

Income from property rental contribute to the formation of the overall income of the owner.

From 2011 natural persons can choose a different way of taxing their rental income. In fact, article nr. 3 of Legislative Decree nr. 23/2011 introduced a new tax - cedolare secca - which replaces those currently due on rental income made by natural persons (IRPEF, additional IRPEF, registration tax as well as the stamp duty). The cedolare secca is alternative to the ordinary taxation and cannot be applied by companies.

The new cedolare secca is calculated by applying a rate of 21% on the annual income rent agreed between the parties. A reduced rate of 19% for leases negotiated rents is also applicable.

3.8.3 Property rental Contractual forms.

Two types of contract are laid down by the regulations: • Open-rent contracts (it. “contratto a canone libero”)

DOING BUSINESS IN ITALY | 43

•

The parties may arrange rental contracts for a period of not less than four years, renewed for a further four year period (6 years + 6 years if premises are leased for commercial use). Automatic renewal does not take place if special conditions of need arise for the owner.

Agreed-rent contracts (it. “contratto a canone concordato”) The parties may arrange rental contracts, agreeing the period (not less than three years, renewable for other two years) and the rent (governed by local agreements between associations of owners and tenants).The legislator has provided a series of tax discounts for this type of contract.

Registration tax on buildings lease contracts Lease contracts shall be registered within 30 days of stipulation and are subject to the application of proportional registration tax, amounting to 2% of the annual rent in case of non-instrumental buildings and 1% for instrumental buildings, with a minimum of Euro 67. All property leasing and rental contracts of any amount must be registered, unless the duration is less than 30 days. For contracts subject to VAT (i.e. instrumental buildings, rented by companies) a 1% registration tax is also due.

3.8.4 Taxes on property transfer The transfer of instrumental or housing property is subject to the payment of indirect taxes (VAT, registration, land and mortgage tax) and direct taxes. Indirect taxes are determined proportionately based on the land value of the property itself.

The most frequently scenarios are: 1. If the vendor is a private individual and the sale is related to instrumental or housing property indirect taxes payable on the sale/purchase are as follows: VAT: Registration tax: Mortgage tax: Land tax:

n/a 7% (3% if first house) 2% (fixed at Euro 168 if first house) 1% (fixed at Euro 168 if first house)

For natural persons, the capital gain made on the transfer of property is taxed only if the sale is made within five years of purchase.

If the property has been acquired by means of tax benefits for a principal residence and is sold within five years of purchase, the vendor will forfeit the concessions enjoyed and the relevant penalties will be applied, unless he purchases another property to be used as his principal residence within one year.

2. If the vendor is a building company and the transfer of the housing property takes place not later than five years (four years for instrumental property) since the building is completed and the buyer is both a private individual or business entity, indirect taxes payable on the sale/purchase are as follows: a) Sale of housing property: VAT: Registration tax: Mortgage tax: Land tax:

4-10-21% (depending on the type of house) fixed at Euro 168 fixed at Euro 168 fixed at Euro 168

DOING BUSINESS IN ITALY | 44

b)

Sale of instrumental property VAT: Registration tax: Mortgage tax: Land tax:

21% fixed at Euro 168 3% 1%

3. If the vendor is a building company and the transfer of the housing property takes place after five years (and four years for instrumental property) since the building is completed or if the vendor is a commercial organisation (i.e. sole trader / business partnership / company) and the buyer is both a private individual or business entity, indirect taxes payable on the sale/purchase are as follows: a) Sale of housing property: VAT: Registration tax: Mortgage tax: Land tax:

b)

n/a 7% (3% if first house) 2% (fixed at Euro 168 if first house) 1% (fixed at Euro 168 if first house)

Sale of instrumental property VAT: Registration tax: Mortgage tax: Land tax:

21% fixed at Euro 168 3% 1%

For sale of instrumental property at business to business level, in some cases the “reverse charge” may be applicable by option of the vendor party.

For commercial organisations, the capital gain made on the transfer of property is always part of its profit chargeable to tax.

3.9 Municipal tax of property (ICI) and other local taxes I.C.I. is a communal tax charged on the possession of buildings, buildable areas and agricultural lands situated within the State territory, intended for any use, including property used in performing company activities.

The municipal tax of property (I.C.I.) is a local tax collected by the Municipalities.

Those liable are owners of buildings, buildable areas or agricultural land situated in the State territory, whatever the intended use, including instrumental property used for company activities.

The tax assessment basis is represented: • For agricultural buildings and land, by the land income multiplied by coefficients varying based on the intended use of the property; • For buildable areas, by the commercial value of the property at the 1st of January in the year of taxation.

The owner of the property or holder of the real right of usufruct, use, residence, em-

DOING BUSINESS IN ITALY | 45

phyteusis or taxable area thereof is required to pay the municipal tax.

The tax is calculated by applying to the tax assessment basis the rate fixed by each Municipality independently, varying between 4 and 7 per thousand, which may reach a maximum of 9 per thousand in case of unrented buildings.

In case of joint ownership or joint entitlement, the tax has to be paid by each joint owner or holder in relation to his share.

Exemptions exist for properties of public institutions intended for institutional use, for religious or cultural activities, for specific land situated in mountainous or hilly regions and for buildings which are the owners residence (so called “first house” exemption).

3.10 Registration tax Registration tax is applied to documents, therefore if no formal documents exists, it is not applied; more specifically, the tax must be paid for documents that must be compulsorily registered and documents that are registered voluntarily.

Documents with a content of estate or assets formed in writing in Italy, verbal contracts, corporate transactions and documents stipulated abroad that have the purpose of constituting or transferring real rights on intangible assets or companies located in Italy, the lease or rent of such assets are compulsorily registered.

With regard to the time at which the obligation to register an instrument arises, a distinction is made between documents subject to registration “within a specified period” and documents subject to registration only “in the event of use”.

All the other documents can be voluntarily submitted for registration by anyone with an interest in doing so.

3.10.1 Persons liable for taxes and periods Persons required to apply for registration include the parties to the contract, notaries and public officers and the clerks and employees of the inland revenue.

For documents subject to registration “within a specified period”, registration must be completed within 20 days as from the date of the document (60 days if the document is drawn up abroad) or 30 days for the leasing of immovable property in Italy.

For documents subject to registration “in the event of use”, registration must only be carried out if the documents are deposited at court clerk’s offices for the purpose of administrative responsibilities, or with Public Administration offices, territorial public bodies respective control bodies.

3.10.2 Application of tax Tax is liquidated by the competent tax office through the application of a tax rate determined by the value of the registered document, or by the service contained therein.

The rate is stated in the rates sheet attached to the Presidential Decree 131/86. The rate applied varies from 0,5% to 15% depending on the type of document subject to registration.

In any case, tax determined in this way cannot be less than 168.00 Euro.

For documents referring to the sale of assets and provision of services subject to VAT (including non-taxable provisions due to the lack of territorial premises and exempt),

DOING BUSINESS IN ITALY | 46

the tax is always applied as a fixed amount. Exceptions are the leasing of instrumental assets that although subject to VAT, pay registration tax proportionally (1%).

The tax must be paid to the Inland Revenue at the time of requesting registration.

Public officials who have drawn up, received or authenticated the document, subjects in whose interest the registration is completed (contracting parties or assignees) and real estate agents are all liable for the payment of taxes.

The tax is also applied, on the transfer of boats, as a fixed amount. It depends on the type and size of the boat.

Concessions Deeds of purchase, relating to non-luxury residential buildings, drawn up by natural persons setting up residence therein, are subject to the reduced rate of 3%.

Deeds for the purchase of property of historic or artistic interest are subject to the reduced rate of 3%.

The transfer of agricultural land to persons who are agricultural businessmen or agricultural cooperatives/associations are subject to the reduced rate of 8%.

3.11 Inheritance and gift tax The Legislative Decree nr. 262/2006 converted into law nr. 286/2006 has reintroduced inheritance and gift tax.

Tax is applied to the transfer of assets and rights mortis causa, by donation, free of charge and on the setting of restraints on destinations (estate fund, trust, etc).

The heirs and legatees who benefit from the following property and rights shall pay this tax: • real estate and rights from real estate; the evaluation of the property is done by multiplying the cadastral revenue by the relevant updated coefficients; • shares in the capital of a company (the value is given by the net equity); • bonds (excluding government bonds); • companies (the value is given by the net equity without evaluating immovable goods and good will); • credits and money; • movable goods (jewels, furniture).

The taxable base is made up of the total net value of the hereditable assets, that is to say of the value of the property and the rights object of the inheritance, net of liabilities and deductible expenses (debts of the deceased, medical expenses and funeral expenses).

The tax due is calculated using a combined system of rate and different allowances depending on the degree of relationship between the assignee and the assignor.

In details: Subjects

Allowance

Tax Rate

Spouse and relatives in direct line (for each heir)

€ 1.000.000

4%

Brothers and sisters (for each heir)

€ 100.000

6%

Other relatives up to the 4th degree, similar in direct line and similar side lines up to the 3rd degree

-

6%

Other subjects

-

8%

DOING BUSINESS IN ITALY | 47

A special allowance of 1,500,000 Euro has also been introduced, exclusively, for transfers to subjects with a recognized serious disability, pursuant to Law 104/1992.

Amounts exempt from tax (fringe benefits) are updated every four years, according to the cost of living index, according with a legislative measure, to be issue (Art. 2, Legislative Decree nr. 262/2006).

Transfers made via “family pacts”, to spouses and descendants, of companies, company branches, company shares and stock are also exempted from inheritance and gift tax. In the event of capital company shares and stock, the benefit is only for shareholdings which provide a majority holding in the votes to be exercised in an ordinary shareholders’ meeting. Exemption is applied on the condition that the assignees continue with the enterprise or maintain control of the company for a period of at least five years and if they provide the correct declaration in the declaration of inheritance.

Formal obligations Inheritance declaration (using appropriate form) must be presented to the relevant local Inland Revenue Office (of the fiscal residence of the de cuius) within 12 months of the date of the start of the inheritance, which usually coincides with the date of the death of the taxpayer. Heirs, legatees, estate executors for remaining inheritance and estate administrators, trustees, those in possession of the property (in the case of absence or declaration of presumed death), must present the declaration. The office will liquidate taxation based on the information declared and notifies the amount to the obliges. Payment must be made by heirs and legatees within 60 days.

Gifts must be registered according to the dispositions foreseen for registration tax.

Request for registration must be filed to the Inland Revenue office by the notary public drawing up the document. The tax must be paid as of registration request and is proportional to the overall value of activities, net of any debt or other liability related to assets and rights resulting from the document.

With reference to inheritance and gift tax many treaties are currently in force.

3.12 Navigation system The navigation system in Italy may have different regulations, with particular reference to the tax system and to the composition of the crew.

In particular, treatments vary depending on whether ships have been entered in the: • “National” Shipping Register; • “International” Shipping Register.

3.12.1 Tax system applicable to ships entered in National Register Taxation applies according to ordinary rules, with the application of IRES and IRAP. The National Shipping Register provides for a crew entirely composed of EU resident sailors.

DOING BUSINESS IN ITALY | 48

3.12.2 Systems applicable to ships entered in International Register The income deriving from the sailing of ships entered in the International Register contributes to income tax up to 20% of the overall income, while it is not liable for IRAP. Capital gains (and capital losses) deriving from the transfer of ships do not fall under the concessionary system, provided the ship has been entered in the International Register for an uninterrupted period of at least three years before the transfer.

Ships designed solely for international commercial traffic can also be registered.

These ships cannot provide coasting services, apart from a few exceptions.

Shipping companies operating through ships entered in the International Register are granted a tax credit at a rate corresponding to the personal income tax payable on the employment and self-employed work income paid to the personnel on board.

The contribution thus made to the employer constitutes income exempt for tax purposes.

It is also possible to benefit from exemption from the payment of social security and welfare contributions payable by law.

3.12.3 So-called “Tonnage Tax” system Legislative Decree 344/2003 did introduce a system for the fixed taxation of income deriving from the sailing of ships entered in the International Register and designed for the following activities: • Passenger transportation • Goods transportation • Salvage, towing and other high-seas activities • Other auxiliary activities and those relating to the foregoing.

• The ships must have a tonnage higher than 100 tons.

As of 1st January 2008, by virtue of 2008 Financial Law, this system can be applied to ships enrolled in the International Register performing the afore mentioned activities disregarding the navigation space (international or national) touched in providing concerned coasting services.

Companies with share capital resident in Italy may join the fixed system. As of 1st January 2008, by virtue of 2008 Financial Law, shipping enterprises incorporated as partnerships may have access to the tonnage tax regime.

A foreign company (or partnership) may apply for Italian tonnage tax system only if it operates in Italy through a permanent establishment.

The system is optional and may be adopted with a binding 10-year option, to be forwarded to the competent tax authorities within three months of commencement of the first year of application of the system.

If the system ceases to apply, it cannot be renewed until the original 10-year period has passed.

The tonnage tax system requires that the application of the fixed system covers all ships, that are eligible for the system, belonging to all companies encompassed in the shipping group (all in all out principle).

The tax assessment basis for each ship is determined daily (excluding the periods in which the ships are not operational), by applying a predetermined profit to the tonnage.

The figure obtained is then corrected depending on the age of the ships.

Capital gains (and capital losses) deriving from the transfer of ships accrued by companies applying the tonnage tax system are deemed to be already accounted for in the

DOING BUSINESS IN ITALY | 49

tonnage taxable base.

Specific rules apply in case of capital gains (and capital losses) deriving from the transfer of ships that, before entering the tonnage tax regime, did benefit from the System applicable to ships entered in International Register (see 5.12.2.).

Companies opting for the tonnage tax system cannot opt for group taxation or for the tax transparency system.

3.13 Tax obligations During the course of each year, the taxpayer is required to comply with a series of obligations that vary, by type and by date, in relation to the category of persons to which the taxpayer belongs and the tax to which the measure relates.

It has to be noted that nearly all the tax returns and fiscal communications must be sent by electronic filing only.

3.13.1 Compliances relating to direct taxation Both IRPEF and IRES taxpayers have to draw up an annual return to be able to pay the taxes in full for the year to which the return relates and the tax payments on account for the current year at the time the return is drawn up.

The tax return must be drawn up on printed sheets compliant with annually approved forms by the tax authorities and forwarded within nine (9) months from the date of the balance sheet. Individuals must file and send the annual tax return within the end of September of the following tax year.

The tax payments are divided into two payments on account paid during the course of the tax year, and a balance to be paid at the same time as payment of the first payment on account for the following year (16th of June, with possibility of postponing to July 16th, paying 0.4% interest).

3.13.2 IRAP For IRAP, an annual return has to be drawn up as well and submitted by the same deadline of the income return.

3.13.3 VAT An annual Value Added Tax return must also be presented, before the end of September of the following tax year: it must contain the total of incoming and outgoing operations, tax due, deductions, payments made, tax due as settlement or difference as credit.

The taxpayer must also send a VAT synthetic return (it. “communicazione dati IVA”) each year, before the end of February, with reference to the previous solar year.

In general, settlement is effected on a monthly, quarterly or infra-yearly basis.

Taxpayers who must make monthly payments must pay any amounts due by the 16th day of the month following that to which the settlement relates or, in the case of quarterly settlement, by the second month following the end of the quarter. For the last yearly quarter, the payment deadline is March 16th. Any credit will be deducted from

DOING BUSINESS IN ITALY | 50

the settlement in the following month or quarter.

By the 27th of December, the taxpayer is asked to provide a payment on account for the last settlement of the year.

3.13.4 Offsetting It is possible to offset credits and debits relating to the same tax (traditional offsetting) or credits and debits deriving from different taxes and social contributions (horizontal offsetting).

In this second case, offsetting may only be effected from the day following that of closure of the period in which the credit was established. The offsetting is not admitted for amounts over Euro 516.456,90 per year.

With effect from January 2010, 1st , the “horizontal offsetting” in the F24 form of interim or annual VAT tax credits, worth more than Euro 10,000.00 will be made only from the 16th of the month following the filing of: Annual statement; or Quarterly instance (“TR” Model).

To enable this process, taxpayers who intend to use in compensation, or to request a refund, the credit arising from the annual VAT tax return will have to submit it in a separate way from 1 February 2010. The taxpayer will thus benefit from the earliest date to compensate, which is March 16, 2010.

With regard to annul VAT credit horizontal offsetting worth more than Euro15,000, it is stated that the annual statement which shows this VAT credit must necessarily bear the endorsement of the “declaration of conformity” (it. “visto di conformità”) of data to the accounting records, by persons entitled to the issue (chartered accountants, accountants). As alternative to visto di conformità, to use tax credits in compensation for amounts over Euro15,000, the VAT tax return must be signed by the persons who drawn up the audit report according to art.2409-bis of the Civil Code, (Board of Statutory or Audit Firm).

With effect from January 2011, 1st, the horizontal offsetting of credits related to direct taxes is forbidden whereas the taxpayer has not duly paid direct taxes already assessed

by Tax Authorities: a 50% penalty is levied in case of failure to comply with such rule.

3.13.5 ICI The return of immovable property owned in the communal territory, excluding exempt property, must be submitted by the person liable for tax, whether resident or non-resident, in the previous year.

The first statement submitted also applies to the following years if no variations have arisen.

The immovable property return must be submitted in the event of variations resulting from acquisitions for consideration, gifts, transfers of property or other real rights, or a change in the characteristics thereof.

The period generally coincides with that fixed for the submission of income returns.

The tax is paid in two equal annual installments: the first by 16th June and the second in the period 1st to 16th December. A one-installment payment can however be made

by June 16th.

DOING BUSINESS IN ITALY | 51

4 Accounting 4.1 Accounting regulations and standards Financial reporting requirements for companies incorporated in Italy are set out in the Italian Civil Code and in the Accounting Principles (Italian GAAP), issued by the Italian Accounting Committee (Organismo Italiano di Contabilità,“OIC”), that are considered as interpretations of the general principles stated in the Civil Code.

In formulating the Italian GAAP, OIC gives due consideration to IFRS, and try to complete them as much as possible, in light of the conditions and practices prevailing in Italy. In particular, the Legislative Decree nr. 39/2010 “Implementation of Directive 2006/43/CE on statutory audits of annual accounts and consolidated accounts” has been approved by the Parliament, amending Council Directives 78/660/CEE and 83/349/CEE and repealing Directive 84/253/CEE. The OIC has been constituted in the legal form of a Foundation, which is governed by a board of directors consisting of 15 members. The members shall be appointed by a large representative group of Italian institutions, such as the Italian National Council of Accountants, the ‘ABI ‘(National Association of Banks), the ‘Confcommercio’ (National Confederation of Commerce), the ‘Assirevi’ (Association of the Italian Auditors), Italian Government Accountants, Confindustria (Italian Confederation of Industry), Italian Stock Exchange and others.

The OIC sits alongside the corresponding European body, EFRAG (European Finance Reporting Advisory Group) and the International body, the IASB. The principal activities of the OIC are the following: • issue the Italian GAAP, for use in the preparation of financial statements for which the application of the International accounting principles has not been provided, by coordinating activity with the other European standard setters; • issue accounting principles for the preparation of the financial statements of not for profit entities and of national and local public administrations; • provide support in connection with the application of the International accounting principles in Italy.

All companies must file full financial statements, except those designated as small or medium sized by reference to legal limits. These companies may file abbreviated accounts with the public register.

4.2 Adoption of IFRS in Italy In June 2002, the European Union adopted an IAS Regulation requiring European companies listed in an EU Securities market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with IFRS starting with financial statements for financial year 2005 onwards. EU countries had the option to: • Require or permit IFRS for unlisted companies.

• Require or permit IFRS in parent company (unconsolidated) financial statements.

• Permit companies whose only listed securities are debt securities to delay IFRS adoption until 2007.

DOING BUSINESS IN ITALY | 52

•

Permit companies that are listed on exchanges outside of the EU and that currently prepare their primary financial statements using a non-EU GAAP (in most cases this would be US GAAP) to delay IFRS adoption until 2007.

Italy is an EU Member State. Consequently, Italian companies listed in an EU/EEA securities market have applied IFRS starting from 2005.

The European Commission has adopted the following wording for use in the notes to the accounts and in the audit reports of companies subject to EU Regulation 1606/2002/EC (the ‘IAS regulation’): • “in accordance with International Financial Reporting Standards as adopted by the EU” or • “in accordance with IFRS as adopted by the EU”.

On 25 February 2005, the Italian Council of Ministers approved a Legislative Decree regarding the options provided by Article 5 of Regulation 1606/2002 of the European Parliament (the EU Accounting Regulation) to permit or require the adoption of the International Financial Reporting Standards (which includes IAS and Interpretations) in respect of annual accounts and of non-publicly-traded companies. As a result, IFRS are applied in Italy as follows: A. Listed companies, issuers of financial instruments widely distributed among the public, banks, stock broking companies, fund management companies, regulated financial institutions.

Consolidated financial statements: IFRS compulsory from 2005.

Separate financial statements: IFRS optional from 2005, compulsory from 2006.

B. Insurance companies.

Consolidated financial statements: IFRS compulsory from 2005.

Separate financial statements: IFRS compulsory from 2006 only for listed companies that do not prepare consolidated financial statements.

C. Subsidiary and associated companies of the above companies, and other companies that prepare consolidated financial statements.

Consolidated financial statements: IFRS optional from 2005. Separate financial statements: IFRS optional from 2005.

D. Companies other than the above.

Individual financial statements: IFRS optional from a year to be determined by the Ministry for the Economy and Justice, currently they should apply Italian GAAP. Small Companies preparing financial statements in abbreviated form and individual financial statements: IFRS not permitted.

4.3 New accounting standards (Italian GAAP) The OIC has issued recently the following standards: OIC3–Disclosure on the financial instruments to be included in the notes of the financial

DOING BUSINESS IN ITALY | 53

statements; OIC4–Merger and Carve-out; OIC5–Completion accounts of bankrupted companies; OIC6–Debt restructuring and financial reporting.

5 Legal aspects 5.1 The Joint Venture Agreement The Italian Law considers only few types of associative forms, as: • the so called “ATI” regulated under Legislative decree nr. 163/2006 (i.e. Associazione temporanea di imprese – a temporary business association which is a voluntary association of companies, that create a new entity for determined amount of time in order to carry out or execute a construction project, service or supply or, also with the purpose of participating to public calls for tenders joining their forces and know-how) and • the “Consorzi”, i.e. the syndicates for coordination of production and exchanges, regulated by articles 2602 and follows of the Italian Civil Law. On the contrary, the Joint Venture is a different entity that has not a specific regulation under Italian Law, even though is a huge reality in the Italian business field, as it is a way for the companies engaged to cooperate and coordinate the activities in order to start or enhance a business in the Italian market.

There are two ways of creating a Joint Venture: • in the first, two or more parties coordinate their activities and efforts, exchanging or integrating some of their resources, with the purpose of obtaining a mutual gain in a certain field, while, at the same time, they remain separate and independent entities; • in the second, two or more companies create a new subject in a form of a new company.

In the latter case, the parties have to draft the related bylaws very carefully, and therefore they have to choose the kind of company in which the JV is realized, considering that if private limited companies are regulated by more flexible rules, in the companies limited by shares it is possible to introduce particular shareholders agreements.

Such agreements, according to article 2341-bis Italian Civil Code have the purpose of regulating the relationships (for a maximum period of five years) among shareholders or the management of the company: a) having as object the exercise of the right of vote in joint stock company or in the controlling companies; b) imposing limits on the transfer of the relevant shares or the participations in the controlling companies; c) having as object or as a result the joint exercise of a dominant influence on such companies.

It has to be highlighted that a Joint Venture may realize an agreement which is able to restrict the competition in the market and therefore may become relevant for the antitrust law.

DOING BUSINESS IN ITALY | 54

DOING BUSINESS IN ITALY | 55

5.2 The Antitrust Law

5.3 Distinguishing the trademarks

According to Article 10 of Law nr. 287 of October 10th, 1990, the Antitrust Authority is established in Italy, an institution which is independent from the Government and is deputy to the control and verify the respect of the rules of the market.

The Antitrust Authority may thus ban agreements between undertakings, behaviors that realize abuse of dominant position, and mergers deemed to create or to strengthen a dominant position in ways that eliminate or substantially reduce competition on a lasting basis.

It could be useful for e new entity that intends to enter the Italian market to have its brand recognized among the others. For this purpose it is possible to obtain a legal protection of the trademark in Italy in order to distinguish the goods and services of one organisation from those of another and to create an identity, a strong connection between the brand and the company. Moreover, registering a trademark consents to prevent others using the same sign in commercial activities.

Moreover, the Antitrust Authority may intervene in matters regarding abuses of economic dependence which is relevant to the protection of competition and the free market, by issuing warnings and imposing penalties.

Relevant behaviours According to the Law nr. 287/1990 are prohibited: Agreements restricting the competition (so called “intese”) Undertakings should compete in the market. On the contrary, sometimes undertakings conclude agreements and coordinate their market behaviour, and such cooperation may have as its object or result the restriction of competition. Article 2 of the Law 287/1990 prohibits the agreements between undertakings that, even only potentially, reduce competition substantially within the national market or in a substantial part of it.

Abuse of dominant position An undertaking holds a dominant position when it is independent of both its competitors and its consumers. The main examples of such abuse are charging prices or imposing terms and conditions which are unjustifiably burdensome, or acting in such a way as to impede market access by other competitors or induce them to abandon their operations. This behaviour is prohibited in force of article 3 of Law nr. 287/1990 and article 102 of TFEU (Treaty on the Functioning of the European Union for possible distortions in trade between EU member States).

Mergers and Acquisition (“Operation of Concentration”) Not all the merger and acquisition operation are relevant to Law nr. 287/1990, as a further element is necessary: the so called “concentration”. This occurs when a company merges with another or acquires control over another, enabling it to exercise a decisive influence on its operations. Moreover, “concentration” occurs when two undertakings unite their efforts in the form of a mutually-controlled joint undertaking that operates as an independent economic entity (also known as full functional). Article 5 of Law nr. 287/1990 prohibits this operation of concentration obtained with a merger or an acquisition, as such operations might reduce competition on a lasting basis, and hence put the parties in a position to raise prices or impose conditions that are detrimental to consumers.

DOING BUSINESS IN ITALY | 56

Italian application It is possible to enter a query for obtaining a protection of a trademark in the Italian territory, limited to such geographic zone and concerning specific class of products.

According to the Industrial Property Code (Legislative Decree nr. 30/2005 – see articles 5 and 20), the trademark’s owner has the right to the exclusive use of it and can prevent third parties from using an identical or similar for identical or similar products or services, in the case of likelihood of confusion relating to the similarity; if the trademark also has a famous reputation, then this right is extended also to dissimilar services or products.

The competent office for the application of the Italian trade mark protection is the Italian Office of Trademarks and Patents.

European application According to the Regulation n. 40/94 of the European Union Council, it is possible to request from Italy the protection of a trademark within the whole territory of the European Union, which means that this trademark can be registered, transferred, withdrawn, invalidated or expired and its use can be prevented only for the whole Community.

The competent authority for the registration of an EU trademark is the Office for the Harmonization in the Internal Market (OHIM) in Alicante (Spain).Any natural person or legal entity from any country in the world may file an application in order to obtain an EU trade mark.

The applications can be filed either directly at the OHIM or at any of the national patent and trademark offices of the 27 Member States of the European Community or the Benelux Trade Mark Office.

DOING BUSINESS IN ITALY | 57

6 Contact RSM Tax & Advisory Italy s.r.l.

RSM Italy Audit & Assurance S.r.l.

Foro Buonaparte, 67 - 20121 Milan Tel. +39 02 89095151 - Fax +39 02 89095143 Email: info@rsmta.it Website: www.rsmta.it

Via C. Torre, 23 - 20143 Milan Tel. +39 02 48518240 - Fax +39 02 48511938 Email: info@rsmitaly.com Website: www.rsmitaly.com

International Desk Tel. +39 011 5613282 - Fax +39 011 5611733 International Desk Manager: Livia Seniuc Email: livia.seniuc@rsmta.it

Offices: Milan, Rome, Padua, Empoli, Turin, Brescia, Agrigento

Rome Studio L4C di Lauri, Lombardi, Lonardo & Carlizzi Via delle Terme Deciane, 10 - 00153 Rome Tel. +39 06 5754963 Fax +39 06 57288935 International Contact Partner: Mauro Lonardo Email: mauro.lonardo@rsmta.it

International Contact Partners: Andrea Tuccio Email: andrea.tuccio@rsmitaly.com Paolo Franzini Email: paolo.franzini@rsmitaly.com

Milan Studio Gerla Associati Via Foro Buonaparte, 67 - 20121 Milan Tel. +39 02 89095151 - Fax +39 89095143 International Contact Partner: Francesco Gerla Email: francesco.gerla@rsmta.it Turin Studio Palea Via Ettore De Sonnaz, 19 - 10121 Turin Tel. +39 011 5613282 Fax +39 011 5611733 International Contact Partner: Marcello Rabbia Email: marcello.rabbia@rsmta.it

DOING BUSINESS IN ITALY | 58

DOING BUSINESS IN ITALY | 59

RSM International Executive Office 11 Old Jewry London EC2R 8DU United Kingdom T: +44 (0)20 7601 1080 F: +44 (0)20 7601 1090 E: rsmcommunications@rsmi.com www.rsmi.com RSM International is the name given to a network of independent accounting and consulting firms each of which practices in its own right. RSM International does not exist in any jurisdiction as a separate legal entity. The network is administered by RSM International Limited, a company registered in England and Wales (company number 4040598) whose registered office is at 11 Old Jewry, London EC2R 8DU. Intellectual property rights used by members of the network including the trademark RSM International are owned by RSM International Association, an association governed by articles 60 et seq of the Civil Code of Switzerland whose seat is in Zug. The aim of this publication is to provide general information about doing business in Italy and every effort has been made to ensure the contents are accurate and current. However, tax rates, legislation and economic conditions referred to in this publication are only accurate at time of writing. Information in this publication is in no way intended to replace or supersede independent or other professional advice.

Copies of this booklet or additional information can be obtained from the RSM International Executive Office, RSM Tax & Advisory Italy or RSM Italy Audit & Assurance.

November 2011 © RSM International Association, 2011 © RSM Tax & Advisory Italy, 2011 © RSM Italy Audit & Assurance, 2011