studio di consulenza tributaria e legale
Rag. Giuseppe Pirola Rag. Sergio Pennuto Dott. Roberto Zei Rag. Eldo Menchinella Dott. Mario Morettini Dott. Leonello Schinasi Rag. Tobia Angeloni Dott. Massimo Cremona Dott. Franco Barro Dott. Nicola Antoniozzi Dott. Pier Luca Mazza Dott. Luciano Patelli Dott. Gianni Colucci Dott. Marcello Romano Dott. Luca Barbera Avv. Andrea Gottardo Dott. Lorenzo Banfi Dott. Marco de Ruvo Avv. Prof. Gaetano Arnò Dott. Massimo Di Terlizzi Dott. Giorgio De Pace Dott. Franco Boga Dott. Federico Grigoli
Dott. Nicola Broggi Avv. Roberto Padova Dott. Stefano Tronconi Dott. Fabrizio Acerbis Avv. Andrea Russo Dott. Andrea Cagnani Avv. Donatella Cungi Dott. Alessandro Mikla Dott. Flaviano Maria Ciarla Avv. Fabrizio Pietrosanti Avv. Gabriele Bricchi Avv. Giorgio Cherubini Dott. Ada A. Garzino Demo Dott. Alberto Santi Dott. Maura Bergamaschi Dott. Giuseppe Cagliero Dott. Stefano Cesati Avv. Maria Clelia Chinappi Dott. Ida Daneri Dott. Felice De Lillo Dott. Valentino Guarini Dott. Guido Guetta Avv. Piero Marchelli
Dott. Marco Meulepas Dott. Giuliana Monte Dott. Paolo Nagar Dott. Luca Occhetta Dott. Fabio Oneglia Avv. Marzia B. Reginato Dott. Dario Santagà Dott. Luca Valdameri Dott. Andrea Alberico Dott. Roberta Ardigò Avv. Tiziana Ballarini Avv. Paola Barazzetta Avv. Alberto Bertuzzo Dott. Massimo Braga Dott. Gianfranco Buschini Dott. Laura Cerliani Dott. Maria Gioina Corbo Avv. Tonio Di Iacovo Avv. Roberta Di Vieto Avv. Barbara Ferri Dott. Luca Fossati Avv. Giovanna Giannelli Dott. Antonella Koenig
Avv. Giovanna Ianni Dott. Fabio Landuzzi Dott. Laura Magnani Dott. Francesco Mantegazza Dott. Luca Marvaldi Dott. Rosita Natta Dott. Elena Robicci Dott. Alessio Rolando Dott. Emanuela Rondelli Dott. Gianluca Ronzio Dott. Claudio Schettini Dott. Andrea Vagliè Dott. Claudio Valz Dott. Federico Venturi Dott. Marco Vianello
On.le Avv. Michele Vietti * Colin Jamieson, Solicitor** Donald J. Carroll, Esquire***
DOMESTIC TAX CONSOLIDATION Dott. Alberto Santi Dott. Ignazio La Candia Ufficio Studi, Studio Pirola, Pennuto Zei & Associati, Milano INTRODUCTION The Italian Government has reformed the current tax system through the enactment of Legislative Decree of 12 December 2003, no. 344. The most significant measures concern inter alia two types of tax consolidation: Domestic Tax Consolidation and International Tax Consolidation1. In particular, one of the main new rules introduced by the Tax Reform - arts. 117 to 129 of the Italian Income Tax Code (TUIR) - concerns the possibility for the controlling company to consolidate the income of group companies, resulting in a single tax liability for the parent company. The Ministry of Finance, by Decree of the President of the Council of Ministers of 27 October 2004, extended the deadline for notifying the election of Domestic Tax Consolidation from 29 October 2004 to 31 December 2004. The Tax Authorities have provided comments on Domestic Tax Consolidation rules in Circular of 20 December 2004, no. 53/E. ENTITIES THAT MAY OPT FOR DOMESTIC TAX CONSOLIDATION The following companies may opt for Domestic Tax Consolidation in their capacity as controlling entities: • joint stock companies resident in the territory of the State; • public and private entities other than companies, resident in the territory of the State, having as their exclusive or main object the conduct of a commercial business; • companies and entities of any kind, with or without legal personality, that do not reside in the territory of the State, but are residents of Countries with which a 1
Resident controlling joint-stock companies and commercial entities - percentage of ownership higher than 50% - subject to Ires (Corporate Income Tax), which are the ultimate holding companies of their group may opt for the International Tax Consolidation. Under the consolidation, all the income and losses produced by all the non-resident controlled undertakings, regardless of their distribution may be allocated with proportion to the profit sharing percentage held by the controlling company. The option cannot be revoked until the end of the controlling company’s fifth fiscal year - any renewals apply for at least 3 fiscal years - and is subject to the condition that the financial statements of the companies involved are certified by a qualified auditor. The International Tax Consolidation is elected by filing a specific ruling request to obtain confirmation from the Tax Authorities, that the relevant requirements are met. 20124 Milano - Via Vittor Pisani, 16 - Tel. (39) 02 669951 - Fax (39) 02 6691800 - c.f. / p. iva 06946520159 00154 Roma - Largo Angelo Fochetti, 28 - Tel. (39) 06 570281 - Fax (39) 06 570282600 10129 Torino - Corso Montevecchio, 39 - Tel . (39) 011 5743611 - Fax (39) 011 5627062 35137 Padova - Largo Europa, 16 - Tel. (39) 049 8246811 - Fax (39) 049 8246850 40122 Bologna - Via delle Lame, 111 - Tel. (39) 051 526711 - Fax (39) 051 6493432 25125 Brescia - Via Cefalonia, 70 - Tel. (39) 030 2219611 - Fax (39) 030 2427641 80121 Napoli - Piazza dei Martiri,30 - Tel. (39) 081 2451918 - Fax (39) 081 2451200 37122 Verona - C.so Porta Nuova, 123 - Tel. (39) 045 8092511 - Fax (39) 045 8015627 43100 Parma – Via Mentana , 27 - Tel. (39) 0521 271254 - Fax (39) 0521 798187 e-mail address: <nome>.<cognome>@studiopirola.com * Of counsel ** Admitted in England and Wales *** Admitted in Rhode Island, U.S.A.
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Double Tax Treaty is in place, which carry out a business in Italy through a permanent establishment2 to which the equity interest in each subsidiary is actually connected; • entities transferring their residence to Italy, starting from the accounting year in which the transfer takes place; • entities and companies not subject to income taxes (IRES), which as a result of a transformation become subject thereto, starting from the accounting year which begins on the effective date of the transformation. The following controlled entities may elect the option: • resident joint stock companies; • entities transferring their residence to Italy, starting from the accounting year in which the transfer takes place; • companies not subject to IRES, which as a result of a transformation become subject thereto, starting from the accounting year which begins on the effective date of the transformation. Companies and other entities benefiting from a reduced IRES rate cannot opt for tax consolidation. Likewise, group taxation cannot be elected in the event of bankruptcy, compulsory winding-up and special management of large companies in a state of crisis, nor can the option be elected by subsidiaries that have requested to be treated as fiscally transparent entities pursuant to art. 115 of Italian Income Tax Code3. As regards the special management of large companies in a state of crisis, the Circular of 20 December 2004, no. 53/E clarifies that “the prohibition to exercise the option for group taxation exclusively applies to large companies in a state of insolvency which are under an asset sale programme…Omitted…and not to companies involved in recovery programmes…Omitted…since although the latter procedure is an insolvency proceeding, it is not aimed at the liquidation of the company but at recreating the conditions required for the company to keep on conducting its business”.
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Italian legislation has incorporated - article 162 of the Italian Income Tax Code (TUIR) - the notion of permanent establishment, largely based on the definition given by article 5 of the OECD Model Convention against double taxation. For the purposes of income taxes (IRES) and of the Regional Production Tax, (IRAP) the term permanent establishment means a fixed place of business in which the business of a non-resident enterprise is wholly or partly carried in the Italian territory. This domestic definition is not relevant for VAT purposes. 3 Pursuant to art. 115 of the Italian Income Tax Code, resident joint stock companies wholly owned by other entities having the same legal form may request to be treated as fiscally transparent entities, provided that such other entities concurrently hold a percentage of profit sharing and voting rights exercisable in the general meeting not lower than 10% and not higher than 50%. Under the fiscally transparent companies regime the income produced by the subsidiary is directly allocated to the shareholders, whether they actually receive it or not. The option to be treated as a fiscally transparent entity is binding for three accounting year.
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SCOPE OF APPLICATION It is considered that a company belongs to a group if it is directly or indirectly controlled by another company which holds a 50% profit share or percentage of ownership therein4. In the event of indirect control, the percentage is determined taking into account the reducing effect of the control chain, disregarding shares which carry no right to vote in ordinary general meetings. Regardless of the percentage of ownership in the subsidiary, the taxable income to be reported in the tax return of the controlling company will be 100% of the taxable income or tax loss of each subsidiary included in the consolidated tax group. EXERCISE OF THE OPTION AND RELEVANT EFFECTS The bilateral option for Domestic Tax Consolidation has the following main characteristics: i. the entities to be included in the tax group may be freely chosen within the group, provided that they are linked by direct or indirect control relationships from the first day of and until expiry of the option for Domestic Tax Consolidation5; ii. the entities electing the option must have the same year-end as the controlling company. The option applies for a period of three accounting years, and it is irrevocable except in the cases provided for by the Income Tax Code and Ministerial Decree implementing the new rules at issue, for example when the control requirement is no longer satisfied, in the event of merger of the subsidiary into a company which is not included in the tax group, or in the event that a company opts to be treated as a fiscally transparent company in a capacity as subsidiary (rather than controlling company) in accordance with article 115 of Italian Income Tax Code. The election for group taxation may be revoked with effect from the accounting period in which the regulations for determining the business income of the companies included in the tax group are aligned with the International Accounting Standards (IAS/IFRS/IFRIC).6 Pursuant to the terms of article 3 of the Ministerial Decree, the percentage of voting rights relates to the general meetings referred to in article 2364 (general meeting of companies without a supervisory committee), article 2364-bis (general meeting of companies with a supervisory committee) and article 2479-bis (general meeting of limited liability companies) of the Italian Civil Code. 5 As provided for by article 1 of the Ministerial Decree, significant control may be exercised “also through entities not eligible for group taxation, including the entities resident in countries which do not allow an adequate exchange of information”. 6 The European Community Official Journal has published three EC Regulations that amend some International Accounting Standards with effect as of 1 January 2005 (IAS, IFRS and IFRIC), previously adopted under Regulation no. 1725 of 29 September 2003, recently amended by Regulation no. 2086 of 19 November 2004, which validated IAS 39 on the recognition and measurement of financial instruments with effect as of 1 January 2005. The following Regulations have been published: EC Regulation no. 2236 of 29 December 2004 - EU Official Journal no. L. 392 of 31 December 2004 - which provided for the adoption of new IFRS and the revision of some IAS with effect from 1 January 2005, to improve their quality and consistency. The EC Regulation 2236/2004 also contains the new version of IAS 36, headed “Impairment of assets” and of IAS 38, on intangible assets. The EC Regulation no. 2237 of 29 December 2004, - EU Official Journal no. L. 393 of 31 December 2004 - revises IAS 32, headed “Financial instruments: disclosure and presentation”, on the classification of financial instruments as liabilities or equity interests. The Regulation no. 2238 of 29 December 2004 - EU Official Journal no. L. 394 of 31 December 2004 - published the revised version of IAS 24, headed “Related party disclosures”, on the 4
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If during the term of the option for group taxation, the controlling company opts for tax consolidation in a capacity as subsidiary company, in conjunction with another company, the group taxation in which such company participated as controlling company will be interrupted. Under the option, each entity forming part of the tax group, including the controlling company, must file the return with the Tax Authorities without paying tax, and deducting from the aggregate income the tax losses for the years prior to the beginning of group taxation. Foreign source income and relevant tax paid abroad will have to be reported in the return, because the controlling company will then calculate the foreign tax credit due on the aggregate income, given that the foreign tax credit can only be carried forward and back by the controlling company. Each subsidiary will also have to: i. complete the tax return to inform the controlling company or entity of its aggregate income, in accordance with art. 121 of Italian Income Tax Code, providing information relating to the dividends received, in respect of which at the time of filing the consolidated income tax return an adjustment reducing the taxable income will have to be made in an amount corresponding to the taxable portion of the dividends distributed by the controlled companies (5% of the dividends), including those deriving from earnings taxed in years prior to the year in which the option becomes effective; ii. provide details for the re-determination of the percentage of non-deductibility (pro-rata patrimoniale) provided for by article 97 of Italian Income Tax Code7, involving an adjustment reducing or increasing the taxable income; iii. provide details of the difference between the book value and the tax value of the assets benefiting from the tax neutrality regime provided for by article 123 of Italian Income Tax Code (sale of assets retaining the same tax value) which involve an adjustment reducing the taxable income. Each entity opting for group taxation may assign - for the purpose of the offset with the IRES liability - its tax credits available for offset against different taxes up to a maximum amount of â&#x201A;Ź 516,456.908, as to the amount not used by the entity participating in group taxation. In Circular dated 28 October 2004 no. 46, Assonime (the Italian association of jointstock companies) clarifies that the election for Domestic Tax Consolidation allows the participating companies to assign not only their credits but also the credits received from other entities, for offset with the IRES due at group level. This should make it possible to transactions put in place with related parties. 7 It is necessary first to identify the part of the interest payable, net of interest receivable, after the application of thin capitalization rules provided by article 98 of the Italian Income Tax Code. All or part of this amount may not be deductible under pro rata rules designed to deny a tax deduction for interest on borrowings taken out to acquire shares. Where the company paying the interest owns shares in subsidiaries which would qualify for the participation exemption regime, and where the book value of the investment in the books of the borrower exceeds the accounts net equity of the parent company, a portion of the interest payable is not deductible. 8 This limit does not apply to asset management companies (SGR), in respect of VAT credits on transactions related to the real estate investment fund.
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offset the available credits against the payments on account due from the beginning of the fiscal year in which the election is made, even if notified at a later time. The credits available for offset are those reported in section RX â&#x20AC;&#x153;Offsets-Refundsâ&#x20AC;? of the Income Tax Return, and any subsidies granted in the form of tax credits. The controlling company will have to file the consolidated income tax return and calculate the aggregate income, making the following adjustments to the algebraic sums of the aggregate net income of the entities which elected group taxation: i. decreasing and increasing adjustments in connection with the redetermination of the percentage of non-deductibility (pro-rata patrimoniale) and ii. decreasing adjustments, as to the amount corresponding to the taxable dividends and the difference between the book value and the tax value of the assets benefiting from tax neutrality. PAYMENT OBLIGATIONS The election of the option by the prescribed deadline implies the assignment of the obligations to pay corporation tax, including payments on account, to the controlling company. Furthermore, if full or partial payments on account have been made separately by the entities which joined in tax consolidation, in the event that the total payments made are insufficient pursuant to the Legislation, the controlling company is subject to the relevant penalties. As provided for by the transitional rules, applicable in FY 2004, under the forecasting method payments on account are made having regard to the amounts due by the individual companies participating in tax consolidation as if no election for Domestic Tax Consolidation had been made: the controlling company will not be liable for any underpayments made by the individual companies, if they occurred prior to election of the option. INTERCOMPANY CONTRACTUAL ARRANGEMENTS Article 118 (4) of Italian Income Tax Code provides that any amounts received or paid between the companies which joined the consolidated tax group, in consideration for the tax benefits derived, are not relevant for the purpose of the determination of income. In particular, for the purposes of the Regional Production Tax (IRAP), these sums may be excluded from the determination of net revenue. Furthermore, the transfer of these sums is not relevant for the purposes of the application of Value Added Tax (VAT), given that the objective conditions for taxation are not met. The regulation of intercompany arrangements, equalising the credits and debts transferred between the companies participating in group taxation, lies exclusively with the companies concerned. Such intercompany arrangements consist in the execution by the companies concerned of an agreement (Consolidation Agreement) which represents the tool to establish if, and to what extent: i. the economic and/or financial benefits received by the group as a result of tax consolidation should be remunerated;
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ii.
any tax savings obtained by the group, as a result of the individual companies relinquishing the benefit they would have derived had no tax consolidation occurred, should be remunerated.
RESPONSIBILITY The controlling company or entity and the subsidiaries involved in group taxation will have joint liability. Each subsidiary joining the consolidated tax group is liable for any additional taxes, penalties and interest assessed on its aggregate income, calculated at the time of the assessment. In the event of non-payment, liability lies primarily with the controlling company, while all other companies involved in group taxation are jointly liable. The right of the controlling company or entity to claim repayment from the subsidiaries participating in group taxation lapses if it fails to transmit to the subsidiary involved in group taxation a copy of the deeds and enactments notified to it, including as domiciliation agent. DOMESTIC TAX CONSOLIDATION AND COMPANY REORGANIZATIONS Merger The merger between consolidated companies does not interrupt group taxation, since the surviving company takes over the option for the remaining term. The merger between the controlling company and one or more subsidiary companies interrupts group taxation between them, but does not trigger the adjustments increasing the taxable income in connection with the tax relief granted as a result of tax consolidation. If the subsidiary company merges the controlling company, group taxation continues to apply in respect of the other subsidiary companies; if, instead, a company included in the consolidated tax group merges a company not included in the tax group, group taxation is not interrupted provided that the conditions for tax consolidation laid down in article 117 of Italian Income Tax Code are satisfied. In all cases other than those mentioned above and those provided for by the Ministerial Decree implementing the rules at issue, the company effecting the reorganisation may apply for continuation of the group taxation by filing a tax ruling request pursuant to article 11 of Law dated 27 July 2000, no. 212. Demerger The full or partial demerger of a subsidiary company that leaves corporate structure unaltered does not interrupt group taxation, provided that the subjective requirements for the election of group taxation are satisfied by the companies which are members of the tax group. In this case, the newly incorporated companies receiving the demerged business will join the consolidated tax group for a period corresponding to the remaining term of the option for the demerged subsidiary company.
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If one of the subsidiary companies receives a demerged business not included in the tax group, group taxation is not interrupted provided that the subjective requirements for the election of tax consolidation are satisfied. The partial demerger of the controlling company does not alter the effects deriving from the election of group taxation by the demerged company, provided that the subjective requirements for the election of tax consolidation are satisfied. Voluntary winding-up and contributions The voluntary winding-up of the controlling or subsidiary company does not interrupt group taxation. If the voluntary winding-up is resolved during the year, the provisions governing mergers and demergers apply, insofar as possible. Contributions made by entities members of a tax group do not interrupt group taxation provided that the subjective requirements for the election of tax consolidation are satisfied. TAX LOSSES AND DOMESTIC TAX CONSOLIDATION The losses of fiscal years prior to the start of group taxation may be used only by the company to which they refer and therefore may be offset against the taxable profits of the entity which realised them; as a result, the subsidiary will transfer to the controlling entity its taxable profit after offset of any losses. Accumulated tax losses are not available for offset against any capital gains realised by the purchaser at the time of the resale of the assets qualifying for the tax neutrality regime; however, the taxpayer may avoid the presumption of tax-avoidance by filing a specific tax ruling request pursuant to article 37-bis (8) of Presidential Decree dated 29 September 1973, no. 600. Any tax losses accrued during the tax consolidation period may be carried over to the subsequent fiscal years and are available for offset against the aggregate income. Any losses not offset at the end of the tax consolidation period remain exclusively with the controlling company or entity, unless they are imputed to the companies which generated them and in respect of which the control requirement, in the manner provided for by the parties concerned, is no longer satisfied. The choice of the allocation criterion is totally free, respecting the full autonomy of the parties. However, such freedom is subject to auditing requirements; the obligation to give the Tax Authorities a prior notification of the criterion chosen should be interpreted in this sense. TAX NEUTRALITY OF INTERCOMPANY TRANSACTIONS There has been introduced an optional tax neutrality regime for intercompany transactions other than transactions concerning revenue-generating assets and shareholdings qualifying for the participation exemption, carried out between companies involved in tax consolidation. Such optional regime must be elected jointly by the seller and the purchaser that are members of the consolidated tax group and the election must be expressly stated in the relevant written sale agreement and in the income tax return of the controlling company.
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Furthermore, the tax neutrality regime may be opted for in the first year of group taxation, even if prior to the notification of election of the option to the Tax Authorities. WRITE-DOWN OF SHAREHOLDINGS For anti-abuse purposes, it has been provided that, up to the amount of the write-downs -arising as a result of value adjustments and provisions not recognised for tax purposes, after deduction of any taxable step-ups - deducted by the controlling or by a subsidiary company, whether or not this elected for Domestic Tax Consolidation, in the fiscal year prior to that of the option and in the nine previous fiscal years, the tax values of the assets and liabilities of the subsidiary, if different from the book value, must be adjusted proportionally to the aggregate amount of such differences. Following notification of the values by the controlling company, each subsidiary company will have to adjust the tax values of the assets and of the provisions recorded among the liabilities of the financial statements for the year prior to that in which the option becomes effective. DOMESTIC TAX CONSOLIDATION AND TONNAGE TAX
With regard to the Tonnage Tax Regime, Circular no. 53/20041 9 specifies that â&#x20AC;&#x153;an entity opting for domestic group taxation cannot opt for the tonnage tax regime, since it is not allowed to renounce group taxation for the above-mentioned periodâ&#x20AC;?. The option for Domestic Tax Consolidation is irrevocable for three years, except in the cases of early interruption provided for by the Italian Income Tax Code and the relevant enforcement Decree, in which cases the Tonnage Tax regime is not provided for.
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The Income Tax Code has introduced the Tonnage Tax in Italy; the Tonnage Tax can be defined as a form of lump-sum taxation of profits arising out of maritime activities but totally independent from the results obtained from the performance of such activities. There are two Tonnage Tax models which the legislation of the States implementing this tax regime have taken inspiration from: i) the tonnage based corporation tax providing for a lump sum determination of the taxable profits (Dutch model); ii) the tonnage tax strictly speaking, providing for a lump sump determination of the tax ( Greek model). Our legislation has drawn inspiration from the Dutch model, considered to be more innovative.