Brochure Doing Business in Italy (2012)

Doing business in Italy

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

RSM International is one of the largest networks of independent audit and consulting firms in the world. RSM International is represented in 94 countries and brings together the talents of 32,500 individuals. RSM member firms are driven by a common vision of providing high quality professional services to ambitious and growing organisations.

DOING BUSINESS IN ITALY | 2

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 extended coverage of the many aspects setting up and running busi­ ness operations in Italy imply, including types of business entities, taxation, accounting and investing in Italy.

It is aimed at providing general information to those contemplating business in our country. We therefore recommend you consult one of the RSM Tax & Advisory and/or RSM Italy Audit & Assurance offices listed at the end of this brochure 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 the information contained in this booklet.

This brochure can be downloaded from the websites: www.rsmta.it and www.rsmitaly.com.

The information contained herein has been updated to October 2012.

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 94 countries and brings together the talents of over 32,500 individuals in over 700 offices worldwide.

The network’s total fee income of US$3.8bn 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.

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About RSM Tax & Advisory Italy 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 120 people among partners and staff, supplies the following integrated services: • Tax assistance and consulting (both domestic and international) • Corporate finance: deal structuring, tax and legal due diligence, tax and legal advisory • Tax, civil and criminal litigation • Transfer pricing • Outsourcing: tax compliance, bookkeeping and reporting • Financial reporting according to Italian GAAPs • Incorporation of companies and establishment of branches • Governance and management consulting • Legal advisory and company secretarial services • “Collegio sindacale” or activity as “sindaco unico” ex art. 2403 of the Italian Civil Code Many of RSM Tax & Advisory Italy’s partners hold offices as independent directors, statutory auditors and member of supervisory bodies ex Law Decree 231/2001 in listed companies and financial institutions.

International Contact Partner Marcello Rabbia - Turin - marcello.rabbia@rsmta.it International Desk Livia Seniuc - Turin - livia.seniuc@rsmta.it

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

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 centres, with major operations in Milan, Rome, Turin, Brescia and Padua.

The firm has more than 70 professionals, many of which hold “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 Law 262/2005 and Law Decree 231/2001 • Financial restructuring, insolvency and turnaround • “Controllo legale dei conti” ex art 2409bis of the Italian Civil Code 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 Partner Andrea Tuccio - Milan - andrea.tuccio@rsmitaly.com

RSM Tax & Advisory Italy s.r.l. and RSM Italy Audit & Assurance s.r.l. are separate and independent legal entities.

DOING BUSINESS IN ITALY | 5

Leaning Tower of Pisa Previous image: Piazza del Duomo, Milan Cover image: Colosseum, Rome

Contents

Foreword

3

1 1.1 1.2 1.3

General Information Geography and population Political institutions Economy

9 9 9 10

2 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8

Types of Business Organisations Introduction Starting a business in Italy Legal, accounting and audit requirements Establishing a branch in Italy Accounting and company measures Dissolution and liquidation of business entities Incorporation of business entities The trust in Italy

12 12 16 18 21 22 23 25 26

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 (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 (IMU) and other local taxes Registration tax Inheritance and gift tax Navigation system Tax obligations

28 28 28 37 38 39 42 43 46 50 51 52 53 55

4 4.1 4.2 4.3

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

59 59 59 60

5 5.1 5.2 5.3

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

62 62 63 63

6

Contacts

66

Mole Antonelliana, Turin - symbol of the city; currently hosting the National Cinema Museum

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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 60.9 million in 2012 and an average density of 202 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 also bilingual regions, where German, French and Slovenian are spoken. The religion most widely practiced is Catholicism.

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

Being 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 generally open from Monday to Friday, as follows: 8.3013.30, 14.30-15.30.

1.2 Political Institutions Italy is a Parliamentary Republic, administratively subdivided into 20 regions, 110 provinces and over 8,092 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 (Chamber of Deputies and Senate) elected by universal suffrage every 5 years; the Government may legislate directly only in exceptional cases.

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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.

The executive power is granted to the Government, which consists 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 among: • 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 (not facts).

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

Under an international perspective, 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 mem­ ber and strong supporter of a wide number of international organisations, such as the Organisation for Economic Co-operation and Development (OECD), the General Agre­ ement 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 2011, Italy’s gross domestic product amounted to EUR 1.58 billion; the per capita income amounted to approximately EUR 24,400.

The most developed sectors of Italian industry include: manufacturing, mechanical, construction, chemicals and transport. A significant contribution to the national wealth is mostly generated by “made in Italy” products (textile products, clothing and footwear, agri-foodstuffs and design), well-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 specializing in a specific stage of the pro­ duction line. Over 200 districts are present on Italian territory as of this day.

Thanks to such associations, the sectors concerned maintain considerable flexibility and a high level of specialization and innovation.

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

Investment is favoured by the marked industrialization present in the North and by

DOING BUSINESS IN ITALY | 10

the existing concessions, intended to favour the economic development of the South.

Finally, membership of the European Community provides for the freedom of move足 ment of citizens, goods, services and capital between Italy and the other 27 Member States, thus creating a single continental market.

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2 Types of business organisations 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, but also in terms of objects to be pursued, capital to be committed, level of liabi­ lity 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 is also financially responsible for the business (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) also work in the business, it is regarded as a family business. The sole holder, receiving at least 51% of the business income remains liable (family workers do not share the losses).

This legal form is very suitable for small businesses and gives access to forms of con­ cessionary 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 involved in the mere use of goods, but in the common and specific exercise of econo­ mic activities.

The partners have unlimited liability for the partnerships’ obligations, although the liability of partners with no powers of representation may be excluded through an agreement of which the third parties must be properly informed.

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

Unlimited partnerships (S.n.c.)

The unlimited 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 partners have unlimited liability.

The partners hold joint and unlimited liability for the business obligations but, unlike the simple partnership, they 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 | 12

Limited partnerships (S.a.s.)

It is possible to set up a partnership with different levels of liability for business obli­ gations by means of a limited partnership (S.a.s.). This partnership is characterized by the presence of two categories of partners: • full partners (it. “accomandatari”), who have the responsibility for the admini­ stration and management of the partnership and have unlimited and joint liability for the fulfilment of the company obligations; • limited partners (it. “accomandanti”), who are liable for the partnership obliga­ tions 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 is limited to the amount of the capital contributed.

Companies 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, being the type of company most suitable for substantial capital investments.

It is also the compulsory type for those 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 EUR 120,000. Said minimum amount 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 corre­ spond to the contributions made by each shareholder. The proportions of capital pay­ ments, 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, 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 sha­ reholders.

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”).

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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 sharehol­ ders: • full shareholders, de jure directors, with personal and unlimited liability; • limited 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 marked by a personal profile.

The shares are generally held by a limited number of shareholders, who are not per­ sonally 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 EUR 10,000 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 sharehol­ der 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 powers.

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

According to art. 2477 of the Italian Civil Code, as amended by Decree no. 5 dated February 9th 2012, concerted by law no. 35 of April 4th 2012, the incorporation act of a company shall provide the appointment of either an audit body (it. “organo di con­ trollo”) or an auditor (it. “revisore”) determining their powers and tasks, including also the audit of the financial statements (it. “revisione legale”). Unless otherwise provided for by the Articles of Association, the audit body is made up of only one member (Sole member audit body – so called “organo monocratico” or “sindaco unico”). The appoint­ ment of an audit body or an auditor is compulsory when the company’s share capital is equal to or higher than EUR 120,000 or other size parameters provided by law are exceeded. It is also compulsory for S.r.l. to appoint an audit body when the company is required to draw up consolidated financial statements or when it controls companies legally subject to statutory audit.

The Articles of Association can also provide for the possibility to appoint a board of auditors (it. “collegio sindacale”), if the aforementioned parameters deem it compul­ sory. In this case, as well as in the case of Sole member audit bodies, the provisions for S.p.A. regarding the board of auditors shall be applied.

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.

DOING BUSINESS IN ITALY | 14

New Private Limited Companies: S.r.l.s. and S.r.l.c.r.

In the view of the Italian legislator, the relevant expenditure in terms of share capi­ tal and costs at the moment of incorporation of an ordinary private limited company (S.r.l.), were acting as a barrier for the development of new businesses in the country.

Therefore, two new types of S.r.l. were introduced at the beginning of 2012: the Sim­ plified Private Limited Company (“Società a responsabilità limitata semplificata” “SRLS”), provided for by the art. 2463-bis of the Italian Civil Code, and the Private Limited Company with Reduced Capital, (“Società a responsabilità limitata a capitale ridotto” - “SRLCR”), provided for by the art. 44 of Law Decree no. 83 of June 22nd, 2012, converted into Law no. 134 of August 8th, 2012.

S.r.l.s.

This new type of company is aimed to allow young people to easily establish new com­ panies or start-ups. The main characteristics of S.r.l.s. are: a) share capital between EUR 1 and 9,999; b) almost total exemption from incorporation costs; c) age limit for shareholders (they must be under 35); d) predetermined deed of incorporation, without any possibility of amendment; e) management of the company assigned to shareholders only.

S.r.l.c.r.

The second new type of company can be established only by individuals, irrespective of their age (however, shareholders are generally above 35), and not by legal entities.

The share capital must be between EUR 1 and 9,999 and it must be fully remitted to the administrative body at the date of incorporation. The deed of incorporation, which can be either a contract or an unilateral act, should contain all legally required elements.

Nonetheless, it gives shareholders more freedom in shaping the company. The mana­ gement of the company may be granted to either one or several shareholders, or to external professionals or individuals who are not part of the company.

Finally, the incorporation costs are similar to those of ordinary private limited com­ panies.

Other types of companies Other types of companies may be set up, 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, simple partnerships excepted, may form consortiums to coordi­ nate 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 no.188 dated 19/98/2005, which allows multinational enterprises to operate in the European Union through companies limited by shares that have an identical basic legislation and a referral to local legislation, limited to the aspects not governed by the regulations.

The European Company may be set up in different ways (by legal persons, with a mini­ mum capital of EUR 120,000):

DOING BUSINESS IN ITALY | 15

The company must be based in 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, as a new legal entity cannot be set up.

A final requisite for the SE is the special involvement of the employees in its business.

That includes information, consultation and participation by means of which the em­ ployees’ representatives may exercise influence on company decisions.

The European Company’s 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

S.r.l.

EUR 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

S.r.l.c.r.

EUR 1

2.2 Starting a business in Italy 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, (either natural or legal per­ sons), 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 notary public’s deed.

As a general rule, the process of setting up a company with share capital consists in the following phases: • 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 restricted current account. In the case of S.r.l. only, the payment may be replaced by an insurance policy or a bank guarantee of the same amount;

DOING BUSINESS IN ITALY | 16

•

valuation of all contributions in kind or credits by an expert registered with 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; • registration of the company with the Register of Companies; • any government authorizations required for particular activities.

The company will acquire legal status upon registration with the Register of Compa­ nies. For operations conducted before registration, responsibility is held jointly and without limit by those who took such actions and by the members that decided, autho­ rized or allowed these actions to be taken.

The deed of incorporation must report, among other information, the following: • the person’s or company’s name, date and place of birth or the state of incorpo­ ration, domicile or registered office, citizenship of each shareholder and, mostly for 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 share capital subscribed and paid-up; • 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 their attribution to the directors and representatives, the appoint­ ment 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 sha­ re capital provided that: • during the formation stage, the entire share capital subscribed must be paid up; • in case most shareholders terminate their affiliation during the life of the com­ pany, the payments still outstanding are made within 90 days; • a declaration containing the details of the sole shareholder is filed with the Regi­ ster of Companies by the directors or sole shareholder no later than 30 days from its entry in the register.

Partnerships Partnerships shall be set up by a notarial deed or by a private agreement authentica­ ted by a notary. The deed of incorporation must be recorded at the Register of Compa­ nies as a condition of the company’s legal acknowledgement.

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

DOING BUSINESS IN ITALY | 17

stake transfers and all relating conditions and limitations, 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 a notary public; • the book of meetings and resolutions of the Board of Directors or the Board of Management (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 (for S.p.A.) or the book of decisions of the board of auditors or of the sole 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 book of bonds and the book of meetings and resolutions of the General Meetings of Bond Holders must be kept.

If an S.p.A. has issued special financial instruments other than shares, a book must be kept indicating their characteristics, the amount of the instruments issued and cancel­ led, 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 consecu­ tively by either the Register of Companies or a notary public.

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.

2.3 Legal, accounting and audit requirements 2.3.1 Legal requirements All companies and individual businesses must be registered with the local Register of Companies of its main place of business.

The details of registration with the register of companies must be indicated on all company’s documents and correspondence.

A specific section in the Register of Companies, containing details of companies conducting management and coordination activities (parent companies) and those subject thereto shall be reported. In particular, the details of the body performing the management and coordination activity on the company must be reported on its docu­ ments and correspondence.

2.3.2 Accounting requirements All companies, be they companies with share capital or partnerships, are required to keep books and records of accounts, as well as keep in order all original documents sent and received for each concern. The accounting documents must be kept for no less than ten years.

Companies with share capital are also required to prepare their annual Financial Sta­

DOING BUSINESS IN ITALY | 18

tements and to file them with the Register of Companies, within 30 days from its ap­ proval by the shareholders. Partnerships are required to draw up an annual report indicating profit and loss, for tax purposes, without filing obligation to the Register of Companies.

Accounting standards are described in the Chapter 4 further below.

2.3.3 Audit requirement Auditing is required for: 1. S.p.A.; 2. S.r.l. with a share capital equal to or higher than EUR 120,000 (the minimum amount required for an S.p.A.) or exceeding two of the following limits in two consecutive years: • total assets of: EUR 4,400,000; • sales and services revenues of: EUR 8,800,000; • average number of employees during the year: 50.

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

The audit of the financial statements (it. “revisione legale dei conti”) shall be perfor­ med 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 being appli­ cable, the Italian auditing standards need to be approved by CONSOB (the Italian Stock Exchange Authority).

2.3.4 Conduct of the audit In Italy, audit can be performed by the Board of Statutory Auditors (it. “Collegio Sinda­ cale”) which may be in charge of both supervision on the compliance with the law and the Articles of Association and the statutory audit of the financial statements.

However, the two tasks can be also split and assigned to two different bodies: the supervision can be given to the Collegio Sindacale and the audit of the financial state­ ments (including the quarterly checks on the accounts) can be given to an audit firm or an auditor. The separation of the two tasks aforementioned is compulsory for listed companies and companies bound to prepare Consolidated financial statements.

1. S.p.A. The statutory audit is conducted by: • an audit firm registered with CONSOB, if the S.p.A. is a listed company or control­ led by a listed company; • an audit firm entered in the register of auditors, but to which the regulations on companies registered with CONSOB apply, solely with regard to that particular assignment, 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 (for example when the S.p.A. is an Entity of Public Interest such as banks, insurance companies etc. not listed).

DOING BUSINESS IN ITALY | 19

2. S.p.A. not listed and not controlled by listed companies. The statutory 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 S.p.A. 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 or an auditor.

3. S.r.l.

When the audit is compulsory or when it is voluntarily opted for by the company, it may be conducted by an audit body (it. “organo di controllo”) or an auditor. Art. 2477 of the Italian Civil Code, as amended by Decree no. 5 dated February 9th 2012, states that, if not otherwise provided for by the Articles of Association, the audit body in S.r.l. is made up of only one member (Sole auditor body). When compulsory, the Articles of Association may also provide the possibility to appoint a Board of Statutory Auditors (it. “Collegio Sindacale”). In this case, as well as for Sole member audit bodies (it. “Sin­ daco Unico” or “organo monocratico”), the provisions for S.p.A. regarding the Board of Statutory Auditors shall be applied.

4. Listed companies or subsidiaries of listed companies.

The supervision on the operating activities is performed by the Collegio Sindacale while 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, whi­ le the statutory audit of the financial statements, including the quarterly checks, by an audit firm registered with CONSOB (the Italian Stock Exchange Authority).

Please note that the Legislative Decree no. 39/2010 cancelled the obligation for the companies performing statutory audit activities in listed companies to be registered with CONSOB. Nevertheless, at present, the implementing decrees making the above provision enter into force have not been issued yet. Therefore listed companies are still bound to appoint audit firms registered with CONSOB to carry out their Statutory audit.

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

DOING BUSINESS IN ITALY | 20

Timetable of approval and audit of financial statements S.p.A. Approval of the Financial Statement by the board of direc­ tors and notification thereof to the audi­ tors, 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

General Meeting held to approve the Financial Statements Filing of the financial statements and other documents to the register of companies

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

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

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

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 Establishing of a branch in Italy Secondary offices (which are not legal entities) of foreign companies in Italy are mainly characterized by two 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 secon­ dary 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, duly registered with the Register of Companies; 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 foreign body 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 formalities as an Italian company in terms of filing of the financial statements and other company documents.

DOING BUSINESS IN ITALY | 21

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 its business activities.

The overall income of a permanent establishment in Italy of a company residing abro­ ad is determined according to the rules governing the determination of the company income, as if it were a company domiciled on the Italian territory.

Representative office If the business office is used only 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; there is no ground for a permanent establishment under a tax perspective.

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 entities, i.e. by determining the individual income independently, based on the regulatory provi­ sions 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 respective offices.

Two main compulsory accounting systems may be envisaged, (according to the cha­ racteristics of the company and the amount of income declared in the previous year): one ordinary and one simplified (suitable for small entities 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 an amount payable by all companies registered or entered in the Register of Companies (including permanent establishments) to the local Chamber of Commerce each year.

DOING BUSINESS IN ITALY | 22

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

Book of accounts

Accounting registers

Ledger: contains all the transactions con­ ducted 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 mon­ ths 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: contains the list of 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 whose income exceeds EUR 5,164,568.99 and stocks exceed EUR 1,032,913.80 for two consecutive years.

The auxiliary warehouse documents must be updated within max. 60 days.

VAT registers of invoices receivable: contains a record of invoices issued relating to all the company’s receivable transactions. The register must be updated within 60 days from the date of the transaction and must be printed within three months from the income tax return deadline.

Sales VAT register: addresses retail traders and contains a record of the receivable tran­ sactions conducted. It must be updated within 60 days and must be printed within three months from the income tax return deadline.

Purchase VAT register: invoices for pur­ chases relevant for VAT purposes should be entered in this register. It has to 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, split into three stages, as follows: a) determining and acknowledging the motivation for winding up the company. b) carrying out of the liquidation activities. c) cancellation of the company from the Register of Companies.

DOING BUSINESS IN ITALY | 23

The dissolution reasons are common to all types of companies, i.e. the expiration 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 specific company types.

For companies limited by shares winding up can be brought about by: • the company’s impossibility to function, • the repeated lack of action by its shareholders, • the company’s being declared invalid, • the reduction of its share capital below the legal minimum, • being unable to pay off the stake of a shareholder who has withdrawn from the company, following a resolution passed in this sense by the shareholders’ mee­ ting, plus • other reasons mentioned in the incorporation deed and in the Articles of Asso­ ciation.

Except for situations when the winding up of the company takes place before its na­ tural expiry date and for the reasons mentioned in its incorporation deed, the winding up becomes effective from the date of the publication in the Register of Companies of the statement by 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, in order to safeguard the company’s equity and assets, the management remains with the directors until the company’s books are handed over and the state­ ments of accounts are drawn up and handed to the liquidators. In the case of breaching actions or omissions damaging the company, the directors are personally and jointly liable in front of shareholders, company’s creditors and third parties.

Furthermore, it is the responsibility of the directors to summon the shareholders’ me­ eting for passing the liquidation resolutions.

The liquidators, who are appointed by either the shareholders’ meeting (with the same vote majority established for the amendment of the Articles of Association), or by the Court, are responsible for drawing up the yearly financial statements to be submitted to the approval of the shareholders’ meeting. A progress report and documents rela­ ting to the liquidation, as well as the criteria used must also be enclosed.

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

After having settled all company’s liabilities available, the liquidators divide the remai­ ning assets of the company among its shareholders. Final liquidation financial state­ ments are then drawn up, in which the parts due to each shareholder are established.

These financial statements are signed by the liquidators and the reports of the Board of Statutory Auditors and of the external auditor are enclosed and filed 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 green light for the liquidators to distribute the relating assets . This is where the tasks and duties of the liquidators stop.

As a 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, with a resolution of its shareholders’ meeting (duly passed with the num­ ber votes necessary for amending the Articles of Association) the company may re­

DOING BUSINESS IN ITALY | 24

solve the revocation 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.

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

A private limited company (S.r.l.) can be established either 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. (reference is made to a standard S.r.l.; slightly diffe­ rent procedures apply to S.r.l.s. and S.r.l.c.r.) consists of: • drafting 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 restricted account or through the stipulation of an insurance policy or a bank guarantee for the same amount; • valuation of any contributions in kind or credits by an expert registered with 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; • submission of the incorporation deed and Articles of Association to the Register of Companies; • registration of the company with the Register of Companies; • obtainment of all government authorizations required for specific activities (in some cases the authorizations may have to be obtained by the date of incorpo­ ration).

The company acquires legal status upon 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 tran­ sfer 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 interested in setting up a company might not be able to do so directly. In such cases, a power of attorney may be granted to another person, thus granting him/her the power to undertake a legal act on their behalf.

Furthermore, foreign powers of attorney must be officially translated into Italian. In addition, for being used in Italy, they require legalization or apostillation.

Incorporation of a S.p.A. Just like the S.r.l., a company limited by shares (S.p.A.), whose minimum capital is EUR 120,000, 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:

DOING BUSINESS IN ITALY | 25

• •

the Articles of Association must be drawn up in any case; it is not possible to replace the payment of the share capital by an insurance policy or a bank guarantee.

2.8 The trust in Italy Trusts have been recognized in the Italian legal regulations since the entry into force in 1992 of Law no.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 fal­ ling 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 either 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 institu­ tion, 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 accounting books.

Two types of Trust can be distinguished: • with identified beneficiaries, whose income is attributed transparently to the be­ neficiaries 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 performed through public deed or private deed authentica­ ted by a notary public, is subject to registration tax in a fixed amount (EUR 168).

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 di­ scretionary 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 to inheritance and gift tax again, 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

DOING BUSINESS IN ITALY | 26

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 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 activity.

Trusts set up in black list countries are deemed to be resident on 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 trusts) are transparent, and the beneficiary is taxed on the income produced by the trust.

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3 Taxation 3.1 General structure The Italian tax system is mainly based on the following taxes: • Corporate income tax (IRES); • Personal income tax (IRPEF); • Regional tax on productive activities (IRAP); • Value Added Tax (IVA); • Succession and donation duty; • Local taxes: national tax on real estate (IMU), etc.; • Registration tax and other indirect taxes on property transfers.

3.2 Corporate income tax (IRES) As from January 1st 2004, all income produced by companies and institutions is subject to the corporate income tax known as IRES (it. “imposta sui redditi delle società”).

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

The 27,5% tax rate is applied on the taxable income (tax assessment basis) and has to be paid in 2 initial down payments and one balance payment.

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

Withholdings are generally completely deductible from the tax. If the sum of the pay­ ments on account and the withholdings exceed the tax payable, such excess may be deducted from the tax payable for the following tax period, reimbursed or used to offset any other tax and social security debts, at the taxpayer’s option. nies as a condition of the company’s legal acknowledgement.

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 compa­ nies resident in the country; • public and private commercial institutions other than companies and trusts resi­ dent 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 the income produced in Italy or in case of a branch located in Italy.

Companies and institutions are considered to be resident when one of the following condition is met for most of the tax period: • the registered office is in Italy; • the administrative office in Italy; • the main object of the activities is in Italy.

DOING BUSINESS IN ITALY | 28

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 the Italian accounting standards.

As from 2011, in principle, tax losses may 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 have been provided for.

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 account.

Some of those expenses are 100% deductible, some of them are partially deductible and other are not deductible at all.

As a general principle, all the expenses made in order to carry on the company are eli­ gible to be fully 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 de­ ducted for tax purposes. The following list, gives some examples of deductible costs and extent of their deductibility: • Depreciation: they are deductible pursuant to a decree (Min. Decree 31.12.1988) which establishes the different percentages of annual deductible depreciation for specific assets; • Telephone costs: they are deductible for 80% of their amount; • Costs related to cars: if the car is used exclusively for business purposes, they are entirely deductible, otherwise, they can be deducted in different percentages (70% - 27,5%) depending on the user and the conditions for use; • Cost of labour: all the costs related to wages, social and health contributions paid by the company are deductible; • Other taxes: apart from IRAP, (deductible only to an extent of 10% of the amount paid), other taxes are deductible in the fiscal year they have been paid; • Provisions: most provisions cannot be deducted for tax purposes since they are not relevant under a tax perspective; • Gifts: they are entirely deductible if represented by goods whose value is inferior to EUR 50 each (gross VAT); • Entertainment expenses: deductible within the following limits:

a. 1.3% of the annual sales (for annual sales below EUR 10 million)

b. 0.5% of the annual sales (for annual sales within EUR 10 million and EUR

50 million)

c. 0.1% of the annual sales (for annual sales of more than EUR 10 million) • Costs for goods and services purchased from companies residing in tax havens are deductible only if certain conditions are met. In any case, the relating amoun­ ts have to be indicated in the annual tax return.

DOING BUSINESS IN ITALY | 29

3.2.4 Controlled Foreign Company (CFC) The income produced by businesses, companies or other entities, resident or establi­ shed in a black list country, controlled directly or indirectly by a resident person (in­ dividual, 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 countries previously mentioned.

The above rules also apply to associated foreign companies, i.e. to participations exce­ eding 20% (10% if the company is listed). 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 tax rates inferior to 50% of the effective Italian 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 in line with OECD Guidelines are applicable in Italy. In particular, the rules apply to: a. foreign companies which control Italian enterprises they perform transactions with; b. Italian enterprises which control foreign companies they perform transactions with; c. Italian or foreign companies which control both entities (Italian enterprises and fo­ reign companies) involved in the transaction.

The Italian practice define “foreign companies” as any kind of business entity, legally recognized in the foreign country, even if it has only one partner. The Italian practice defines “Italian companies” as 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 prin­ ciple recommended by the OECD Guidelines, according to which the price is negotiated by independent entities.

The Italian practice recommends seven different methods to determine a price in ac­ cordance 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; 5.

Comparable profit method; 6.

Return on invested capital method; 7.

Market gross margin method.

There are no legal obligations in terms of documentation on the price policy used within the business group. However, it is recommendable to arrange documentation to

DOING BUSINESS IN ITALY | 30

prove the transfer pricing method adopted within the group.

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

The annual tax return must include the following information : • 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 July 22nd, 2010), and the documentation requirements broadly replicate the recom­ mendations of the EU Code of Conduct on transfer pricing documentation for associa­ ted 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, towards a more comprehensive infor­ mative package (please see the table at the end for a detailed list of the documenta­ tion 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 do­ cumentation 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 additio­ nal to the one 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 ta­ xpayer’s ordinary business; • A description - not limited to the list - of any advance pricing agreements conclu­ ded with the tax authorities in other EU countries; • 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 of the situation of the previous fiscal year; • The reasons behind the exclusion, if applicable, of the use of the traditional tran­ sactional 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, with the only exception of the Master File prepared abroad for

DOING BUSINESS IN ITALY | 31

• •

• •

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 tho­ se not relevant to the taxpayer’s ordinary business activity; be updated annually, except for “small and medium sized enterprises” (enterpri­ ses with an annual turnover of less than EUR 50 million) which are free to update the economic analyses (e.g. the benchmark studies) included in the documenta­ tion every 3 years, if no significant amendments have been made; be signed by the taxpayer’s legal representative on every page and with extended signature on the last page; be made available to the Tax Authorities in electronic format, within 10 days from the request.

The documentation will not be considered “suitable” to support arm’s length in­ ter-company transactions (and therefore unable to protect the taxpayer that has pre­ pared it against potential penalties) if: • the information provided is not complete and compliant with the regulations, re­ gardless of whether the documentation meets the formal requirements set forth in the regulations, and/or • 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 stan­ dard 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.

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

Country Albania Algeria Argentina Armenia Australia Austria Azerbaijan Bangladesh Belarus Belgium

DOING BUSINESS IN ITALY | 32

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

Applicable From 21.12.1999 30.06.1995 15.12.1983 05.05.2008 05.11.1985 06.04.1985 25.02.2011 07.07.1996 30.11.2009 29.07.1989

Brazil Bulgaria Canada China Croatia Cyprus 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 1 Mauritius 2 Mexico Moldavia Morocco Mozambique Netherlands New Zealand Norway Oman Pakistan Philippines Poland Portugal

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 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

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 25.05.1987 22.10.2002 27.02.1992 15.06.1990 26.09.1989 15.01.1983

DOING BUSINESS IN ITALY | 33

Qatar Republic of Macedonia Romania Russia Saudi Arabia Senegal Singapore 3 Slovakia Slovenia South Africa South Korea Ex-Soviet Union 4 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 5 Zambia

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

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

Modified by L. 03.05.210 no.77 applicable from November 24, 2010 Additional protocol dated 31.08.2012 Additional protocol dated 14.09.2012 4 The countries emerging from the dissolution of the Soviet Union apply the Treaty, unless a spe足 cific national convention has been stipulated and enforced. The Italy-Soviet Union treaty currently applies to the following countries: Kyrgyzstan, Tajikistan and Turkmenistan 5 The treaty stipulated with Yugoslavia currently applies to the following countries: Bosnia Herze足 govina, Serbia and Montenegro.

1

2 3

3.2.8 Dividends Income of companies and associations subject to IRES is only taxed when they are produced. The subsequent 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 the profits received.

DOING BUSINESS IN ITALY | 34

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 countries with a preferential tax sy­ stem are fully taxable.

Dividends paid to companies based in member states of the European Union (EU) and in members of the European Economic Area (EEA) that allow a suitable exchange of information with Italy, are taxed at source at a rate of 1.375%. ces resulting from the agreement signed.

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

Capital losses are not deductible.

The legal conditions are the following: 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 du­ ring the period of ownership; c) tax residence of the subsidiary in a country 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 conditions set out in letters c) and d) must be met from the beginning of the tax period prior to realization. ces resulting from the agreement signed.

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

Any excess of interest payables can be deducted up to 30% of the EBITDA plus cost of financial leases (ROL).

Any further excess cannot be deducted during the taxation period, but can be carried forward and eventually deducted in later periods, on the condition that the 30% of the EBITDA relevant to each financial year is higher than the difference between the total interest payable plus assimilated costs and the total of interest receivable and assimilated revenue.

On the other hand the excess of the above ROL can be carried forward in later periods in order to offset any excess of interest payables.

In order to apply the system described, interest payable and interest receivable, assi­ milated 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.

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

DOING BUSINESS IN ITALY | 35

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/ his/her 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 min. 10% and max. 50%.

These conditions must be met from the very first day of the tax period of the subsi­ diary in which the option is exercised and remain in force 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 sharehol­ ders 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 EUR 7,500,000; • the company does not have participations with the participation exemption re­ quirements.

3.2.12 National and world tax consolidation Companies belonging to the same group may opt for the consolidation of their com­ pany 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 return, calculating the overall global income ba­ sed on the algebraic sum of the overall net income declared by each of the com­ panies 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 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 participants submit a decla­ ration of large-scale gross earnings for the same taxation period that is not fully used for deduction.

DOING BUSINESS IN ITALY | 36

These rules can be applied with reference to excesses carried forward, excluding any excess 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 IRES rate reductions may not exercise the option.

The following conditions must also be met: • residence in Italy 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-resi­ dent 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 conditions 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 ba­ lance 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 the valid exercise of the option.

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 calendar year.

Persons liable for tax The following persons are liable to tax: • natural persons resident on Italian territory in respect of the entire income owned; • natural persons not resident on Italian territory solely for the income produced in Italy. Italian residents include natural persons who, for most of the tax period, meet at least one of the following conditions: • they are registered in the registers of the population resident on the national territory; • they are domiciled in Italy (domicile to be understood as the principal office for business and interests, including moral and company interests); • they are resident in Italy (regular residence).

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

DOING BUSINESS IN ITALY | 37

The categories contributing to the formation of the overall income are as follows: • land income, relating to land and buildings situated on the Italian territory; • capital income; • income from employment; • income from self-employed; • 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 2012) are as follows: Income

Rates

Up to EUR 15,000 From EUR 15,000 to EUR 28,000 From EUR 28,000 to EUR 55,000 From EUR 55,000 to EUR 75,000 Over EUR 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. Deductions are usually equal to 19% of the charges borne, reducing the gross taxation as calculated.

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

Starting from 2013, the 23% and 27% tax rates will be reduced to 22% and 26% re­ spectively.

Regional and municipal 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 (established by the regional government on a yearly basis), falls between a minimum of 1.23% and a maximum of 1.73% (from 1.73% to 2.03% if a Region does not reach the pre-agreed target of its financial statements); • a municipal surcharge composed of a first rate (equal throughout the national territory and established every year 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 taxed on the income produced in Italy on a territorial basis.

The following incomes are deemed to be produced in Italy:

DOING BUSINESS IN ITALY | 38

• •

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, except 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 (exceptions: e.g. 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 per­ sonality are subject to corporation tax (IRES, Imposta sul Reddito delle Società).

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

Moreover, for corporation tax purposes (IRES), the incomes indicated above are de­ emed to be produced in Italy; for non-resident companies and other entities, the business income includes capital gains and capital losses relating to assets used 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 is usually subject to a 20% withholding tax, unless otherwise stated by the tax 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 acti­ vities is subject to tax for the 49.72% of its amount.

Dividend income received by individuals not related to business activities is subject to: • ordinary tax for the 49.72% of its amount, if related to qualified participations (20% advance withholding tax also applies to foreign source dividends); • 20% substitutive final tax withheld at source for the total amount, if related to non-qualified participations.

DOING BUSINESS IN ITALY | 39

Qualified participations are participations entitling to: • more than 2% of voting rights in an ordinary meeting or 5% of capital or corpo­ rate assets of quoted companies; • more than 20% of voting rights in an ordinary meeting or 25% of capital or cor­ porate 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. Reduced rates and reimbursement may apply (leading to a 15% ef­ fective tax rate), provided that certain conditions are met.

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

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

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 wi­ thholding 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), foreign state securities (only white list countries), 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 indivi­ duals; the withholding tax is applied on a final basis.

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

Payments to associated EU Companies are exempt under the EC Interest and Royalties Directive, provided that certain conditions are met.

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

Dividends

Country

Individuals, companies

Qualifying, companies

Albania Algeria Argentina Armenia Australia Austria Bangladesh Belarus

10 15 15 10 15 15 15 15

10 15 15 5 15 15 10 5

DOING BUSINESS IN ITALY | 40

Interest

Royalties

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

5 5/15 10/18 7 10 0/10 10 6

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 Mauritius Mexico Moldova Montenegro Morocco Mozambique Netherlands New Zealand Norway Oman Pakistan

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 15 15 15 10 15 15 15 15 15 10 25

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

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 0/– 0/15 5 10 0/10 0/10 0/10 0/10 0/15 0/5 30

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 15 0/15 5 10 5/10 10 5 10 5 10 30

DOING BUSINESS IN ITALY | 41

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 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

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

0/10/15 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

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 on the terri­ tory of several regions, the distribution of the taxable income, and, therefore, of IRAP, is made in proportion to the cost of the employees working in the various regional establishments and offices.

3.6.1 Persons subject to IRAP IRAP is due to those regularly engaged, in the Region, an independently run activity to the production of goods or services. In particular, the following persons are subject to IRAP:

DOING BUSINESS IN ITALY | 42

• • •

individuals receiving company income; individuals receiving income from self-employed work; joint-name partnerships, limited partnerships and those equivalent to simple par­ tnerships 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 The determination of the tax base is different, depending on whether the taxpayer is a commercial company, an agricultural producer, public or private non-commercial institutions or public administration offices.

It should be noted that, if the taxpayer performs different activities, the tax base on which the rate applies is made only by the sum of the positive figures. For example, if a taxpayer has a tax base of EUR 100,000 relating to a commercial company and is also an agricultural producer using a tax base equal to EUR -20,000, the rate will be applied to a tax base of EUR 100,000.

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, va­ riations in stocks (if positive) and other operating income and revenues, and the nega­ tive components, consisting solely of the cost of purchasing goods and services, the cost incurred for using third party goods, variations in stocks (if negative), deprecia­ tion, 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 (ban­ ks, financial institutions and companies and insurance companies) and, in some cases, different rates are applied as well.

3.7 Value added tax (VAT) VAT is applied on “value added” in the sense that, by means of a system of reimburse­ ment charges and deductions, tax is payable on the increase in value of goods or ser­ vices in the specific phases of production and trade, until it reaches the final consumer who bears the full cost of the tax.

DOING BUSINESS IN ITALY | 43

3.7.1 Tax assessment basis and rates There are three conditions that must be met for a transaction to be subject to VAT: • objective condition: there must be a transfer of goods or provision of services; • subjective condition: the operations must be carried out in running business or in practising arts and professions; • territorial condition: the operations must be carried out within the Italian borders.

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

VAT substantially applies to the following operations: • transfer of goods made in Italy in running business or in practising arts and pro­ fessions; • provision of services in Italy in running business or in practising arts and profes­ sions; • intra-EU purchases of goods from another EU member state in running busines­ ses or in practising arts and professions; • purchases made by foreign countries of some services carried out in Italy in run­ ning businesses or in practising arts and professions; • imports of goods from non-EU countries, made by anyone.

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

Some operations are, in fact, tax exempt, while others fall outside the scope of VAT. The former are operations that respect the three conditions but are excluded by express provision of law, such as the sale of postage stamps and stamp duties, financial expen­ ses, medical services, insurance operations, etc. The latter, while physically carried out in Italy, are considered for presumption of law as if they were not carried out in Italy and therefore not subject to 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 VAT rate is 21%.

In addition to the ordinary rate, there are two reduced rates, 10% and 4%, and the “zero” rate which applies to certain so-called “non-taxable” operations (exports of goods, provision of some international services or services relating to 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 an operation relevant for VAT purposes 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

DOING BUSINESS IN ITALY | 44

VAT is applied through the reverse charge mechanism by the recipient of the goods or services. If the foreign operator has a permanent establishment in Italy, it/he/she should apply for an Italian VAT number and comply to all legally set provisions, as if it were a national person.

If the foreign operator does not have a permanent establishment in Italy, it/he/she may also: • appoint an Italian VAT tax representative, i.e. an individual person 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 for VAT purposes in Italy, 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 reciprocal assistance agreements on indirect taxation.

The appointment of the tax representative or direct identification should follow a spe­ cial 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 goods or services rendered directly from abroad, the transaction shall be taxable in Italy through the reverse charge mechanism by the recipient (pur­ chaser) 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 the 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 goods or services directly from abroad to a final consumers (so called B2C transactions) applying for a VAT identification through their Italian VAT number (VAT Rep, Permanent establishment or direct identification) shall become necessary.

The VAT position of a person remains valid until the termination of all 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 payable6; • periods for of settlements and payments of VAT; • procedure for the completion and submission of VAT returns;

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 with reference to two months before, instead of the month immediately before (Ministerial Circular no. 29 of 10 June 1991). For example, the VAT paid in February 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 computa­ tion made in January, in accordance with the documents [of the month immediately preceding] of January.

6

DOING BUSINESS IN ITALY | 45

•

procedure for the completion and submission of VAT communication of tran­ sactions with business entities located in countries with privileged tax systems (TAX HAVEN or BLACK LIST COUNTRIES). The subjects whose business is rele­ vant for VAT purposes are obliged to submit a monthly/quarterly VAT return whi­ ch 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 consi­ dered Black List or Tax Haven on May 4th, 1999 and November 21th, 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 been conducted during the year. There are a few special cases that are exempt from this obligation.

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. agriculture, publishing, travelling, tourism, etc.)

Customs warehouses and “VAT warehouses” Special rules establish the conditions for create 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 pay­ ment 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 its 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 installed 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.

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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, in the absence of specific agreements between the owners, the owner of the main property is bound to purchase the secondary property.

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.

3.8.1.2 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 con­ tract).

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 cata­ stale”), depending on the period of possession during the calendar year, the percen­ tage 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 main residence, the relating income is not taxed.

Income from buildings/lands belonging to companies or relating to commercial busi­ nesses 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.

The new tax called “cedolare secca” - which replaces those currently due on rental income made by natural persons (IRPEF, additional IRPEF, registration tax as well as

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the stamp duty) is thus alternative to the ordinary taxation and cannot be applied by companies.

The 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 negotiated rents is also applicable.

3.8.3 Property rental Contractual forms Two types of contract have been provided for by the regulations: • Open-rent contracts (it. “contratto a canone libero”) • The parties may stipulate rental contracts for a period of not less than four ye­ ars, renewed for other four years (6 years + 6 years if premises are leased for commercial use). Automatic renewal does not take place if the owner needs the property beforehand for specific reasons.

• 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 agre­ ements between associations of owners and tenants). The legislator has provided a series of tax discounts for this type of contract.

VAT on building lease contracts • Contracts regarding non instrumental buildings are generally VAT exempt. VAT applies (provided the lessor exercises the 21% VAT application option in the contract) in case of buildings used as “social housing”, pursuant to Min. Decree 22/4/2008, and in case of leases carried out by companies which have built or refurbished the building for lease.

• Contracts regarding instrumental buildings are generally VAT exempt unless the lessor exercise the 21% VAT application option in the lease contract.

Registration tax on building 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 instrumental buildings rented by owners not subject to VAT. The registration tax is applied with a 1% rate for instrumental buildin­ gs rented by VAT subjects (in this last case, as already pointed out, the lease is VAT exempt unless a 21% VAT option is applied by the lessor in the lease contract). In any case, the minimum registration tax to be paid cannot be inferior to EUR 67. All property leasing and rental contracts of any amount must be registered, unless the duration is less than 30 days.

3.8.4 Taxes on property transfer The transfer of instrumental or housing property is subject to the payment of both in­ direct 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:

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A. Housing property a. If the vendor is a building company and the transfer of the housing property takes place within five years from the completion of the building and the buyer is either a private individual or a business entity, indirect taxes payable on the sale/ purchase are as follows: VAT: Registration tax: Mortgage tax: Land tax:

4-10-21% (depending on the type of property) Fixed: EUR 168 Fixed: EUR 168 Fixed: EUR 168

b. If the vendor is a building company and the transfer of the housing property takes place after five years from the completion of the building and the buyer is either a private individual or a business entity, indirect taxes payable on the sale/ purchase are as follows: VAT: Registration tax: Mortgage tax: Land tax:

exempt or subject to VAT if the vendor exercises the option to tax 7% - (3% if first house) in case of VAT exempt; Fixed at EUR 168 in case of VAT option.

2% (fixed at EUR 168 if first house) in case of VAT exempt; Fixed at EUR 168 in case of VAT option.

1% (fixed at EUR 168 if first house) in case of VAT exempt; Fixed at EUR 168 in case of VAT option.

The reverse charge mechanism applies in the case of sale of housing property at business to business level and when the vendor (building company) has opted for the application of VAT. c. If the vendor is a commercial organization (i.e. sole trader/business partnership/ company) and the buyer is either a private individual or a business entity, indirect taxes payable on the sale/purchase are as follows: VAT: Registration tax: Mortgage tax: Land tax:

exempt 7% (3% if first house) 2% (fixed: EUR 168 if first house) 1% (fixed: EUR 168 if first house)

d. If the vendor is a private individual, 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: EUR 168 if first house) 1% (fixed: EUR 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

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enjoyed and the relevant penalties will be applied, unless he/she purchases another property to be used as his/her principal residence within one year.

B. Instrumental property a. If the vendor is a building company and the transfer of the instrumental property takes place within five years since the building is completed and the buyer is either a private individual or a business entity, indirect taxes payable on the sale/purchase are as follows: VAT: Registration tax: Mortgage tax: Land tax:

21% Fixed: EUR 168 3% 1%

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

exempt or subject to VAT if the vendor exercises the option to tax Fixed: EUR 168 3% 1%

The reverse charge mechanism applies in the case of sale of instrumental property at business to business level and when the vendor (building company or commer­ cial organization) has opted for the application of VAT. 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 on property (IMU) and other local taxes IMU is the municipal tax charged on the possession of buildings, buildable areas and agricultural lands situated within the Italian territory, intended for any use, including property used in performing company activities.

The owner of the property or holder of the real right of usufruct, use, residence, em­ phyteusis or taxable area thereof is required to pay the municipal tax. In case of a financial lease, the tenant of a real estate is also subject to the tax.

The tax assessment basis is represented: • • •

for buildings by the value obtained multiplying the cadastral rent increased by 5% by different multiplier (from 55 up to 160) based on the cadastral category; for building sites by the commercial value of the property at the 1st of January in the year of taxation; for land by the value obtained multiplying the cadastral income revalued by 25%

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by 110 in case of agricultural land, uncultivated, owned and run by farmers and professional agricultural entrepreneurs and by 135 in other cases.

The tax is calculated by applying to the tax assessment basis the basic rate of 0.76%.

Each municipality, as part of its own statutory authority, may vary such rate by max.

0.3% (increase or decrease), a range between 0.46% and 1.06% being thus determi­ ned.

There are, however, some reductions with regard to historical buildings and uninhabi­ table properties, and some exemptions exist for properties of public institutions, for religious or cultural activities and for specific land situated in mountainous or hilly regions.

3.10 Registration tax The tax must be paid for documents that must be compulsorily registered and docu­ ments that are registered voluntarily.

Documents referring to real estate or assets drawn up in Italy, corporate transaction papers 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 to be compulsorily registered.

With regard to the moment at which the obligation to register a document arises, a distinction is made between documents subject to registration “within a specified pe­ riod” 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 the court clerk’s offices for the purpose of administrative responsibilities, or with Public Administration offices, territorial pu­ blic bodies and control bodies.

3.10.2 Application of tax Tax is liquidated by the competent tax office through the application of a tax rate de­ termined 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 EUR 168.

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, as well as

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exempt provisions), the tax is always applied as a fixed amount. Exceptions are the le­ asing of instrumental assets which, despite their being subject to VAT, pay registration tax proportionally (1%).

The tax must be paid to the Inland Revenue at the time when the registration is reque­ sted. Public officials who have drawn up, received or authenticated the document, per­ sons 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, according to 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 independent farmers or agricultural cooperatives/ associations are subject to the reduced rate of 8% (or even lower if specific conditions occur).

3.11 Inheritance and gift tax The Legislative Decree no.262/2006 converted into law no.286/2006 has reintrodu­ ced both inheritance and gift taxes.

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).

Heirs and legatees shall pay this tax if they acquire ownership of the following proper­ ty and rights: • real estate and rights from real estate; the evaluation of the property is done by multiplying the cadastral revenue by the relevant coefficients, duly updated; • 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 (jewellery, furniture).

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

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

More specifically:

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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%

A special allowance of EUR 1,500,000 has also been introduced, exclusively for tran­ sfers to persons with a serious acknowledged disability, pursuant to Law 104/1992.

Transfers of companies, company branches, company shares and stock via “family pacts” to spouses and descendants are also exempted from inheritance and gift tax (Article 3, paragraph 4-ter, Law Decree 346/90 - Ministerial Circular 22.01.2008 n° 3/E - Ministerial Resolution 18.11.2008 n° 446/E). 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.

Formal obligations Inheritance statement (using appropriate form) must be presented to the relevant lo­ cal Inland Revenue Office (of the fiscal residence of the de cuius) within 12 months of the date when the inheritance becomes effective, which usually coincides with the date of a taxpayer’s death. 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 alleged death) must file the statement. The office calculates the tax based on the information declared and notifies the amount to the taxpayer.

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 pu­ blic 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.

The statement submitted to the local Inland Revenue Office may be amended by filing a substitute form by the end of the period (12 months).

After the expiration of the 12 month period, the original statement may be amended with a corrective form, to be filed within the set deadlines, as provided by rules.

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

In particular, tax regime varies depending on whether ships have been entered in the: • National Shipping Register; • International Shipping Register.

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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 crews entirely composed of EU resident sailors.

3.12.2 Systems applicable to ships entered in International Register The income deriving from the sailing of ships entered in the International Register con­ tributes 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 pur­ poses.

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 introduced a system for the fixed taxation of income deriving from the sailing of ships entered in the International Register aimed at: • 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 January 1st, 2008, by virtue of the 2008 Financial Law, this system can be ap­ plied to ships enrolled in the International Register performing the afore mentioned activities disregarding the navigation space (international or national) touched in pro­ viding concerned coasting services.

Share capital companies residing in Italy may join the fixed system. As of January 1st, 2008, by virtue of the 2008 Financial Law, shipping enterprises incorporated as part­ nerships 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 forwar­ ded to the competent tax authorities within three months from the beginning 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).

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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 ton­ nage.

The figure obtained is then corrected, according to the age of the ships.

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

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

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

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

It has to be noted that nearly all 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 refers and the tax payments on account for the year in course at the time the return is drawn up.

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

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

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

3.13.3 VAT An annual Value Added Tax return must also be filed, 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.

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Taxpayers who must make monthly payments must pay any amounts due by the 16th day of the month following the one 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. All credits will be deducted from the settlement in the following month or quarter.

By December 27th, 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 clo­ sure of the period in which the credit was established. The offsetting is not admitted for amounts exceeding EUR 516,456.90 per year.

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

From February 1st, 2010, taxpayers interested in offsets or refunds, must submit the credit arising from the annual VAT tax return separately. The taxpayer will thus benefit from the earliest date to compensate, which is March 16th, 2010.

With regard to annul VAT credit horizontal offsetting worth more than EUR15,000, it is stated that the annual statement which shows this VAT credit must necessarily bear the endorsement of the “declaration of consistency” (it. “visto di conformità”) of the data with 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 EUR15,000, the VAT return must be signed by the persons who have drawn up the audit report according to art.2409-bis of the Italian Civil Code, (Board of Statutory or Audit Firm).

With effect from January 1st, 2011, the horizontal offsetting of credits relating to di­ rect taxes is no longer permitted, wherever the taxpayer has not paid the direct taxes already assessed by the Tax Authorities: a 50% penalty is levied in case of failure to comply with such rule.

3.13.5 IMU As of today, the IMU (municipal tax on property) return is still in draft form.

Such return has to be prepared and submitted in case of change of taxable status by both previous and new taxable persons.

The filing must be made no later than 90 days from the date when the ownership of the property has been acquired or when relevant changes for tax calculation have occurred. For the 2012 financial year, the filing deadline has been rolled over to No­ vember 30th, 2012. The return is effective for the following years as well, provided that no change in the disclosed information and elements entailing adjustment of the tax due occur.

The tax is payable in two annual instalments: June 16th and December 16th. In case of

DOING BUSINESS IN ITALY | 56

main residence property, IMU may be paid in three instalments by June 16th, Septem足 ber 16th and December 16th.

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Pantheon, Rome

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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 (it. Organismo Italiano di Contabilità,“OIC”), that are conside­ red as interpretations of the general principles stated in the Civil Code.

In formulating the Italian GAAP, OIC gives due consideration to IFRS, and tries to com­ plete them as much as possible, in the light of the conditions and practices prevailing in Italy. In particular, the Legislative Decree no.39/2010 “Implementation of Directi­ ve 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” (Na­ tional Confederation of Commerce), the “Assirevi” (Association of the Italian Auditors), Italian Government Accountants, Confindustria (Italian Confederation of Industry), Ita­ lian 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 activi­ ties of the OIC are the following: • issue the Italian GAAP, for use in the preparation of financial statements for whi­ ch the application of the International accounting principles has not been provi­ ded, 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 accoun­ ting 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 com­ panies listed on 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.

• permit companies that are listed on exchanges outside of the EU and that cur­ rently prepare their primary financial statements using a non-EU GAAP (in most

DOING BUSINESS IN ITALY | 59

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 secu­ rities market have applied IFRS starting from 2005.

The European Commission has adopted the following wording for use in the no­ tes 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 February 25th, 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 fi­ nancial 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 state­ ments: 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 latest standards issued by OIC are the following: OIC 3 - (2006) OIC 4 - (2007) OIC 5 - (2008) OIC 6 - (2011).

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Moreover, the accounting standards here below are under revision: OIC 16 - Tangibles OIC 18 - Accruals and prepayments OIC 19 - Provisions for risks and charges - severance indemnities OIC 19 - Payables OIC 29 - Changes in accounting standards, accounting estimates and corrections of errors, events and extraordinary transactions, as well as events occurred after the balance sheet date OIC 13 - Inventories OIC 14 - Cash and cash equivalents OIC 15 - Receivables OIC 20 - Debt securities.

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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 no.163/2006 (i.e. Associa­ zione temporanea di imprese – a temporary business association which is a volun­ tary 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 regula­ tion 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 inde­ pendent 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 Articles of Association 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 sharehol­ ders agreements.

Such agreements, according to article 2341-bis of the Italian Civil Code have the pur­ pose of regulating the relationships (for a maximum period of five years) among sha­ reholders 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 stipulate an agreement which is able to restrict the competition in the market and therefore, become relevant for the antitrust law. statements: IFRS not permitted.

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5.3 Antitrust Law According to Article 10 of Law no.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, behaviours that realize abuse of dominant position, and mergers deemed to create or to stren­ gthen a dominant position in ways that eliminate or substantially reduce competition on a lasting basis.

Moreover, the Antitrust Authority may intervene in matters regarding abuses of eco­ nomic 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 no.287/1990 are prohibited: Agreements restricting the competition (so called “intese”): undertakings should compete in the market. On the contrary, sometimes undertakings conclude agree­ ments 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 no.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 ac­ quisition operation are relevant to Law no.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 opera­ tions. 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 no.287/1990 prohibi­ ts 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.

5.4 Distinguishing the trademarks 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

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prevent others using the same sign in commercial activities.

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

According to the Industrial Property Code (Legislative Decree no.30/2005 - articles 5 and 20), the trademark’s owner has the right to its exclusive use 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 no.40/94 of the European Union Council, it is possible to request from Italy the protection of a trademark within the entire territory of the European Union, which means that this trademark can be registered, transferred, wi­ thdrawn, invalidated or expired and its use can be prevented only for the whole Com­ munity.

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 or legal person from whatever 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 pa­ tent and trademark offices of the 27 Member States of the European Community or the Benelux Trade Mark Office.

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Cathedral of Santa Maria del Fiore, Florence

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

Foro Buonaparte 67 - 20121 Milan Tel. +39 02 89095151 Fax +39 02 89095143 Email: info@rsmta.it Website: www.rsmta.it Blog: blog.rsmta.it International Contact Partner Marcello Rabbia Email: marcello.rabbia@rsmta.it International Desk Livia Seniuc Email: livia.seniuc@rsmta.it Tel. +39 011 5613282

Rome Studio L4C di Lauri, Lombardi, Lonardo & Carlizzi Via delle Terme Deciane, 10 - 00153 Rome Tel. +39 06 5754963 Fax + 39 06 57288935 Contact Partner: Mauro Lonardo Email: mauro.lonardo@rsmta.it Milan Studio Gerla Associati Foro Buonaparte, 67 - 20121 Milan Tel. +39 02 89095151 Fax +39 02 89095143 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 Contact Partner: Marcello Rabbia Email: marcello.rabbia@rsmta.it

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RSM Italy Audit & Assurance S.r.l.

Via C. Torre, 23 - 20143 Milan Tel. +39 02 48518240 - Fax +39 02 48511938 Email: info@rsmitaly.com Website: www.rsmitaly.com International Contact Partner Andrea Tuccio Email: andrea.tuccio@rsmitaly.com Offices Milan, Rome, Padua, Empoli, Turin, Brescia, Agrigento

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Notes

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Notes

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Notes

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Porta Nuova business district, Milan

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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 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.

RSM International is the brand used by a network of independent accounting and consulting firms.

Each member of the network is a legally separate and independent firm. The brand is owned by RSM International Association. The network is managed by RSM International Limited. Neither RSM International Limited nor RSM International Association provide accounting or consulting services. The network using the brand RSM International is not itself a separate legal entity of any description in any The network is administered by RSM International Limited, a company registe­ red 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 tra­ demark 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. November 2012 © RSM International Association, 2012 © RSM Tax & Advisory Italy, 2012 © RSM Italy Audit & Assurance, 2012