Milan GMT
Studio Legale Tributario
+39 (02) 85141
Fax: +39 (02) 8901-0199 20123 Milan Italy
Via Meravigli -14
Principal Tax Contact
Stefania Radoccia, +39 (02) 851-43802 National Director of Tax
Mobile: +39 335-745-4259
Email: stefania.radoccia@it.ey.com
Business Tax Services
Alexia Pinter
+39 (045) 839-29-526 (resident in Verona)
Tax Policy and Controversy
Maria Antonietta Biscozzi
Mobile: +39 335-122-9923
Email: alexia.pinter@it.ey.com
+39 (02) 851-43312
Mobile: +39 335-122-9318
Email: maria-antonietta.biscozzi@it.ey.com
Pasquale Cormio +39 (02) 851-43267
Mobile: +39 320-430-4416
Email: pasquale.cormio@it.ey.com
Global Compliance and Reporting
Marco Cianchelli
+39 (02) 8066-93202
Mobile: +39 335-1231-519
Email: marco.cianchelli@it.ey.com
Giuseppe Mauri +39 (02) 8066-93902
Mobile: +39 335-1230-191
Email: giuseppe.mauri@it.ey.com
Massimo Milcovich
+39 (02) 851-43339
Mobile: +39 335-123-0199
Email: massimo.milcovich@it.ey.com
Marta Pensotti Bruni +39 (02) 851-43260
Mobile: +39 334-653-9803
Email: marta.pensotti-bruni@it.ey.com
Paolo Zucca, +39 (02) 851-43938 Capital Markets
Mobile: +39 335-123-1388
Email: paolo.zucca@it.ey.com
International Tax and Transaction Services – International Corporate Tax Advisory
Simone De Giovanni
Marco Magenta
+39 (02) 851-42645
Mobile: +39 334-217-6944
Email: simone.de-giovanni@it.ey.com
+39 (02) 851-43529
Mobile: +39 335-545-9199
Email: marco.magenta@it.ey.com
International Tax and Transaction Services – Transaction Tax Advisory
Roberto De Bernardinis
+39 (02) 851-43486
Mobile: +39 338-538-1456
Email: roberto.de-bernardinis@it.ey.com
Quirino Imbimbo +39 (02) 851-43565
Mobile: +39 334-8825-983
Email: quirino.imbimbo@it.ey.com
Alessandro Padula
Rossella Patella
Savino Tatò
+39 (02) 851-43243
Mobile: +39 347-322-1599
Email: alessandro.padula@it.ey.com
+39 (02) 851-43496
Mobile: +39 366-613-4232
Email: rossella.patella@it.ey.com
+39 (02) 851-43511
Mobile: +39 335-1230-0992
Email: savino.tato@it.ey.com
International Tax and Transaction Services – Japanese Business Services
Takahiro Kitte
+39 (02) 8066-93230
Mobile: +39 335-123-0052
Email: takahiro.kitte@it.ey.com
International Tax and Transaction Services – Tax Desk Abroad
Emiliano Zanotti
+1 (212) 466-9723 (resident in New York)
Mobile: +1 (646) 593-2609 Email: emiliano.zanotti2@ey.com
International Tax and Transaction Services – International Capital Markets
Marco Ragusa
Renzo Rivolta
Domenico Serranò
Giancarlo Tardio
+39 (02) 851-43926
Mobile: +39 335-123-0574 Email: marco.ragusa@it.ey.com
+39 (02) 851-43427
Mobile: +39 331-674-3230
Email: renzo.rivolta@it.ey.com
+39 (02) 851-43932
Mobile: +39 331-663-8427 Email: domenico.serrano@it.ey.com
+39 (02) 851-43947
Mobile: +39 335-679-3658 Email: giancarlo.tardio@it.ey.com
International Tax and Transaction Services – Transfer Pricing and Operating Model Effectiveness
Massimo Bellini
Davide Bergami
Giusy Bochicchio
Luigi Colantonio
+39 (02) 851-43428
Mobile: +39 331-674-3260 Email: massimo.bellini@it.ey.com
+39 (02) 851-43409
Mobile: +39 335-122-9309 Email: davide.bergami@it.ey.com
+39 (02) 851-43650
Mobile: +39 335-602-2681 Email: giusy.bochicchio@it.ey.com
+39 (02) 851-49466
Mobile: +39 346-507-6349
Email: luigi.colantonio@it.ey.com
Antonfortunato Corneli, +39 (02) 851-43911
Capital Markets
Alfredo Orlandi
Tax and Finance Operate
Davide Bergami
Business Tax Advisory
Marco Cristoforoni
Mobile: +39 335-815-6168
Email: antonfortunato.corneli@it.ey.com
+39 (02) 851-43465
Mobile: +39 335-153-3674
Email: alfredo.orlandi@it.ey.com
+39 (02) 851-43409
Mobile: +39 335-122-9309
Email: davide.bergami@it.ey.com
+39 (02) 851-43250
Mobile: +39 335-122-9736
Email: marco.cristoforoni@it.ey.com
Giovanni Lettieri
People Advisory Services
Fabrizio Cimino
Paolo Santarelli
Indirect Tax
Anselmo Martellotta
Stefano Pavesi
Legal Services
Daniele Caneva
Giovanni Casucci
Oriana Granato
+39 (02) 851-43516
Mobile: +39 335-565-1957
Email: giovanni.lettieri@it.ey.com
+39 (02) 851-43241
Mobile: +39 335-1425-985
Email: fabrizio.cimino@it.ey.com
+39 (02) 851-43271
Mobile: +39 335-1233-151 Email: paolo.santarelli@it.ey.com
+39 (02) 851-43485
Mobile: +39 338-9356-172 Email: anselmo.martellotta@it.ey.com
+39 (02) 851-43646
Mobile: +39 366-6149-252 Email: stefano.pavesi@it.ey.com
+39 (02) 851-42999
Mobile: +39 339-797-9744
Email: daniele.caneva@it.ey.com
+39 (02) 851-49490
Mobile: +39 333-189-6753
Email: giovanni.casucci@it.ey.com
+39 (02) 851-49387
Mobile: +39 334-505-2215
Email: oriana.granato@it.ey.com
Stefania Radoccia +39 (02) 851-43802
Mobile: +39 335-745-4259
Email: stefania.radoccia@it.ey.com
Bologna GMT +1
Studio Legale Tributario +39 (051) 278-411
Via Massimo D’Azeglio, 34 Fax: +39 (051) 235-538
40123 Bologna
Italy
International Tax and Transaction Services – International Corporate Tax Advisory
Mario Ferrol +39 (051) 278-434
Mobile: +39 335-122-9904
Email: mario.ferrol@it.ey.com
Luisa Savio
+39 (051) 278-336
Mobile: +39 335-774-1962
Email: luisa.savio@it.ey.com
International Tax and Transaction Services – Transfer Pricing and Operating Model Effectiveness
Vanessa Greco
+39 (051) 278-337
Mobile: +39 349-394-0897
Email: vanessa.greco@it.ey.com
Florence GMT +1
Studio Legale Tributario +39 (055) 552-411
Piazza della Libertà, 11
Fax: +39 (055) 552-4420
50123 Florence +39 (055) 552-4410
Italy
Business Tax Advisory
Cristiano Margheri
+39 (055) 552-4449
Mobile: + 39 333-546-6772
Email: cristiano.margheri@it.ey.com
Studio Legale Tributario
+39 (06) 855-67-111 Via Aurora, 43
Fax: +39 (06) 855-67-336 00187 Rome Italy
International Tax and Transaction Services – International Corporate Tax Advisory
Daniele Ascoli
Domenico Borzumato
+39 (06) 855-67-5377
Mobile: + 39 335-174-1603
Email: daniele.ascoli@it.ey.com
+44 (20) 7951-5693 (resident in London)
Global Compliance and Reporting
Fabio Laureri
Business Tax Advisory
Giacomo Albano
Mobile: +39 335-144-4978
Email: dborzumato@uk.ey.com
+39 (06) 324-75-4417
Mobile: +39 335-548-1519
Email: fabio.laureri@it.ey.com
+39 (06) 855-67-5338
Mobile: +39 335-745-4245
Email: giacomo.albano@it.ey.com
Alessandro Pacieri +39 (06) 855-67-5349
Mobile: +39 339-752-8882
Email: alessandro.pacieri@it.ey.com
People Advisory Services
Barbara Damin
+39 (06) 855-67-5240
Mobile: +39 338-935-0115
Email: barbara.damin@it.ey.com
Claudia Giambanco +39 (06) 855-67-5332
Mobile: +39 335-123-3660 Email: claudia.giambanco@it.ey.com
Indirect Tax
Alessandra Di Salvo
Nicoletta Mazzitelli
Legal Services
Maria Cirillo
Renato Giallombardo
Francesco Marotta
Alessandra Pietroletti
+39 (06) 855-67-4917
Mobile: +39 335-736-1484
Email: alessandra.di.salvo@it.ey.com
+39 (06) 855-67-5323
Mobile: +39 335-752-7026 Email: nicoletta.mazzitelli@it.ey.com
+39 (06) 855-67-862
Mobile: +39 335-736-1485 Email: maria.cirillo@it.ey.com
+39 (06) 855-67-5949
Mobile: +39 348-397-3862
Email: renato.giallombardo@it.ey.com
+39 (06) 855-67-5807
Mobile: +39 335-596-1663
Email: francesco.marotta@it.ey.com
+39 (06) 855-67-851
Mobile: +39 334-655-0870
Email: alessandra.pietroletti@it.ey.com
Treviso
Studio Legale Tributario
+39 (0422) 625-111 v. le Appiani 20/B
Fax: +39 (0422) 228-06 31100 Treviso Italy
Business Tax Advisory
Stefano Brunello
Valeria Mangano
+39 (0422) 625-106
Mobile: +39 335-123-2646
Email: stefano.brunello@it.ey.com
+39 (0422) 625-165
Mobile: +39 335-123-2639
Email: valeria.mangano@it.ey.com
Turin GMT +1
Studio Legale Tributario +39 (011) 516-5211
Via Meucci, 5
Fax: +39 (011) 531-047 10121 Turin Italy
Tax Technology and Transformation
Marco Bosca
+39 (011) 516-5236
Mobile: +39 335-123-2994
Email: marco.bosca@it.ey.com
Verona GMT +1
Studio Legale Tributario +39 (045) 839-2911
Viale Isonzo, 11
Fax: +39 (045) 8392-9527 37126 Verona Italy
Business Tax Services
Alexia Pinter
A. At a glance
+39 (045) 839-29-526
Mobile: +39 335-122-9923
Email: alexia.pinter@it.ey.com
Corporate Income Tax Rate (%) 24 (a)
Capital Gains Tax Rate (%) 1.2/24 (b) Branch Tax Rate (%) 24 (a)
Withholding Tax (%)
Dividends 0/1.2/26 (c)(d)
Interest 0/12.5/26 (e)(f)
Royalties from Patents, Know-how, etc. 0/22.5/30 (f)(g) Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward Unlimited (h)
(a) A 3.5% surcharge applies to banks and other financial entities. A local tax on productive activities (imposta regionale sulle attività produttive, or IRAP) is imposed on the net value of production at a standard rate of 3.9%. For further details regarding IRAP, see Section B. (b) For details concerning capital gains taxation, see Section B. (c) Withholding tax is not imposed on dividends paid between resident compa nies. The 26% rate applies to dividends paid to resident individuals with substantial and non-substantial participations (for information on substantial and non-substantial participations, see the discussion of capital gains taxa tion in Section B). The 26% rate applies to dividends paid to nonresidents. An exception applies to selected European Union (EU) or European Economic Area (EEA) investment funds which benefit from a dividend withholding tax exemption as set forth by the 2021 Budget Law. Nonresidents may be able to obtain a refund of the withholding tax equal to the amount of foreign tax paid on the dividends, up to a limit of 11/26 of the withholding tax paid. Tax treaties may provide for a lower tax rate. A 1.2% rate applies under certain circumstances (see Section B). If either the treaty or the 1.2% rate applies, the 11/26 tax refund cannot be claimed.
(d) Under the EU Parent-Subsidiary Directive, dividends distributed by an Italian subsidiary to an EU parent company are exempt from withholding tax, if among other conditions, the recipient holds 10% or more of the shares of the subsidiary for at least 12 months. See Section B. Similar treatment (however, a 24-month minimum shareholding period is required) may apply to dividend payments to Swiss parents under the EU-Switzerland treaty.
(e) The 0% rate applies under certain circumstances to interest derived by non residents on the approved list (see Section B) from treasury bonds, bonds issued by banks and “listed” companies, “listed” bonds issued by “non-listed” companies (often referred to as “mini-bonds”), nonbank current accounts and certain cash pooling arrangements, and in other specific cases (for example, mid- to long-term loans with Italian or foreign banks or qualifying financial institutions). The term “listed” refers to a listing on the Italian exchange or on an official exchange or a multilateral system for exchange of an EU or EEA country. The 26% rate applies to interest derived by residents and non residents from corporate bonds and similar instruments and from loans in the case of resident individuals and nonresident recipients, in general. The 26% rate also applies as a final tax to interest paid to residents on bank accounts and deposit certificates. The rate applicable to interest paid on treasury bonds issued by the Italian government and by approved-list countries is reduced to 12.5%. For resident individuals carrying on business activities in Italy and resident companies, interest withholding taxes are advance payments of tax. In all other cases, the withholding taxes are final taxes. Tax treaties may also provide for lower rates. For further details, see Section B.
(f) No withholding tax is imposed on interest and royalties paid between associ ated companies of different EU member states if certain conditions are met. For details, see Section B. Similar treatment may apply to interest payments to Swiss companies under the EU-Switzerland treaty.
(g) The withholding tax rate of 30% applies to royalties paid to nonresidents. However, in certain circumstances, the tax applies on 75% of the gross amount, resulting in an effective tax rate of 22.5%. These rates may be reduced under tax treaties.
(h) Loss carryforwards are allowed for corporate income tax purposes only (not for IRAP). Losses may be carried forward indefinitely. Losses can generally be used against a maximum amount of 80% of taxable income, with an exception made for those incurred in the first three years of an activity, which can be used against 100% of taxable income. Anti-abuse rules may limit loss carryforwards.
B. Taxes on corporate income and capital gains
Corporate income tax. Resident companies are subject to corpo rate income tax (imposta sul reddito delle società, or IRES) on their worldwide income (however, effective from the 2016 fiscal year, an elective branch exemption regime is available; see Section E). A resident company is a company that has any of the following located in Italy for the majority of the tax year:
• Its registered office
• Its administrative office (similar to a “place of effective manage ment” concept)
• Its principal activity
Unless they are able to prove the contrary, foreign entities con trolling an Italian company are deemed to be resident for tax purposes in Italy (so-called “Esterovestizione”) if either of the following conditions is satisfied:
• The foreign entity is directly or indirectly controlled by Italian resident entities or individuals.
• The majority of members of the board of directors managing the foreign entity are resident in Italy.
Nonresident companies are subject to IRES on their Italian-source income only.
Rates of corporate income tax. The 2022 corporate tax rate is 24%. A 3.5% surcharge applies to banks and other financial enti ties for which the aggregate corporate tax rate is 27.5%.
Banks, insurance and financial entities are not subject to the general 30% Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) limitation discussed in Limitations on interest deductions in Section C. In particular, banks and finan cial intermediaries (as defined by Article 162-bis of the Italian Consolidated Law on Income Tax (Testo Unico delle Imposte sui Redditi, or TUIR) are allowed to deduct 100% of their net interest expenses, while insurance companies, parent companies of insur ance groups, qualifying asset management companies and qualifying brokerage companies (Società di Intermediazione Mobiliare, or SIMs) are allowed to deduct 96% of their net inter est expenses.
Local tax. Resident and nonresident companies are subject to a regional tax on productive activities (imposta regionale sulle attività produttive, or IRAP) on their Italian-source income. For manufacturing companies, IRAP is imposed at a standard rate of 3.9% on the “net value of production” (see below). However, dif ferent rates apply to the following:
• Corporations and entities granted concession rights other than those running highways and tunnels: 4.2%
• Banks, other financial entities and holdings (that is, companies whose main or exclusive activity is holding shares in other companies): 4.65%
• Insurance companies: 5.9%
• Public administration entities performing business activities: 8.5%
In addition, each of the 20 Italian regions may increase or de crease the rate of IRAP by a maximum of 0.9176 percentage point, and companies generating income in more than one region are required to allocate their tax base for IRAP purposes among the various regions in the IRAP tax return.
The IRAP tax base is the “net value of production,” which is calculated by subtracting the cost of production from the value of production (that is, in general, revenue less operating costs). The IRAP calculation must take into account the profit-and-loss scheme contained in provisions introduced by Legislative Decree No. 139/2015, as well as the corresponding tax provisions expressly applicable to IRAP, which were introduced by Law Decree No. 244/2016. Certain deductions are not allowed for IRAP purposes, such as the following:
• Bad debt losses.
• Labor costs (excluding certain compulsory social contributions and a fixed amount of the wages, in application of the so-called Cuneo Fiscale). However, under the 2015 Budget Law, labor costs incurred for employees hired on a permanent basis are fully deductible for IRAP purposes, beginning with the fiscal year including 31 December 2015. However, insurance compa nies, qualifying holding companies and qualifying brokerage companies (SIMs) can deduct 96% of interest expenses and are taxed on 100% of interest income.
In addition, special rules for the calculation of the tax base for IRAP purposes apply to banking institutions, insurance compa nies, public entities and noncommercial entities.
Capital gains
Resident companies and nonresident companies with a permanent establishment in Italy. In general, capital gains derived by resident companies or nonresident companies with a permanent establishment (PE) in Italy are subject to IRES and IRAP (gains derived from sales of participations and extraordinary capital gains de rived from transfers of going concerns are excluded from the tax base for IRAP purposes). Capital gains on investments that have been recorded in the last three financial statements as fixed assets may be electively taxed over a maximum period of five years for IRES purposes.
Italian corporate taxpayers (that is, companies and branches) may benefit from a 95% participation exemption regime (that is, only 5% is taxable) for capital gains derived from disposals of Italian or foreign shareholdings that satisfy all of the following condi tions:
• The shareholding has been classified in the first financial state ments closed during the holding period as a long-term financial investment.
• The Italian parent company holds the shareholding for an unin terrupted period of at least 12 months before the disposal.
• The subsidiary has been carrying out uninterruptedly through the last three financial years prior to the year of the disposal an active business activity (real estate companies are assumed not to be carrying on a business activity; therefore, they can satisfy this requirement only under certain limited circumstances).
• The subsidiary must have not been resident in a low-tax juris diction uninterruptedly as of the beginning of the holding pe riod or, under certain circumstances, through the last five years (unless the taxpayer can prove, also by way of an advance tax ruling, that the subsidiary was actually subject to a congruous level of taxation). For additional information regarding gains from low-tax participations, see Dividends).
In general, capital losses on participations are deductible. An exception exists for capital losses on participations that would benefit from the 95% participation exemption. These losses are 100% nondeductible. However, losses from sales of participa tions not qualifying for the participation exemption are nonde ductible only up to the amount equal to the exempt portion of the dividends received on such participations during the 36 months preceding the sale.
Nonresident companies without a PE in Italy. Most tax treaties prevent Italy from levying tax on nonresidents deriving capital gains from the sale of Italian participations (exceptions are made for those cases in which treaties allow Italy to levy tax if the value of the company is mostly represented by real estate property).
If no treaty protection is available, effective from 2019, capital gains derived by a nonresident entity from the transfer of any substantial participations in Italian companies and partnerships are subject to a 26% substitute tax. A different treatment applied until 2018 under which such capital gains were subject to 24% IRES on 58.14% of the amount, resulting in an effective 13.95% taxation.
A “substantial participation” in a company listed on a stock ex change requires more than 2% of the voting rights at ordinary shareholders’ meetings or 5% of the company’s capital. For an unlisted company, these percentages are increased to 20% and 25%, respectively.
Capital gains on “non-substantial participations” are also subject to 26% source taxation. However, certain exemptions to the 26% rate may apply under domestic law, such as for the following:
• Nonresidents (including persons from a low-tax jurisdiction) selling listed shares
• Nonresident shareholders resident in approved-list jurisdictions (that is, with which Italy has a full exchange-of-information clause in place) under specified circumstances
The 2021 Budget Law has also introduced a capital exemption regime for selected EU/EEA investment funds.
Administration. Income tax returns for companies with a calendar year must be filed by 30 November of the following year. Income tax returns for companies with a non-calendar year must be filed by the end of the 11th month of the following year. Companies must make advance payments of their corporate and local tax liability based on a forecast method or a specified percentage of the tax paid for the preceding year.
IRES and IRAP must be paid in accordance with the following schedule:
• The first advance payment due for the current fiscal year, amounting to 40% of the tax paid for the previous year, must be paid by the same date as the balance due for the previous fiscal year (last day of the sixth month following the end of the previ ous fiscal year).
• The second advance payment of 60% must be paid by the last day of the 11th month following the end of the fiscal year.
• The balance payment must be paid by the last day of the sixth month following the end of the fiscal year.
Statute of limitations. The 2016 Budget Law introduced a change to the statute of limitations rules. Under the new measures, a company may be subject to a tax assessment up to the end of the fifth year following the year of filing of the relevant tax return (the previous term was the fourth year following the year of the filing of the tax return). In addition, the statute of limitations is now extended to seven years for a failure to file any tax return (the previous term was five years). The 2016 Budget Law repealed the doubling of the statute of limitations in the case of criminal tax investigations. The new rules apply to tax assessments issued with reference to the 2016 fiscal year and subse quent years.
Law Decree No. 193/2016 introduced new provisions with respect to the correction of tax returns. To correct mistakes or omissions, including those related to increased or reduced taxable income, tax debts or tax credits, taxpayers may now submit an amending return to the Revenue Agency before the statute of limitations period expires (that is, before 31 December of the fifth year fol lowing the year in which the relevant tax return is filed). Any
arising tax credits can then be offset against other amounts due, subject to certain conditions.
Tax rulings. Several tax ruling procedures are available in Italy.
The following are the main categories of rulings:
• Ordinary ruling (interpello ordinario), concerning the applica tion of statutory provisions with objectively unclear interpreta tions
• Probative ruling (interpello probatorio), concerning the valuation and the fulfillment of the requirements necessary to quali fy for specific tax regimes
• Anti-abuse ruling (interpello antiabuso), concerning the appli cation of the abuse of law legislation to actual cases
• Exempting ruling (interpello disapplicativo), concerning the relief from application of specific anti-avoidance rules (for ex ample, limitations to deductions or tax credits)
Advance Tax Agreements for Companies with International Operations. The scope of the Advance Tax Agreement for Companies with International Operations (commonly referred to also as the “International Ruling”) includes the following:
• Transfer-pricing issues (through the conclusion of advance pricing agreements [APAs])
• Cross-border flow matters
• Attribution of profits to domestic and foreign PEs
• Existence of PEs
• Agreements on the tax basis of assets in the case of inbound and outbound migrations
In principle, the International Ruling is valid for five years, which consists of the year in which it is signed and the following four years, to the extent that the underlying factual and legal circum stances remain unchanged.
During the period of validity of the agreement, the tax authorities may exercise their power of scrutiny only with respect to matters that are not covered in the agreement.
Rollback effects are possible. Also, under the 2021 Budget Law, an APA may cover all the previous fiscal years for which the stat ute of limitations has not yet expired. However, the law requires that the circumstances under which the APA was reached are likewise applicable to the previous fiscal years and that no investigations were started or tax assessments were noticed for the same fiscal years with respect to the issues subject to the APA. In addition, in the context of a bilateral or multilateral APA, this “extended rollback” is allowed, provided that the foreign compe tent authorities agree to extend the APA to the previous fiscal years.
A fixed fee amount, which may vary based on the turnover of the group, is required for filing a bilateral and multilateral APA ruling request before the competent Italian tax authorities.
Advance tax ruling for new investments. Another type of ruling is available for investments of at least EUR20 million that have a significant and durable impact on employment with respect to the particular business activity.
The ruling provides the taxpayer an advance confirmation of the tax treatment of the entire investment plan (including the various envisaged transactions to achieve the plan) as well as, if needed, assurance on whether a going concern is formed. In addition, the ruling may also confirm the absence of any abusive behaviors, the existence of prerequisites to exclude the application of anti-avoidance provisions or recognition of access to specific tax regimes.
Taxpayers conforming to the ruling response may also take ad vantage of the Cooperative Compliance Program (see Cooperative Compliance Program in Section C), regardless of their turnover threshold.
Dividends. Dividends distributed to Italian entities and Italian PEs of foreign companies are 95% excluded from corporate taxation regardless of the source (domestic or foreign) of such dividends and are taxable on a cash basis.
Dividends sourced in low-tax jurisdictions are taxed according to the following rules:
• Dividends derived from direct participations in low-tax subsid iaries are fully taxed.
• Dividends derived indirectly through controlled foreign approved-list subsidiaries with low-tax participations are fully taxed.
• Dividends sourced in a low-tax country may obtain 95% ordi nary exemption treatment if the taxpayer can document that the participation in the foreign entity did not lead to an allocation of income to countries or territories with a privileged tax regime.
• Low-tax dividends are 50% excluded from corporate taxation if the taxpayer can document that the foreign entity carried out as its main activity an actual industrial or commercial activity in the relevant market or territory. In this case, the Italian compa ny may also benefit from a 50% foreign tax credit on the for eign taxes paid by the subsidiary.
• Dividends accrued during any fiscal year before 2015 and paid by a low-tax entity in or after 2015 may obtain 95% exclusion treatment provided that the entity was considered approvedlisted under the pre-2015 regime.
The definition of low-tax jurisdiction was amended by Legislative Decree No. 142/2018, which implements the EU Anti-Tax Avoidance Directive (ATAD) according to which foreign subsid iaries are considered low-tax if they are subject to either of the following:
• An effective level of income taxation lower than 50% of the Italian corporate income tax (IRES) rate had the company been resident in Italy
• A nominal tax rate lower than 50% (also considering tax rates resulting from special local tax regimes) of the Italian corporate income tax (IRES) rate in the event that the foreign subsidiary is not controlled by the Italian parent (for example, less than 50% participation)
Dividends distributed by Italian companies to nonresident com panies without a PE in Italy are subject to a 26% withholding tax (double tax treaties may provide for lower rates). Nonresidents may obtain a refund of dividend withholding tax equal to the
amount of foreign tax paid on the dividends, but the maximum refund equals 11/26 of the withholding tax paid. Dividends paid by Italian entities (out of profits accrued in the fiscal year follow ing the one in progress on 31 December 2007 and in subsequent fiscal years) to entities established in an EU member state or in an EEA country included in the approved list are subject to a reduced withholding tax rate of 1.2%. If a treaty withholding tax rate or the domestic 1.2% rate applies, the 11/26 tax refund can not be claimed.
As a result of the implementation of the EU Parent-Subsidiary Directive (Directive 90/435/EEC), companies from EU member states that receive dividends from Italian companies may be exempted from the dividend withholding tax or obtain a refund of the tax paid if they hold at least 10% of the shares of the payer for at least one year. A similar provision is available for Swiss recipients under certain circumstances on the basis of Article 15 of the EU-Switzerland treaty of 2004.
For nonresident companies with a PE in Italy, dividends may be attributed to the Italian PE for tax purposes. In this case, the dividend is taxed at the level of the PE, and no withholding tax applies.
Effective from the 2021 fiscal year, Italian-source dividends paid to selected EU/EEA investment funds benefit from a dividend withholding tax exemption.
Effective from the 2021 fiscal year, 50% of dividends paid to Italian non-commercial entities or Italian PEs of foreign noncommercial entities are excluded from taxation (previously fully subject to tax).
Withholding taxes on interest and royalties. Under Italian domes tic law, a 26% withholding tax is imposed on loan interest paid to nonresidents. Lower rates may apply under double tax treaties.
A 30% withholding tax applies to royalties (including rent for industrial equipment) paid to nonresidents. In certain circum stances, the tax applies to 75% of the gross amount, resulting in an effective tax rate of 22.5%. Lower rates may apply under double tax treaties.
As a result of the implementation of the EU Interest and Royalty Directive (Directive 2003/49/EC), interest payments and qualify ing royalties paid between “associated companies” of different EU member states are exempt from withholding tax. A company is an “associated company” of a second company if any of the following circumstances exist:
• The first company has a direct minimum holding of 25% of the voting rights of the second company.
• The second company has a direct minimum holding of 25% of the voting rights of the first company.
• An EU company has a direct minimum holding of 25% of the voting rights of both the first company and the second company.
Under the EU directive, the shareholding must be held for an uninterrupted period of at least 12 months. If the 12-month requirement is not satisfied as of the date of payment of the inter est or royalties, the withholding agent must withhold taxes on
interest or royalties. However, if the requirement is subsequently satisfied, the recipient of the payment may request a refund from the tax authorities.
To qualify for the withholding tax exemption, the following addi tional conditions must be satisfied:
• The recipient must be a company from another EU member state that is established as one of the legal forms listed in Annex A of the law.
• The company must be subject to corporate tax without being exempt or subject to a tax that is identical or similar.
• The recipient must be the beneficial owner of the payment.
An interest and royalty regime similar to the abovementioned Directive 2003/49/EC applies under certain circumstances to recipients residing in Switzerland on the basis of Article 15 of the EC-Switzerland tax treaty of 2004.
Domestic withholding taxes on interest and royalties may be reduced or eliminated under tax treaties.
An exemption also applies to interest derived by nonresidents on the approved list under certain circumstances (see foot note [e] in Section A).
Tax on financial transactions. A domestic tax on financial transac tions (so-called “Tobin Tax,” which is also known as the “Italian Financial Transaction Tax”) is imposed on certain financial trans actions regardless of where the transactions are executed and the nationalities of the parties. The tax is imposed on the following types of transfers:
• Transfers of shares and participating financial instruments issued by Italian resident entities (including the conversions of bonds into shares but excluding the conversion of bonds into newly issued shares in the case of the exercise of options of existing shareholders)
• Transfers of other instruments representing the above shares and participating financial instruments
• Derivatives transactions that have as a main underlying asset the above shares or participating financial instruments
• Transactions in “derivative financial instruments” in shares and participating financial instruments or in such instruments whose value depends mostly on the value of one or more of the above financial instruments
• Transactions in any other securities that allow the purchase or sale of the above shares and participating financial instruments or transactions that allow for cash regulations based on the shares
The tax on financial transactions also applies to high-frequency trading transactions executed on Italian financial markets if con ditions listed in the Ministerial Decree issued on 21 February 2013 are met. Specific exemptions and exclusions are also provided by this decree (for example, the tax does not apply to new issues of shares or on intercompany transactions).
The tax is levied at the following rates, which depend on the type of transaction and relevant market:
• Transactions in shares and participating financial instruments are subject to a 0.1% tax if executed on a regulated market or a
multilateral trading facility established in an EU member state or in an EEA member state allowing an adequate exchange of information with Italy. The rate is 0.2% in all other cases.
• Transactions in derivatives and other financial instruments relating to shares and participating financial instruments are subject to a fixed tax ranging from EUR0.01875 to EUR200, depending on the type of instrument and the value of the agree ments. If derivative contracts are executed on a regulated mar ket or multilateral trade facility, the tax is reduced to 20% of these fixed amounts.
• High-frequency trading transactions are subject to a 0.02% tax on the counter-value of orders automatically generated (includ ing revocations or changes to original orders). The tax is applied in addition to the tax on financial transactions due on transfers of shares and participating financial instruments as well as on transactions in the relevant derivative instruments.
The tax on financial transactions on share transactions is due from the transferee only, while the tax applicable to transactions in derivatives is due from each party to the transaction.
The tax payment must be made in accordance with the following rules:
• By the 16th day of the month following the month in which the transfer of the ownership occurred (if effected through the Centralized Management Company [Società di Gestione Accentrata], by the 16th day of the second month following the transaction date) for the following:
Shares and participating financial instruments issued by Italian resident entities Instruments representing such shares and participating financial instruments
• By the 16th day of the month following the month in which the contract is concluded (if effected through the Centralized Management Company, by the 16th day of the second month following the transactions date) for the following:
Derivatives that have as a main underlying asset the above shares or participating financial instruments
“Derivative financial instruments” in shares and participat ing financial instruments Instruments whose value depends mostly on the value of one or more of the above financial instruments
Other securities that allow the purchase and sale of the above shares and participating financial instruments or that allow for cash regulations (settlements) based on such financial instruments
• By the 16th day of the month following the month in which the annulment or amending order is sent for the high-frequency trading transactions executed on Italian financial markets
Digital Services Tax. The 2020 Budget Law enacted a Digital Services Tax (DST) immediately effective as of 1 January 2020 by building on the DST provision that was contained in the 2019 Budget Law but that never entered into force as result of the absence of a required implementing decree.
The DST is an indirect tax (that is, not eligible for double tax treaty protection) and is applied at a rate of 3% on revenues
deriving from the supply to third parties of the following “digital servicers:”
• Placement on a digital interface of an advertisement targeted at users of that interface
• Making available to users a multi-sided digital interface that allows the users to find other users and to interact with them and that may also facilitate the provision of the underlying sup ply of goods or services directly between users
• Transmission of data collected about users and generated from users’ activities on digital interfaces
The DST is imposed on resident and nonresident enterprises that during a fiscal year (to be assumed as the calendar year), indi vidually or at group level, realized both of the following:
• An amount of revenue not lower than EUR750 million
• An amount of revenue derived from digital services realized in Italy not lower than EUR5,500,000
Revenues from the above digital services are deemed to be derived within Italy if the user (that is, the relevant device) is located in Italy at a qualifying point in time and on the basis of specific nexus criteria depending on the type of service.
Exit tax. The following transactions qualify as taxable events in Italy:
• The transfer of tax residence abroad
• The transfer of assets on cross-border mergers and demergers
• The transfer of assets from a resident company to a foreign exempt PE (a foreign PE for which the Italian head office had opted for the branch exemption regime)
• The transfer of assets from an Italian PE to the foreign headquarters or to other PEs
As a result, any unrealized capital gains must be computed on the basis of the fair market value principle and taxed immediately. Any of such transfers is not considered a taxable event only to the extent that the assets related to the Italian business remain attrib uted to an Italian PE.
As an alternative to an immediate levy, Italian companies shifting their tax residence (or undergoing any of the abovementioned cross-border reorganizations or transfers of assets) to other EU or EEA countries with which Italy has a full tax information exchange agreement in place may elect to spread the payment of the exit tax through five annual installments.
Inbound migration. The tax migration of companies from an approved-list jurisdiction to Italy entails the tax step-up of the company’s assets and liabilities at fair market value.
For entities migrating to Italy from low-tax jurisdictions, the tax basis of the assets must be agreed to in advance through an advance ruling (see Administration) or otherwise it must be con sidered equal to the lower of the acquisition cost, the book value or the fair market value, with the tax basis of the liabilities amounting to the higher of these items.
Patent Box Regime. The 2015 Budget Law introduced a favorable tax regime for income generated through the use of qualified intangible assets, such as industrial patents, models and designs
capable of being legally protected, know-how and other intellec tual properties (IPs).
Taxpayers performing activities related to such intangibles are eligible, under a specific election, for a downward adjustment of the IRES and IRAP bases equal to 50% (for 2017 and subsequent years) of the income derived from the use of the qualifying IPs. The exemption applies to income earned both from the licensing of the IPs to related or unrelated parties and from the direct ex ploitation of the asset.
Law Decree No. 146 of 21 October 2021 (converted into law on 17 December 2021) repealed the above-mentioned old patent box regime by shifting from a profit-based incentive (50% exemp tion) to a cost-based incentive by introducing a super deduction for research and development (R&D) expenses. Under the new incentive the following rules apply:
• R&D expenses (other than those incurred with related parties) sustained in relation to qualifying IP may be recognized for tax purposes for an amount equal to 210% of the relevant expendi ture for both IRES and IRAP.
• Qualifying R&D costs relate only to copyrighted software, patents, designs and models. (R&D expenses for trademarks and know-how are excluded.)
• If R&D expenses are incurred prior to the creation of a qualify ing IP, the extra 110% deduction applies from the fiscal year in which the relevant IP is granted legal protection. The extra deduction includes R&D expenses incurred up to the eighth fiscal year before IP protection is granted.
• The election for the new incentive is irrevocable and lasts for five fiscal years with the possibility of subsequent renewals.
• Penalty protection is available if backup documentation is pre pared by the taxpayers.
The 2022 Budget Law clarified that the new incentive is available starting the fiscal year in course as of 31 December 2021 (that is the 2021 fiscal year for calendar-year companies). Accordingly, 2020 is the last fiscal year with reference to which the old patent box regime election can be made (possibly with a five-year valid ity; that is, up to 2024 at the latest). However, taxpayers who are still waiting for the conclusion of an old patent box ruling (in cluding renewals of prior agreements) may renounce such regime and elect the new incentive even for fiscal years before the one in course as of 31 December 2021. Such alternative is not available for fiscal years for which an old patent box ruling (including renewals of prior agreements) is already concluded, or with refer ence to which taxpayers have elected the self-computation method.
Foreign tax relief. A foreign tax credit may be claimed for foreignsource income. The amount of the foreign tax credit cannot exceed that part of the corporate income tax, computed at the standard rate, that is attributable to the foreign-source income. Accordingly, the foreign tax credit may be claimed up to the amount that results from prorating the total tax due by the proportion of foreignsource income over total income.
If income is received from more than one foreign country, the above limitation on the foreign tax credit is applied for each
country (per-country limitation). Excess foreign tax credits may be carried forward or back for eight years.
For corporate groups that elect the worldwide tax consolidation (see Section C), an Italian parent company may consolidate profits and losses of its foreign subsidiaries joining the tax group and compute a single group tax liability. Such group tax liability may be offset by a foreign tax credit granted to the resident parent company with respect to taxes paid abroad by foreign subsidiar ies that are members of the tax group.
C. Determination of business income
General. To determine taxable income, profits disclosed in the financial statements are adjusted for exempt profits, nondeductible expenses, special deductions and losses carried forward. Exempt profits include interest on government bonds issued on or before 30 September 1986 and income subject to Italian withholding tax at source as a final tax.
The following general principles govern the deduction of expenses:
• Expenses are deductible if and to the extent to which they relate to activities or assets that produce revenue or other receipts that are included in income.
• Expenses are deductible in the fiscal year to which they relate (accrual basis rule). Exceptions are provided for specific items, such as compensation due to directors, which is deductible in the fiscal year in which it is paid.
Deductibility of municipal property tax. The municipal property tax (Imposta Municipale Unica, or IMU) is 60% deductible from corporate income tax for the 2020 and 2021 fiscal years and 100% deductible for the 2022 fiscal year and future years. For further details regarding this tax, see Section D.
Inventories. Inventory is normally valued at the lower of cost or market value for both fiscal and accounting purposes. For deter mination of “cost,” companies may select one of the various methods of inventory valuation specifically provided in the law, such as first-in, first-out (FIFO); last-in, first-out (LIFO); or aver age cost.
Depreciation and amortization allowances. Depreciation at rates not exceeding those prescribed by the Ministry of Finance is calculated on the purchase price or cost of manufacturing. Incidental costs, such as customs duties and transport and instal lation expenses, are included in the depreciable base. Depreciation is computed on the straight-line method. Rates for plant and machinery vary between 3% and 15%.
In general, buildings may be depreciated using a 3% annual rate. Land may not be depreciated. If a building has not been purchased separately from the underlying land, for tax purposes, the gross value must be divided between the non-depreciable land component and the depreciable building component. The land component may not be less than 20% of the gross value (increased to 30% for industrial buildings). As a result, the effective depre ciation rate for buildings is 2.4% (2.1% for industrial buildings).
Purchased goodwill may be amortized over a period of 18 years. Know-how, copyrights and patents may be amortized in
accordance with financial statements, but over at least two fiscal years. The amortization period for trademarks is 18 years.
Research expenses and advertising expenses may be either entirely deducted in the year incurred or written off in equal installments in that year and in the four subsequent years, at the company’s option.
Amortization allowances of other rights may be claimed with reference to the utilization period provided by the agreement.
A tax credit for the purchase of new tangible assets is available for purchases made from 16 November 2020 to 31 December 2021, with an extension to 30 June 2022, provided that purchase orders are accepted by the seller by 31 December 2021 and at least 20% of their price is paid by the same date.
The following are the amounts of the tax credit:
• In general, for new assets, the tax credit amounts to 10% (15% for investments related to smart working) of the purchase cost with a maximum annual investment amount of EUR2 million (for tangible assets) or EUR1 million (for intangible assets).
• For new high-tech assets qualifying under the Industry 4.0 Plan, the tax credit amounts to the following: 50% of the purchase cost for investments up to EUR2,500,000 30% of the purchase cost for investments from EUR2,500,000 to EUR10 million 10% of the purchase cost for investments from EUR10 mil lion to EUR20 million. No additional tax credit is provided for investments over EUR20 million.
• For new software-related investments (that is, software, infor mation technology systems and platforms) related to the Industry 4.0 Plan, the tax credit amounts to 20% of the pur chase cost with a maximum annual investment amount of EUR1 million (considering also the investments made in the 2022-2023 timeframe).
The 2021 Budget Law includes an extension of the tax credit for assets that will be purchased in the period from 1 January 2022 through 31 December 2022 (with a further extension to 30 June 2023, provided that purchase orders are accepted by the seller by 31 December 2022 and at least 20% of their price is paid by the same date). In that case, the following is the amounts of the tax credit:
• In general, for new assets, the tax credit amounts to 6% of the purchase cost with a maximum annual investment amount of EUR2 million (tangible assets) or EUR1 million (for intangible assets)
• For new high-tech assets qualifying under the Industry 4.0 Plan, the tax credit amounts to the following:
— 40% of the purchase cost for investments up to EUR2.5 mil lion
— 20% of the purchase cost for investments from EUR2.5 mil lion to EUR10 million
— 10% of the purchase cost for investments from EUR10 mil lion to EUR20 million
No additional tax credit is provided for investments over EUR20 million.
• For new software-related investments (that is, software, infor mation technology systems and platforms) related to the Industry 4.0 Plan, the tax credit amounts to 20% of the pur chase cost with a maximum annual investment amount of EUR1 million (considering also the investments made in the 2021-2022 timeframe).
The tax credit applies in three equal annual installments as of the year in which the assets come into operation (and have the requirements provided by the Industry 4.0 Plan).
Furthermore, a third-party sworn appraisal is required in the case of any Industry 4.0 Plan purchase (high-tech and software relat ed) with a value higher than EUR300,000.
The 2022 Budget Law extended the previously available tax credit for new high-tech investments to assets purchased during the period from 1 January 2023 to 31 December 2025, or even until 30 June 2026, provided that purchase orders are accepted by the seller by 31 December 2025 and at least 20% of their price is paid by the same date.
For investments in high-tech tangible assets purchased from 2023 to 2025, the tax credit amounts to the following:
• 20% of the purchase cost for investment up to EUR2.5 million
• 10% of the purchase cost for investment from EUR2.5 million up to EUR10 million
• 5% of the purchase cost for investment from EUR10 million up to EUR20 million
For investments in high-tech intangible assets, the tax credit amounts to the following:
• 20% of the purchase cost for investment made in 2023 with a maximum annual investment amount of EUR1 million
• 15% of the purchase cost for investment made in 2024 with a maximum annual investment amount of EUR1 million
• 10% of the purchase cost for investment made in 2025 with a maximum annual investment amount of EUR1 million
Step-up of Italian participations. The Italian government has revamped a one-off opportunity for resident individuals and nonresident entities to elect for a tax step-up of participations in unlisted Italian companies held as of 1 January 2022 through the payment of a substitute tax.
The base of the substitute tax equals the value of the participation as of 1 January 2022 and needs to be certified by a sworn appraisal prepared no later than 15 June 2022. The rate of the substitute tax is 14%.
The substitute tax may either be paid in full by 15 June 2022 or through three annual installments beginning 15 June 2022 (with the second and third installments due by 15 June 2023 and 15 June 2024 and subject to an annual 3% interest surcharge).
Tax credit for R&D. A tax credit is available for eligible R&D expenses for the 2022 fiscal year.
The eligible R&D activities are classified into three categories. The following are the amounts of the tax credit for each category:
• For R&D activities, the tax credit amounts to 20% of the eligi ble expenses with a maximum annual amount granted to each company of EUR4 million.
• For technological innovation, the tax credit amounts to 10% of the eligible expenses (increased to 15% in the case of ecological transition or if the relevant activity qualifies as a digital innovation under the Industry 4.0 Plan) with a maximum annual amount granted to each company of EUR2 million.
• For design activities carried out by companies in the textile and fashion, footwear, eyewear, goldsmith, furniture and ceramics sectors, and for the design and manufacture of new products and samples, the tax credit amounts to 10% of the eligible expenses with a maximum annual amount granted to each com pany of EUR2 million.
Beginning with the 2021 fiscal year, a third-party appraisal is required.
The old R&D tax credit (based on the “incremental approach”) is still available with respect to activities and expenses incurred in the 2016, 2017, 2018 and 2019 fiscal years, with slightly differ ent rules in each fiscal year.
To obtain the benefit with respect to the past years, an amended tax return must be filed with the Italian Revenue Agency, pro vided that all the other requirements are met.
The Budget Law extends the previously available tax credit for R&D activities up to the fiscal year in course as of 31 December 2031 and revises the applicable tax credit rates.
The tax credit available for R&D activities amounts to the follow ing:
• 20% in 2022 with a maximum amount of EUR4 million
• 10% from 2023 to 2031 with a maximum annual amount of EUR5 million.
The tax credit available for innovation, design and sustainable investments is extended to to the fiscal year in course as of 31 December 2025 with the following rates and annual maximum amounts:
Innovation and design
Sustainability
Percentage Maximum Percentage Maximum amount amount
Fiscal year % EUR % EUR 2023 10 2 million 10 4 million 2024 5 2 million 5 4 million 2025 5 2 million 5 4 million
Provisions. The Italian tax law provides a limited number of pro visions.
Bad and doubtful debts. A general provision of 0.5% of total trade receivables at the year-end may be made each year until the total doubtful debt provision reaches 5%. Bad debts actually incurred are deductible to the extent they are not covered by the accumu lated reserve. In this regard, losses on bad debts are deductible for corporate income tax purposes only if they derive from “certain and precise” elements and if the debtor has been subject to a bankruptcy procedure or insolvency procedure. The Internationalization Decree provides that, effective from the 2015 fiscal year, the deduction for bad debt losses is allowed with
respect to foreign bankruptcy and insolvency procedures, to the extent that they are equivalent to the Italian procedures and that the relevant foreign country allows a satisfactory exchange of information. “Certain and precise elements” are deemed to exist if one of the following conditions is met:
• The bad debt is not more than EUR2,500 (or EUR5,000 in the case of companies having a turnover not less than EUR100 mil lion) and has been unpaid for at least six months.
• The right to collect the credit has expired. Under Article 2946 of the Italian Civil Law, the ordinary right to collect a credit expires after 10 years.
• The credit has been deleted from the financial statements in application of the relevant accounting rules.
For banks and financial entities, Law Decree No. 83/2015 repealed the rules concerning the tax deductibility of bad debt write-downs and bad debt losses arising from the transfer of receivables.
Redundancy and retirement payments. Provisions for redundancy and retirement payments are deductible in amounts stated by civil law and relevant collective agreements.
Limitations on interest deductions. For companies other than banks and other financial entities, the deductibility of net interest expenses is determined in accordance with an Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) test. Under this test, net interest expenses (that is, interest expenses exceeding interest income) are deductible only up to 30% of EBITDA and the excess can be carried forward indefinitely and used in the fiscal years in which 30% of EBITDA is higher than the net interest expense for the year. The 30% EBITDA rule may also apply at the level of a domestic tax group, meaning that the excess of interest expenses at the level of one entity may be de ducted by the group if other members have a corresponding amount of excess EBITDA.
Legislative Decree No. 142/2018 (the ATAD decree) introduced the following amendments, effective from 2019:
• Qualifying EBITDA for purposes of the 30% limitation is now computed on the basis of tax relevant figures (and no longer on accounting figures).
• A new definition of interest expenses (based on a concept of substance over form) is introduced. For example, under the new definition, interest expenses capitalized in the cost of pur chased goods are now included.
• Excess interest income of any fiscal year can now be carried forward to offset interest expenses in any following fiscal years.
• Excess 30% EBITDA can now be carried forward for five fis cal years only (no limits applied under the old rule).
Under grandfathering rules, the excess interest expenses accrued under the old regime can still be carried forward, and any excess 30% EBITDA computed under the old rules can be used against excess interest expenses on loans signed before 17 June 2016.
Foreign-exchange losses. Gains and losses resulting from the mark-to-market of foreign currency-denominated debts, credits and securities are not relevant. An exception is provided for those
hedged against exchange risk if the hedging is correspondingly marked-to-market at the exchange rate at the end of the fiscal year.
Relief for losses. For corporate income tax purposes only, losses may be carried forward with no time limit and deducted from income of the following periods for a total amount equal to 80% of taxable income (or a lower value if the tax-loss amount does not reach 80% of the amount of taxable income for the fiscal year).
Losses incurred in the first three years of an activity may also be carried forward for an unlimited number of tax periods, and the limit of 80% of taxable income does not apply. The three-year time limit is computed from the company’s date of incorporation. In addition, to qualify for an unlimited loss carryforward, such losses must derive from a new activity; that is, companies within the same group may not have previously carried out the activity.
Restrictions on tax losses carried forward apply if ownership of the company is transferred and if the company changes its activity. The company resulting from or surviving after a merger may carry forward unrelieved losses of the merged companies to off set its own profits. In general, tax losses carried forward may not exceed the lower of the net equity at the close of the last fiscal year or the net equity shown on the statement of net worth prepared for the merger of each company involved in the merger. This limitation is applied on a company-by-company basis. Contributions to capital made in the 24 months preceding the date of the net worth statement are disregarded. Special rules further limit the amount of the losses that can be carried forward. Additional measures combat abuses resulting from the use of losses with respect to mergers, demergers and the transparency regime (see Consortium relief).
Intragroup transfer of tax losses. Under new provisions intro duced by the 2017 Budget Law, it is now possible for Italian resi dent companies, not being part of a tax group, but connected by at least 20% voting rights and profit share, to transfer tax losses accrued in the first three fiscal years to each other, provided that certain conditions are met.
The transfer must be related to the whole amount of the tax losses for the first three fiscal years of activity. The acquiring company must remunerate the seller for the losses transferred by using the same corporate tax rate of the fiscal year when the tax losses ac crued. The remuneration is not subject to tax for the seller.
Limitation on tax attributes carryforward in the case of change of ownership and extraordinary transactions. Tax losses and other tax attributes of a company may not be carried forward if the majority of the shares giving voting rights in the ordinary share holders’ meeting of that company are transferred (that is, change of control) and if a change of the main business activity carried out by that company takes place, unless a vitality test is met. The vitality test is an anti-avoidance rule aimed at barring the transfer of net operating losses and other attributes (also through an intercompany reorganization) to profitable companies that could offset
all or a large part of the companies’ taxable income with the in herited losses and other attributes.
Notional interest deduction. The Italian notional interest deduction (NID) or allowance for corporate equity (commonly referred to by the Italian acronym ACE) allows Italian enterprises (including Italian branches of foreign businesses) to claim a 1.3% deduction from taxable income corresponding to an assumed “notional return” on qualifying equity increases contributed after the 2010 fiscal year. In particular, Italian resident companies are permitted to deduct from their net taxable income (that is, after applying any tax loss carryforward) an amount corresponding to a notional return on the increase in equity as compared to the equity as of the end of the 2010 fiscal year. Such deduction may offset the annual taxable income but may not generate a loss. Any unused excess can be carried forward without time limitation.
Qualifying equity increases mainly include contributions in cash (also in the form of waiver of certain shareholder debt) and the setting aside of profits to available reserves. Qualifying equity decreases include any assignments to the shareholder such as dividend distributions and repayment of capital reserves. Qualifying equity decreases may also occur under specific antiavoidance clauses (for example, in the case of cash contributions or the provision of loans to related companies and acquisitions of participations in related companies and going concerns from related companies). Clearance from anti-avoidance provisions may be obtained by a ruling if it can be demonstrated that there is no benefit duplication.
Non-operating companies. Italian resident companies and PEs of nonresident companies are deemed to be “non-operating compa nies” if the total of their average non-extraordinary revenues (proceeds from the ordinary activities of a company as shown on its financial statements) and increases in inventory are less than the sum of the average of the following during the preceding three years:
• 2% of the book value of the company’s financial assets
• 6% of the book value of the company’s real estate assets
• 15% of the book value of the company’s other long-term assets
The following companies are also deemed to be non-operating companies:
• Companies that incurred tax losses for five consecutive fiscal years
• Companies that incurred tax losses for four consecutive fiscal years and in the fifth fiscal year generated income in an amount lower than the minimum resulting from the application of the percentages described in the next paragraph
If the company qualifies as a non-operating company, its taxable income cannot be lower than the sum of the following items (minimum income):
• 1.5% of the book value of the company’s financial assets for the year
• 4.75% of the book value of the company’s real estate assets for the year
• 12% of the book value of the company’s other assets for the year
Non-operating companies may not generate tax losses. Previous tax losses (that is, those incurred when the company was operating) cannot be offset against the minimum income. In the (unlike ly) event that the taxable income exceeds the minimum, only 80% of the amount exceeding the minimum can be offset.
The income of non-operating companies is subject to corporate income tax at a rate of 34.5% (rather than the ordinary 24% rate). IRAP (see Section B) also applies.
Non-operating companies that are in a value-added tax (VAT) credit position may no longer take the following actions:
• They may not claim such VAT for a refund.
• They may not use the VAT to offset other tax payments due.
• They may not surrender the VAT to other group companies.
• They may not carry forward the VAT.
Companies can be exempted from the abovementioned regime, for both income tax and VAT purposes, if they prove to the tax authorities that they were not able to reach the minimum income requirements because of extraordinary circumstances (an advance ruling must be obtained for such a determination). Certain com panies are specifically excluded from the non-operating compa nies’ regime (for example, listed groups, companies with 50 or more shareholders, companies with an amount of business income greater than the total assets value and companies that become in solvent or enter into an insolvency procedure).
Groups of companies. Groups of companies may benefit from tax consolidation and consortium relief. These regimes allow the offsetting of profit and losses of members of a group of compa nies.
Domestic tax consolidation. Italian tax consolidation rules provide two separate consolidation systems, depending on the residence of the companies involved. A domestic consolidation regime is available for Italian resident companies only. A worldwide con solidation regime, with slightly different conditions, is available for multinationals.
To qualify for consolidation, more than 50% of the voting rights of each subsidiary must be owned, directly or indirectly, by the common Italian parent company.
For a domestic consolidation, the election is binding for three fiscal years. However, if the holding company loses control over a subsidiary, such subsidiary must be immediately excluded from the consolidation. The tax consolidation includes 100% of the subsidiaries’ profits and losses, even if the subsidiary has other shareholders. The domestic consolidation may be limited to cer tain entities, leaving one or more otherwise eligible entities out side the group filing election. Tax losses realized before the election for tax consolidation can be used only by the company that incurred such losses. Tax consolidation also allows net inter est expenses (exceeding 30% of a company’s EBITDA) to be offset with excess EBITDA capacity of another group company.
Dividends paid within a domestic consolidation are subject to the ordinary 1.2% tax at the level of the recipient.
Horizontal consolidation. To comply with Case C-40/13 of the Court of Justice of the EU, the Internationalization Decree introduced the possibility of electing a domestic tax consolidation between two or more Italian sister companies with a common parent residing in any EU or EEA country that provides adequate exchange of information with Italy. These new measures are effective from the 2015 fiscal year.
Under these measures, a nonresident parent company can desig nate an Italian resident subsidiary to elect for a tax-consolidation regime together with each resident company controlled by the same foreign entity.
In addition, the horizontal consolidation may also include Italian PEs of EU and qualifying EEA companies to the extent that the nonresident company with a PE in Italy is controlled by the same parent company.
Consortium relief. Italian corporations can elect consortium relief if each shareholder holds more than 10% but less than 50% of the voting rights in the contemplated Italian transparent company. Under this election, the subsidiaries are treated as look-through entities for Italian tax purposes and their profits and losses flow through to the parent company in proportion to the stake owned. These profits or losses can offset the shareholders’ losses or prof its in the fiscal year in which the transparent company’s fiscal year ends. Tax losses realized by the shareholders before the exercise of the election for the consortium relief cannot be used to offset profits of transparent companies.
Dividends distributed by an eligible transparent company are not taken into account for tax purposes in the hands of the recipient shareholders. As a result, Italian corporate shareholders of a trans parent company are not subject to corporate income tax on 5% of the dividends received (in all other circumstances this would mean an effective tax rate of 1.2%).
The election does not change the tax treatment of dividends dis tributed out of reserves containing profits accrued before the exercise of the election.
The consortium relief election is binding for three fiscal years and requires the consent of all the shareholders.
The consortium relief election may be beneficial for joint ven tures that are not eligible for tax consolidation because the control test is not met. In addition, the election is also available for non resident companies that are not subject to Italian withholding tax on dividend payments (that is, EU corporate shareholders qualifying under the EU Parent-Subsidiary Directive). If both EU cor porate shareholders qualifying under the EU Parent-Subsidiary Directive and Italian corporate shareholders hold an Italian subsid iary, the EU corporate shareholders would want to elect consor tium relief to allow the Italian corporate shareholders to benefit from tax transparency.
Group value-added tax. For groups of companies linked by more than a 50% direct shareholding, net value-added tax (VAT; see Section D) refundable to one group company with respect to its own transactions may be offset against VAT payable by another,
and only the balance is required to be paid by, or refunded to, the group.
European VAT Group. The 2017 Budget Law introduces, effective from 1 January 2018, the option for the European VAT Group (as provided by Article 11 of the EU Directive 2006/112/CE) in the Italian VAT law.
Companies included in the European VAT Group are treated as a single VAT taxable person, which means the following:
• Transactions carried out between the entities of the group are not subject to VAT.
• Transactions carried out between an entity of the group and a third party are treated as performed by the group as a single entity.
• Entities incorporated in Italy should be entitled to elect the group if, while legally independent, they are closely bound one to another by the following financial, economic and organiza tional links:
Financial link: a minimum corporate participation link must exist between the entities electing for the group (more than 50% of the voting rights).
Economic link: the entities must perform the same kind of activity or complementary, ancillary and auxiliary activities. Organizational link: a link between the decision-making bodies of the entities must exist.
If the election is made, all entities fulfilling the requirements must adhere to the group.
D. Other significant taxes
The following table summarizes other significant taxes.
Nature of tax Rate
Value-added tax (VAT), on goods, services and imports
Standard rate 22% Other rates 4%/10% Municipal tax (Imposta Unica Comunale, or IUC); includes real property tax (Imposta Municipale Unica, or IMU) and tax on garbage disposal (Tassa per Rifiuti, or TARI) IMU; imposed on Italian property’s re-evaluated cadastral value; rates may be modified by municipal authorities; not applicable to principal home; payable by the owner of the real property Various TARI; imposed on the user Various
E. Miscellaneous matters
Foreign-exchange controls. The underlying principle of the foreignexchange control system is that transactions with nonresidents are permitted unless expressly prohibited. However, payments by residents to foreign intermediaries must be channeled through authorized banks or professional intermediaries. In addition, transfers of money and securities exceeding EUR10,000 must be declared to the Italian Exchange Office. Inbound and outbound investments are virtually unrestricted.
Transfer pricing. Italy imposes transfer-pricing rules on transac tions between related resident and nonresident companies. Under these rules, intragroup transactions must be carried out at arm’s length. In principle, Italian transfer-pricing rules do not apply to domestic transactions. However, under case law, grossly inade quate prices in these transactions can be adjusted on abuse-of-law grounds.
No penalty applies as a result of transfer-pricing adjustments if Italian companies complied with Italian transfer-pricing docu mentation requirements, allowing verification of the consistency of the transfer prices set by the multinational enterprises with the arm’s-length principle.
On 23 November 2020, the Italian tax authorities issued new instructions regarding the content and validity of the elective transfer-pricing documentation in order to adopt the Base Erosion and Profit Shifting (BEPS) Action 13 deliverable. Such documentation consists of the following documents:
• Masterfile
• Country-Specific Documentation
The Masterfile collects information regarding the multinational group. It must be organized in the following chapters.
Chapter Information in chapter
1
2
Description of the group structure
Description of the activities carried out by the group, including information concerning main profit generator factors, transaction flows, main intercompany service agreements, main markets, brief functional analysis of the entities of the group describing their contribution to value creation and business restructuring transactions
3
4
5
Description of the intangible assets owned by the group
Description of the intercompany financial transactions
Description of the group financial reports, including consolidated financial statements (to be attached) and a list and summary of any APAs and other tax rulings related to the cross-border allocation of income
Under the 2010 instructions, taxpayers could prepare, in certain cases, a Masterfile only in relation to a subgroup, in order to avoid filing the group Masterfile. Such possibility no longer ex ists, given that the new instructions refer only to group Masterfiles, consistent with the applicable Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. Also, under the new instructions, more than one Masterfile for each group can be prepared if it is possible to segregate in separate sets different operations and different transfer-pricing policies that are applicable within the same group.
The Country-Specific Documentation contains information re garding the enterprise. It must be organized in the following chapters and annexes.
Chapter Information in chapter or annex
1
General description of the entity, including information concerning the relevant operating structure and business strategies
2 Intercompany transactions
3 Financial information, including individual financial statements and statements reconciling the Profit Level Indicators used to apply the transfer-pricing methodology with the figures in the annual financial statements
Annex 1 Copies of the contractual documentation for each covered transaction
Annex 2 Copies of APAs and other cross-border tax rulings of the Italian entity as well as of other companies, if any way linked to the covered transaction.
The transfer-pricing rules described above do not apply to trans actions between resident entities.
Decree No. 50 of 2017 replaced the reference to the “fair mar ket value” principle set out in Article 9 of the TUIR for purpos es of computing transfer-pricing adjustments.
Under the new wording of Article 110, Paragraph 7 of the TUIR, the transfer-pricing adjustments are determined with reference to the conditions and prices that would have been agreed on by in dependent entities operating in conditions of free competition and in comparable circumstances, if an increase in income is derived. In other words, the transfer-pricing adjustments should be determined under a free-competition scenario, which is more in line with the OECD guidelines for national legislation.
The negative income tax adjustment under Article 110, Paragraph 7, of the TUIR, can occur in the following circumstances:
• In the execution of agreements concluded with the competent authorities of foreign states following the mutual agreement procedure provided under a double tax treaty.
• At the end of the checks carried out as part of the international cooperation activities whose results are shared by states’ participants.
• Following a ruling regarding the taxpayer by a state with which Italy has entered into a double tax treaty that allows an adequate exchange of information and is issued according to the methods and terms provided by the Director of the Revenue Agency, against a positive adjustment and in accordance with the arm’slength principle. A facility exists for the taxpayer to request the activation of the mutual agreement procedure referred to in the first bullet, provided that the conditions are met.
Country-by-Country Reporting. The 2016 Budget Law introduced a new Country-by-Country Reporting (CbCR) obligation for multinational entities. Entities subject to this obligation must submit an annual report indicating the amounts of revenues, gross profits, taxes paid and accrued, and other indicators of effective economic activities.
Italian parent companies of certain groups and certain Italian resident companies controlled by a foreign company are subject to the CbCR obligation.
Italian parent companies are subject to the CbCR obligation if their groups meet the following conditions:
• They are required to submit group consolidated financial statements. These are groups that exceed two of the following two of the following thresholds for two consecutive years:
Total assets of EUR20 million
Turnover of EUR40 million
250 employees
• They had consolidated annual turnover in the preceding fiscal year of at least EUR750 million.
• They are not controlled by other entities.
Italian resident companies controlled by a foreign company are subject to the CbCR obligation if they are required to submit group consolidated financial statements in a country where the CbCR does not apply or in a country that does not allow exchange of information regarding the CbCR.
In the case of a failure to submit a report or an incomplete submis sion of a report, penalties apply from EUR10,000 to EUR50,000.
On 8 March 2017, the Italian Ministry of Economy and Finance released the Ministerial Decree with implementation details for the CbCR process for Italian entities belonging to Multinational Enterprise (MNE) groups.
Cooperative Compliance Program. An elective Cooperative Compliance Program (CCP) is introduced for selected taxpayers that have adopted an adequate internal audit model to manage and control their tax risks with the purpose of promoting com munication and cooperation between taxpayers and tax authori ties.
Taxpayers that adhere to the CCP can benefit from certain advan tages such as the following:
• Agreements on tax positions before the filing of the return
• Quicker rulings (45 days)
• No need for guarantees for tax refunds
• Reduction of applicable penalties to half of the minimum in the case of assessments concerning tax risks timely communicated by the taxpayer
Taxpayers that file a request to adhere to the CCP should receive an answer within 120 days.
In the case of a positive answer, admission to the regime is effec tive as of the fiscal year in which the request is filed and contin ues until the taxpayer files an end notice.
The tax authorities may exclude taxpayers from the CCP if dur ing any of the years following the taxpayers’ admission, the tax payers no longer meet the CCP’s requirements.
Taxpayers should adopt a collaborative attitude with Italian tax authorities by timely disclosing transactions that may be deemed to be aggressive tax planning, by promptly responding to any re quest and by promoting a corporate culture adhering to principles of fairness and respect of tax laws.
Controlled foreign companies. The income of a controlled foreign company (CFC) is attributed to the Italian parent under a flowthrough taxation principle if both of the following circumstances exist:
• The foreign subsidiary is subject to an effective tax rate lower than 50% of the applicable Italian corporate income tax rate.
• More than 1/3 of the foreign subsidiary’s revenues qualify as passive income, such as dividends, interest, royalties, and fi nancial lease, insurance, bank and other financial activity in come, as well as income derived from the sale of goods or provision of low-value services to related parties.
A CFC is deemed to be controlled by an Italian company if either of the following circumstances exist:
• Direct or indirect control is exercised in the foreign company’s shareholders meeting, including by way of trust companies or intermediaries, through the majority of voting rights or a quali fying influence under Article 2359 of the Italian Civil Code.
• Over 50% of the participation in the foreign company’s profits is held either directly or indirectly by way of other companies controlled under Article 2359 of the Italian Civil Code, includ ing by way of trust companies or intermediaries.
CFC rules also apply to a foreign PE of a CFC, a foreign exempt PE of the Italian controlling company or an Italian subsidiary of the Italian controlling company.
An advance ruling may be electively obtained to demonstrate that the foreign entity (or PE) carried out an actual industrial or com mercial activity.
Since the ruling is not mandatory, the conditions required for the exemption can also be proved during the tax audit process. Accordingly, tax assessments concerning the CFC regime cannot be issued if the taxpayer has not been given the opportunity to provide evidence of this exemption within 90 days after the clari fication request.
In the absence of a positive ruling (and provided that the flowthrough taxation has not been applied), the Italian parent needs to disclose in its tax return the ownership of the shares triggering the application of the CFC rules. Specific penalties of up to EUR50,000 apply for a failure to make such disclosure.
Anti-avoidance legislation. A general anti-avoidance rule is set forth by Article 10-bis of Law 212/2000 and applies to all direct and indirect taxes with the exclusion of custom duties.
The rule defines “abuse of law” as “one or more transactions lacking any economic substance which, despite being formally compliant with the tax rules, achieve essentially undue tax advan tages.”
Transactions are deemed to lack economic substance if they imply facts, actions and agreements, even related to each other, that are unable to generate significant business consequences other than tax advantages. As indicators of lack of economic substance, the anti-avoidance rule refers to cases in which incon sistency exists between the qualification of the individual trans actions and their legal basis as a whole and cases in which the
choice to use certain legal instruments is not consistent with the ordinary market practice.
Tax advantages are deemed to be undue if they consist of benefits that, even if not immediate, are achieved in conflict with the purpose of the relevant tax provisions and the principles of the tax system.
Notwithstanding the above, the anti-avoidance rule establishes that no abuse of law exists if a transaction is justified by nonnegligible business purposes (other than of a tax nature), includ ing those aimed at improving the organizational and managerial structure of the business.
Taxpayers can submit ruling requests to the Italian authorities to verify whether any envisaged or realized transactions are consid ered abusive. The application must be filed before the deadline for the relevant tax return submission or before the satisfaction of other tax obligations associated with the transactions.
Anti-hybrid provision. Law Decree No. 142/2018 implemented the EU ATAD into domestic law.
Italian anti-hybrid rules apply as of the fiscal year starting after the one ongoing on 31 December 2019 (that is, as of 2020 for calendar-year companies). Rules applying to (Italian) reverse hybrids apply as of the fiscal year starting after the one ongoing on 31 December 2021 (that is, as of 2022 for calendar-year com panies).
The Italian ATAD Decree applies to IRES and the Italian indi vidual income tax (imposta sul reddito delle persone fisiche, or IRPEF), but it does not apply to IRAP. With reference to foreign jurisdictions, the Italian anti-hybrid rules take into consideration any tax covered by a bilateral tax treaty in place with the relevant country. However, if the applicable treaty also includes local taxes (that is, regional or cantonal), the anti-hybrid rules will only consider taxes applied at the highest governmental level (for ex ample, at the federal level). Absent a bilateral tax treaty, reference is made to taxes with the same or equivalent nature of the Italian taxes applied at the highest governmental level.
Debt-to-equity rules. For information regarding restrictions on the deductibility of interest, see Section C.
Mergers and acquisitions. Mergers of two or more companies, demergers and asset contributions in exchange for shares are, in principle, tax-neutral transactions. However, companies under taking mergers, demergers and asset contributions in exchange for shares may step up the tax basis of the assets for IRES and IRAP purposes by paying a step-up tax at rates ranging from 12% to 16%. Different types of step-up elections are available.
Tax benefits for selected business aggregations. The 2021 Budget Law introduced tax benefits for selected business aggregations between third parties or newly acquired targets, including merger and demerger transactions, as well as business contributions, implemented through 2021. The 2022 Budget Law extends cer tain tax benefits for selected business aggregations between third parties, including merger and demerger transactions, as well as business contributions, implemented on or before 30 June 2022.
The receiving entities involved in the aggregation may elect for the conversion into a tax credit of the deferred tax assets (DTAs) related to the tax losses carried forward and excess Italian NID.
The threshold for the convertible DTAs is generally 2% of the sum of the assets of the entities involved (but excluding the en tity with the most valuable assets).
For such purposes, it is not required that the convertible DTAs be recorded in the financial statements. The threshold of convertible DTAs is set at EUR500 million.
Foreign PEs of Italian entities and Italian PEs of foreign entities
Foreign PEs of Italian entities. An election is available to exempt income generated through foreign PEs. For branches located in a low-tax country, CFC rules apply. The election is irrevocable and involves automatically all of a company’s PEs (that is, “all in or all out”).
Italian PEs of foreign entities. Income is attributed to Italian PEs in line with the “Authorized OECD Approach.” The PE income is determined according to the ordinary rules for resident compa nies and on the basis of a specific statutory account prepared according to the Italian accounting principles applying to resident enterprises with similar features.
Dealings between Italian PEs and foreign headquarters are ex plicitly subject to Italian transfer-pricing rules. In this respect, a PE is treated as separate and independent from its headquarters, and profits attributed to the PE are those that the branch would have earned at arm’s length as if it were a “distinct and separate” entity performing the same or similar functions under the same or similar conditions, determined by applying the arm’s-length prin ciple. A branch “free capital” (fondo di dotazione) is also attrib uted to the PE on the basis of OECD principles.
The 2018 Budget Law expanded the definition of PE to align it with the revised definition in the 2017 version of the OECD model. However, as a departure from the current OECD version, the Italian domestic rule includes the following definition of a digital PE: “A continuous and significant economic presence of a foreign company in Italy, regardless of whether it has a substan tial Italian physical presence, will trigger the existence of a fixed base that could give rise to an Italian PE.”
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. On 7 June 2017, Italy and 67 other jurisdictions signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the MLI).
At the time of signature, Italy submitted a list of 84 tax treaties entered into by Italy and other jurisdictions that it would like to designate as covered tax agreements (tax treaties to be amended through the MLI).
Together with the list of covered tax agreements, Italy also submitted a provisional list of reservations and notifications (MLI positions) with respect to the various provisions of the MLI. The definitive MLI positions will be provided on the deposit of Italy’s instrument of ratification, acceptance or approval of the MLI.