Corporate Tax 2020

Last Updated January 15, 2020

Italy

Law and Practice

Author



Maisto e Associati was established in 1991 and is an independent Italian law firm, specialised in tax law, with offices in Milan, Rome and London. Over the years, the firm has grown consistently in size and reputation and now has 57 professionals, including 12 partners and three counsels, with consolidated experience in managing complex domestic and multi-jurisdictional cases. Most of the work of the firm has an international dimension. Clients include national and international financial institutions, venture capital, private equity and real estate players, large corporations and multinationals, high net worth individuals and wealthy families. Most of the firm’s professionals participate in advisory bodies and study groups, are frequent speakers at congresses and contribute to numerous publications and to the most prestigious tax journals. Several firm members have substantial experience in international taxation issues, having worked in the Netherlands, Switzerland, the USA and the UK.

Italian businesses frequently carry out their activity through corporate structures.

A corporate entity may adopt one of the following forms:

  • joint-stock company (società per azioni - SpA),
  • limited liability company (società a responsabilità limitata - Srl.)
  • partnership limited by shares (società in accomandita per azioni - Sapa).

Other corporate entities are co-operative companies and Societas Europeae (SE).

The first two corporate forms generally grant shareholders’ limited liability up to the value of the shares or quotas held in the company’s capital.

The incorporation as an SpA is required in order to carry out certain business activities (such as banking) and is generally selected to carry out businesses of medium-large size, while Srl is typically preferred for small and medium-sized enterprises. Both Srl and SpA can have a single share/quota-holder.

A Sapa is characterised by the presence of two classes of shareholders:

  • general partners (soci accomandatari) who are jointly and unlimitedly liable for the company’s obligations and act as directors; and
  • limited partners (soci accomandanti) who are liable for the company obligations up to the amounts of their contributions and cannot be directors. 

Other business forms may include individual enterprise and tax transparent partnerships (see 1.2 Transparent Entities).

Corporate entities (SpA, Srl, Sapa, società cooperative and Societas Europeae) are separate legal entities for tax purposes and are subject to corporate income tax (IRES) and Regional tax on business activity (IRAP).

However, subject to certain conditions, corporate entities may opt for a special regime whereby they are treated as transparent for tax purposes (regime di trasparenza volontaria)

The most common transparent entities are the general partnership (società in nome collettivo - Snc) and the limited partnership (società in accomandita semplice - Sas), which are both entitled to carry out business activities.

A third type of partnership, the simple partnership (società semplice), is mainly used as passive holding vehicle and for succession planning purposes, given the flexible rules applicable to its governance. However, Italian law does not allow it to be used for business activities.

An Snc is characterised by the unlimited liability of all of its partners, while Sas has two classes of shareholders (ie, general partners and limited partners) with different degrees of liability.

From a private law perspective, partnerships are regarded as separate legal entities, whereas, from a tax standpoint, they are treated as transparent for income tax purposes.

Particularly, partnerships are not subject to corporate income tax (IRES), although they are subject to IRAP. In accordance with tax transparency rules, the income of the partnership is computed at the partnership’s level and then attributed to each partner for tax purposes, regardless of distributions made and in proportion to their share in the partnership’s profit.

Corporations and partnerships are considered tax resident of Italy if, for most part of their tax year, they have one or more of the following connecting ties within the Italian territory:

  • a legal seat;
  • a place of management; or
  • a main business purpose.

The legal seat is where, according to the deed of incorporation, the entity’s registered office is situated.

The place of management is generally intended as the place where the management and control functions of the company are actually carried out (the criterion is regarded by Italian case law as akin to the place of effective management test under the 2014 OECD Model Tax Convention).

The main business purpose is the main activity (including day-to-day operations) carried out by the entity.

Since Italian law does not envisage the possibility to split the tax year for tax residence purposes, whenever one of the above criteria is satisfied for most part of the tax year, the company/partnership is regarded as a tax resident of Italy for the whole year. On the other hand, if none of the criteria is met for the most part of the tax year, the company/partnership is regarded as a non-resident person for the whole year.

Any determination on tax residence in accordance with double tax treaty would prevail over the determination for domestic tax rules.

Resident companies are taxable in Italy on their worldwide income while non-resident companies are subject to IRES and IRAP on their Italian-sourced income.

With regard to partnerships, residence comes into play as a connecting factor in order to establish the source of the partnership’s income. Thus, the income of resident partnerships is regarded as Italian sourced, while income of non-resident partnerships is not.

Resident corporate entities are subject to a 24% corporate income tax (IRES) on their worldwide income. In addition, they are subject to IRAP, which is generally levied at a basic rate of 3.9% (such rate may be varied depending on the Region and on the business sectors). Certain surcharges and increased rates apply to companies operating in specific industries (eg, the banking sector).

Individuals carrying out a business activity directly (ie, individual entrepreneurs), or carrying out a business through a transparent entity are subject to individual income tax (IRPEF) levied at the ordinary progressive tax rates which ranges from 23% up to 43% on income exceeding EUR75,000. Local surcharges apply. Partnerships (and not their partners) are subject to IRAP.

Taxable profits for IRES purposes are computed on the basis of accounting profits and on an accrual basis (save for certain exceptions such as dividends or directors’ fees which are tax-relevant on a cash basis).

The tax base is determined by applying certain downward and upward adjustments to accounting profits, based on specific rules provided for by the Italian tax law. Such adjustments include non-deductibility of expenses not pertaining to the business activity and other expenses exceeding certain thresholds (eg, entertainment and accommodation costs). Further adjustments may arise from differences between depreciation/amortisation rates allowed for tax purposes and those used for accounting purposes. 

For instance, trademarks and goodwill can be amortised up to one eighteenth of their cost for each tax period while patents and other IPs can be amortised up to one half of their cost.

Furthermore, tax law provides specific limitations for the deduction of bad debts. For instance, in any given tax year, unsecured bad commercial debts are tax deductible only up to 0.5% of the total receivables gross value, until a maximum provision of 5% of the gross value of the receivables as of the end of the tax year.

IRAP is levied on the “net value of production”, which is computed differently depending on the type of taxpayer and activity carried out (eg, there are different rules for companies, banks and financial institutions, insurance companies, partnerships).

Income from the exploitation of certain qualifying intangibles (eg, software and patents; trademarks were originally included, but were removed in 2017) may benefit from a patent box regime. A company may opt for the regime if it carries out R&D activities (directly or indirectly, by outsourcing to non-related companies, universities or other research institutions). In general terms, the regime grants a 50% exemption on the portion of the corporate income attributable to the economic contribution of the intangible, multiplied by the ratio between qualifying R&D expenditures and the total cost for the development of the intangibles. The value of qualifying R&D expenditures may be increased up to 30% by including the acquisition costs and R&D costs from outsourcing to related companies. The determination of the economic contribution of the intangible can be defined in a ruling with the tax authorities. Under certain conditions, the patent box regime applies as well to capital gains on the sale of the relevant intangibles.

A tax credit may be available for certain qualifying R&D expenses in excess of EUR30,000. Such credit is equal to up to 50% of the amount of qualifying R&D expenses that exceed the average of similar R&D expenses incurred in the previous years. In any tax year, the tax credit cannot exceed EUR10 million. In order to benefit from the tax credit, the eligible companies shall also meet certain record-keeping requirements (ie, tracing and tracking system and certification by a qualified auditor).

Innovative start-ups are companies which satisfy specific requirements such having an R&D expenditure which amounts at least to a certain amount established by law. Companies investing in an innovative start-up company and holding the investment for at least three consecutive tax years, are allowed to deduct from their taxable income 40% of the amount actually invested with a maximum yearly deduction of EUR720,000. Such threshold is increased to EUR900,000 if the investment is in the entire capital of an innovative start-up.

Under certain conditions accelerated or enhanced depreciation may be claimed. 

An optional tonnage tax regime provides for a deemed computation for income tax purposes of the taxable income stemming from the operation of ships. To be eligible for such regime, the entity must operate ships that:

  • have a net tonnage greater than 100 tons;
  • are used to transport goods or passengers or to perform certain other qualifying activities on the high seas; and
  • must be enrolled in the Italian international ships register.

Specific limitations apply for ships chartered (also on a bare boat basis). The regime allows for the determination of a deemed income based on the net tonnage of the ships apportioned to the effective shipping days (in lieu of the determination on the basis of the profits stemming from the financial statements). Once the option is exercised, it is irrevocable for ten tax years and is deemed to be renewed at the end of such period, unless expressly revoked. 

Shipping companies qualifying for the tonnage tax regime are not subject to IRAP. Furthermore, companies opting for the tonnage tax regime cannot be included in the consolidation regime (see 2.6 Basic Rules on Consolidated Tax Grouping). 

If a resident company receives assets (including goodwill) as a consequence of a merger, a demerger and/or the contribution of a going concern, it may benefit from a tax-free step-up of the tax basis of such assets for corporate tax and IRAP purposes for a value up to EUR5 million. The regime is applicable only in relation to transactions taking place between 1 May 2019 and 31 December 2022. Moreover, the regime applies on condition that the companies that are parties to the transaction are unrelated and have been active from an economic standpoint in the last two fiscal years preceding the transaction. The benefits from the above regime are clawed back if, in the four years following the year of the transaction, the company sells the assets that benefitted from the free step-up or is party to a merger, demerger and/or contribution of a going concern (such claw-back can be avoided, under certain circumstances by obtaining a specific ruling from the Revenue Agency).

Losses may be carried forward without time limitation to offset the corporate tax base in subsequent tax years; no carry back is allowed. In particular, losses incurred in a tax year can offset the corporate tax base of subsequent tax years up to 80% of the latter amount. This limitation does not apply to losses incurred by a company during the first three years of activity. In both cases, no time limitation applies.

However, the right of the company to carry forward losses is excluded in certain circumstances, such as:

  • where there is a change in the persons controlling the company, in the range of two tax periods preceding or following the change of control, there is a change in the activity of the company and the company did not satisfy certain substance requirements (number of employees, revenues, employment costs) in the one/two tax years preceding the transfer;
  • there is a merger or demerger and, in addition, the tax losses exceed the qualifying net equity of the company and the company with losses carried forward did not satisfy certain substance requirements (revenues and employment costs) in the tax year preceding the merger/demerger.

The above loss carry-forward exclusions may be avoided by obtaining a specific ruling confirming the absence of any abuse of law.

Subject to certain minor exceptions, the deductibility of interest, whether relating to intercompany financing or not, is subject to a specific deduction barrier. In particular, interest payable in excess of interest receivable is deductible up to 30% of the company’s tax-relevant EBITDA.

Interest expenses that exceed such barrier in a tax year may be carried forward and deducted in subsequent tax years (up to the amount of the 30% tax-relevant EBITDA that exceeds the net interest expenses of those subsequent years), or, if the company is part of a fiscal unity, used by other entities of the fiscal unity. Any excess of the 30% EBITDA over net interest expenses may be carried forward in the following five tax years or, if the company is part of a fiscal unity, may be used by other companies of the fiscal unity. Also interest income that exceeds interest expenses in a tax year may be carried forward to offset interest expenses of subsequent tax periods.

Certain companies involved in the financial sector are not subject to the interest limitation rule described above and can deduct up to 96% of their interest payable (under certain conditions, interest payable to companies of the same fiscal unity is not subject to this limitation).

Under the Italian domestic tax consolidation regime, companies belonging to a group may opt for the determination of an overall taxable base (fiscal unity). The tax return of the fiscal unity must be filed by the controlling company, or, in certain cases, by a controlled company designated by the non-resident controlling company (the company filing the tax return of the fiscal unity is generally known as the “consolidating entity”).

The regime is available to:

  • Italian resident companies controlled by an Italian resident parent;
  • Italian resident companies controlled by a non-resident parent with an Italian PE, provided that the parent is tax resident of a jurisdiction that has concluded a treaty enabling exchange of information with Italy; and
  • Italian resident companies controlled by a parent that is tax resident of an EU or EEA Member State.

In addition, non-resident companies with an Italian PE can be included in the fiscal unity as a consolidated entity (if resident in a EU/EEA Member State).

The consolidating entity must own, since the beginning of the relevant tax period, a participation in the consolidated entities representing more than 50% of the share capital and more than 50% of the rights to the profits (shares without voting rights are not taken into account).

All entities included in the fiscal unity must have tax years ending on the same date.

The perimeter of the tax consolidation may be freely devised by the taxpayers (ie, some companies may be kept out).

In the fiscal unity, the overall tax base is computed as the sum of the taxable bases (with some adjustments) of all participating entities. The taxable bases of the group entities are taken into account for their whole amount, irrespective of the percentage of participation held by the controlling company.

Once the election for the fiscal unity is made, the option is irrevocable for three years unless the conditions for the options cease to be met (interruption events).

Furthermore, under certain conditions, a worldwide consolidation tax regime is available. In this case the fiscal unity must include all foreign controlled companies.

Capital gains are generally treated as ordinary income, subject to corporate income tax levied at 24%.

However, under a specific participation exemption regime, capital gains realised by companies on the disposal of participations in other companies are exempt for 95% of their amount (while capital losses are wholly non-deductible) if the following conditions are met:

  • The participations must have been held uninterruptedly since the first day of the 12th month preceding the sale (with a LIFO method);
  • The participations must have been entered as fixed financial assets in the first financial statements after acquisition;
  • The participated company must have been carrying out a business activity in the last three tax periods or, if later, since incorporation;
  • The participated company must not have been resident of a low tax jurisdiction for all the five tax years prior to the year of sale if the buyer is a non-related party or for the entire holding period if the buyer is a related company. Such condition is waived if it is demonstrated that the ownership of the participation did not – for the same period - have the effect of shifting the income to a low tax jurisdiction. 

With regard to the third bullet point, companies whose value is mainly represented by real estate not used in the course of a business activity are deemed to not carry out a business. This condition does not apply, however, in respect of participations in companies whose shares are listed on a stock exchange.

If the participation exemption regime does not apply, the taxpayer may still opt for spreading the capital gain tax base over five tax years if the participation has been booked as fixed financial assets in the last three financial statements or, for other assets, the capital asset has been held for at least three years.

VAT

VAT is a general tax on consumption in Italy. As an EU Member State, Italian VAT provisions are in line with the EU VAT Directives.

Where the conditions are met, VAT is levied at a general rate of 22% on transfers of goods and supplies of services. Reduced rates (4%, 5% and 10%) may apply to certain types of transactions.

In general, VAT taxable persons are entrepreneurs, artists and professionals.

The following transactions are subject to Italian VAT:

  • supply of goods and services in Italy by a VAT taxable person;
  • intra-EU acquisition of goods in Italy by a VAT taxable person; and
  • import of goods from outside the EU into Italy by any person (including a non-VAT taxable person).

Exports and intra-EU sales of goods are VAT zero-rated.

Registration Tax, Mortgage and Cadastral Taxes

Registration tax is generally due on deeds (including contracts) executed in Italy. In certain cases (such as transfers of real estate or of a business located in Italy), registration tax is due even if the deed of transfer is executed abroad.

The deed of transfer may be subject to registration tax either at the fixed amount (EUR200) or at a proportional rate, depending on the nature of the deed. If the deed of transfer is within the scope of VAT (even if exempt or zero rated), registration tax applies at the fixed amount (EUR200).

Mortgage and cadastral taxes generally apply to deeds of transfer or mortgages on Italian real estate. These taxes can also apply to the sale of a business if real estate is included. In case of transfers of real estate assets subject to VAT, a EUR200 mortgage tax and EUR200 cadastral tax are also levied, with certain exceptions (for instance, in case of sale of business real estate, a 3% mortgage tax and 1% cadastral tax apply).

Loans guaranteed by a mortgage on real estate are subject to mortgage tax at the rate of 2% of the guaranteed amount (a 0.5% charge may apply on the cancellation of the mortgage), on top of registration tax, which applies at the rate of 0.5% of the guaranteed amount (guarantees granted by the same debtor are subject to registration tax at the fixed amount of EUR200).

However, financing transactions executed in Italy with a medium-long term maturity and granted by qualifying lenders (including resident banks), are not subject to the above-mentioned registration, cadastral and mortgage (as well as other duties) but to an overall 0.25% substitute tax.

Financial Transaction Tax

A financial transaction tax (FTT) is levied on transfers of shares and certain participating financial instruments issued by companies that have their registered office in Italy, regardless of the place of residence of the parties and of where the contract is executed.

The standard tax rate is 0.20% on the transaction value. A reduced tax rate (0.10%) applies to transactions executed on regulated stock markets or in multilateral trading facilities.

The ownership of real estate located in Italy are subject to municipal real estate tax (IMU), levied at the basic rate of 0.76%, subject to local variations.

Other local taxes connected to the ownership of real estate apply.

Closely held businesses are generally in the form of limited liability companies (Srl) or partnerships.

Even if the corporate rates are lower than individual rates, the total effective tax rate applicable to an individual receiving the profits from an incorporated business (by means of profits distribution) is substantially similar to that deriving from the realisation of income from the carry out of business activities as an individual entrepreneur. In fact, dividends distributed to individual shareholders are subject to a 26% substitute tax, so that the total effective tax rate is in the range of 44% (while the top progressive tax rate for individual is 43%).

There are no specific rules aimed at preventing closely held corporations from accumulating earnings for investment purposes. As a general rule, retained earnings of corporations are taxed in the hands of the shareholders only upon distribution.

On the other hand, there are certain rules that apply with a view to stimulate the re-investment of corporate profits.

Under current rules, dividends from and gains on the sale of shares in closely held corporations are taxed in the hand of individual shareholders with the rate of 26%.

This regime does not apply to dividends that are paid out of profits earned until 31 December 2017 and whose distribution is declared between 1 January 2018 and 31 December 2022. For such dividends, the previous regime provided for different tax regimes varying depending on the percentage of participation held by the shareholder.

There are no special rules for the taxation of dividends from and gains on the sale of shares in publicly traded corporations. The tax regime is the same described in 3.4 Sales of Shares by Individuals in Closely Held Corporations.

Dividends paid to non-residents in respect of participations that are not connected with Italian PEs are generally subject to a 26% withholding tax, which may be reduced by applicable double tax treaties. Non-resident recipients may benefit from a potential refund of the foreign tax paid on dividends up to 11/26 of the Italian withholding tax if they prove that a similar tax has already been paid abroad on a final basis on the same dividends.

A reduced 1.2% withholding tax is levied on dividends that are paid out of profits accrued in fiscal years starting on or after 1 January 2008 if the beneficial owner is a company resident and subject to corporate income tax in another EEA Member State that allows an adequate exchange of information with Italy.

There is no withholding tax if the EU Parent-Subsidiary Directive applies.

Interest payments made to non-residents in respect of loans or instruments that are not connected with Italian PEs are generally subject to a 26% withholding tax that may be reduced by the applicable double tax treaty or eliminated if the EU Interest and Royalties Directive applies. A reduced withholding tax rate (12.5%) is granted to interest arising from government bonds and similar instruments. Some exemptions from withholding tax apply under specific conditions. For example, no withholding tax is levied on interest from certain bonds paid to residents of jurisdictions with an effective exchange of information with Italy, interest on Italian bank accounts and deposits, and interest payments made in relation to medium-long term financing granted by qualifying lenders.

Royalties paid to non-residents in respect of loans or instruments that are not connected with Italian PEs are generally subject to a withholding tax rate levied at 30% with the possibility, under certain conditions, to reduce the taxable base by 25%. The royalty withholding tax may be reduced by the applicable double tax treaty or eliminated if the EU Interest and Royalties Directive applies.

When deciding in which jurisdiction to set up a holding company that will hold participations in Italian resident companies, foreign investors tend to prefer countries that have treaties with Italy granting a full tax relief on the capital gains from the disposal of such participations.

For example, treaty residents of Luxembourg, the Netherlands and the United Kingdom are not subject to tax in Italy on gains from the disposal of participations in Italian companies. Other treaties, in certain circumstances, do not provide tax relief on gains from the disposal of similar participations (for example, the treaty with France does not provide relief from Italian tax in the case of disposal of a participation in an Italian company granting the holder the right to receive at least 25% of the profits of the company).

Italian tax authorities often challenge the applicability of double tax treaties and/or EU Directives based on the argument that the recipient is not the beneficial owner of the relevant income or is an artificial arrangement (ie, with no sufficient substance).

In Circular letter No 6 of 30 March 2016, the Italian tax authorities held the view that that treaty benefits can be disallowed when a non-resident company lacks economic substance based on a case-by-case analysis of all relevant facts and circumstances. The tax authorities held that, when treaty benefits are so denied to a non-resident company, the ultimate investors of such company could (subject to the relevant conditions) claim the application of the tax treaties signed between Italy and their state of residence (if any).

Furthermore, domestic tax authorities can challenge abusive practices on the basis of Article 10 bis of Law 212, dated 27 July 2000, which contains a general anti-abuse rule that empowers domestic tax authorities to counteract tax advantages arising from abusive transactions, including treaty-shopping arrangements.

Intercompany cross-border transactions have to be priced at arm’s length conditions.

Tax authorities frequently challenge the arm’s length value of transactions having regard to the choice of the set of relevant comparables, the transfer pricing methodologies chosen, the relevant values to take into account and the time window of the comparability analysis.

Other aspects of intra-group cross-border transactions that are subject to the scrutiny of Italian tax authorities include:

  • challenge of the functional profile of the parties to the transactions in the light of all facts and circumstances emerging during a tax audit; and
  • re-characterisation of the nature of certain transactions. For example, tax authorities may re-characterise a shareholder’s loan as a capital contribution.

Limited risk distribution arrangements are often used by foreign companies to determine the arm’s length remuneration of Italian distributors of the group. In principle, such arrangements are treated as in line with the arm’s length principle. However, as pointed out in 4.4 Transfer Pricing Issues, Italian tax authorities may challenge the functional profile of the Italian distributor if the functions actually performed by the latter are not consistent with the arrangement.

Italian transfer pricing rules as are essentially patterned on the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines).

In that regard, Article 110(7) of the Italian Income Tax Code, containing the primary legislation dealing with transfer pricing, has been recently amended to be aligned with the OECD Guidelines and includes an express reference to the arm's length notion.

Compensating adjustments are allowed under Italian tax law and practice.

On the one hand, it is generally accepted in Italy that the contracts regulating the transactions between group companies provide for year-end adjustments, based on the actual financial data, to be carried out before the financial statements are realised and the tax returns filed. Although this practice does not represent a proper instance of compensating adjustment (as it does not lead to a departure of the tax figures from the accounting figures), it offers the taxpayer the possibility to correct – also for tax purposes – the prices initially applied in the relevant transactions in order to take into account facts that have became know only thereafter.

On the other hand, proper compensating adjustments (ie, adjustment in which the taxpayer reports a transfer price for tax purposes that differs from the amount actually charged between the associated enterprises) are also accepted in Italy. In particular, these adjustments may occur in two cases: when the outcome of TP tax settlements concerning certain tax years are carried forward to subsequent tax years and when the results of APAs concerning certain tax years are carried back to previous tax years. In both cases, compensating adjustments are employed in order to modify the tax profits relating to past years, for which the tax returns have already been filed.

There are no significant differences between the taxation of Italian PEs of non-resident companies and resident companies.

Capital gains realised by non-residents upon the transfer of shares or other participations in Italian companies are regarded as Italian-source and, therefore, subject to tax in Italy. The applicable rate is generally 26%. There are certain exceptions, such as the following:

  • capital gains on non-substantial shareholdings traded in regulated markets are not subject to tax; and
  • capital gains on non-substantial shareholdings are exempt if the non-resident person is tax resident in a State which allows for an adequate exchange of information with Italy or if such person qualifies as an “institutional investor” established in a State which allows for an adequate exchange of information with Italy.

A person is regarded as selling a non-substantial shareholding if the amount of participation sold during a 12-month period does not exceed 20% (or 2% in the case of a listed company) of the voting rights or 25% (or 5% in the case of a listed company) of the stated capital.

The above taxation could be prevented in case of application of double tax treaties.

There are no provisions explicitly addressing the taxation of indirect disposals of shareholdings in Italian resident companies (ie, disposals of shareholdings in a non-resident company that owns an interest in a resident company).

In case of change of control, the following consequences may arise:

  • interruption of any fiscal unit regime (see 2.6 Basic Rules on Consolidated Tax Grouping); and
  • forfeiture of tax losses (see 2.4 Basic Rules on Loss Relief).

In general terms, the Italian tax authorities tend to follow the guidance laid down by the OECD Guidelines and, therefore, do not make use of predetermined formulas to determine the income of resident subsidiaries or Italian PEs.

Article 152(2) of the Income Tax Code explicitly states that the PE is treated as if it is a distinct and separate enterprise, engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, the risks assumed and the assets held. The “free capital” of the permanent establishment (fondo di dotazione) is determined based on the OECD principles, taking into account the functions performed, the risks assumed and the assets held.

In general terms, Italian tax authorities follow the OECD Guidelines and allow the deduction of management and administrative expenses incurred by a non-resident related company on the conditions that the expenses do not qualify as shareholder’s costs, the services have been effectively rendered to the Italian resident company, the services are provided for the benefit of the Italian company and the value of the consideration is at arm’s length. Proper documentation providing evidence that these conditions are met should be kept by the Italian company.

In general terms, interest payments made to non-resident related parties are subject to transfer pricing legislation. In addition, the deductibility of interest expenses is subject to the interest limitation rule explained in 2.5 Imposed Limits on Deduction of Interest.

Resident companies are subject to corporate income tax on their worldwide profits. If such profits include foreign-source income or gains that are subject to tax also in the State of source, the Italian resident company is granted a foreign tax credit.

Resident companies that have PEs abroad may also apply, instead of the tax credit method, an optional branch exemption regime. The option must be exercised in the tax return relevant to the year in which the PE has been set up.

If the option is exercised it is irrevocable and the regime will apply to all the foreign PEs of the resident company.

The profits attributable to the foreign PE shall be determined pursuant to the Authorised OECD Approach (AOA). If the foreign jurisdiction does not apply the AOA, the company may apply for a ruling asking for the application for Italian tax purposes of the method used in the foreign jurisdiction to determine the profits attributable to the PE.

As foreign-source income and foreign-source gains are usually subject to tax in the hands of a resident company, the related expenses are deductible under the same rules applicable to the deduction of domestic source income and gains. In relation to the income from (and losses of) PEs under the branch exemption regime see 6.1 Foreign Income of Local Corporations.

Inbound dividends paid by non-resident companies are subject to the same rules applicable to dividends paid by resident companies and are, therefore, 95% exempt in the hands of the recipient (a few tax treaties provide for full exemption of qualified intercompany dividends).

As a general rule, this regime applies on condition that the payment is fully profit-contingent (ie, the amount distributed has been determined in the light of the economic performance of the payer) and the payment is fully non-deductible in the country of the payer. If the payment is partly deductible and the conditions for the application of the Parent Subsidiary Directive (Directive 2011/96/EU) are met, the 95% exemption applies to the part of the dividend payment that is non-deductible.

As an exception to the above, dividends from low tax jurisdictions are fully taxable.

EU and EEA Member States are never considered as low tax jurisdictions. The criteria applicable in order to determine if a non-EU/EEA jurisdiction is low tax are as follows:

  • if the resident company has a non-controlling shareholding in the non-resident company, the jurisdiction is low tax if the nominal tax rate in the foreign jurisdiction – taking into account any special regime applicable therein – is lower than 50% of the tax rate applicable in Italy;
  • if the resident company has a controlling shareholding, the jurisdiction is low tax if the effective tax rate in the foreign jurisdiction is lower than 50% of the effective income tax rate applicable in Italy.

The full taxation of dividends applies:

  • if the dividends are paid directly by a company resident in a low tax jurisdiction; or
  • if the Italian resident company has a controlling holding in a foreign company that, in turn, has a shareholding in a company resident in a low tax jurisdiction (to the extent of dividends deriving from the company resident in the low tax jurisdiction).

Dividends from low tax jurisdiction can benefit from the 95% exemption under certain conditions. Essentially, pursuant to the current practice of the tax authorities, the shareholder should demonstrate that the profits of the company resident in the low tax jurisdiction are subject to an “appropriate tax burden” since when the shareholding was acquired.

Where such conditions are not met, but the resident company provides evidence that the foreign entity carries out an effective business activity through personnel, equipment, assets and premises, then only 50% of the dividends is taxed. Moreover, in such a case, if the recipient controls the foreign entity, it is granted also a credit for 50% of the corporate tax paid by the foreign entity.

The rules on the taxation of dividends from low tax jurisdictions apply, under the same conditions explained above, also to profits repatriated from PEs under the branch exemption regime.

If an Italian resident company has developed an intangible and such intangible is used by a foreign related company, such dealing is generally subject to transfer pricing legislation. Income from the use of intangibles may benefit from the patent box regime described in 2.2 Special Incentives for Technology Investments.

CFC legislation applies if:

  • the Italian taxpayer (a resident company or Italian permanent establishment of a non-resident company) has a controlling holding in the foreign entity;
  • the foreign entity is subject to an effective tax rate lower than 50% of the Italian effective income tax rate; and
  • more than one third of the revenues of the foreign entity are represented by certain tainted income (such as dividends, royalties or interest, revenues from banking, insurance and financial activities, revenues from financial leasing, gains from the sale of shareholdings, revenues from certain low-value-adding intercompany transactions).

If CFC legislation applies, the profits of the foreign entity shall be computed pursuant to Italian tax legislation and attributed for tax purposes to the Italian taxpayer in proportion to its rights to the entity’s profits. The CFC income is taxed separately in the hands of the Italian taxpayer (ie, with no possibility to be offset against the losses of the latter). A credit for the taxes paid by the CFC (and any withholding tax paid on the distribution of the CFC profits) may be deducted from the Italian tax due on the CFC income.

An exemption from the CFC legislation is granted if the resident company provides evidence that the foreign entity carries out an effective business activity through personnel, equipment, assets and premises. It is possible to apply for a ruling in order to obtain confirmation from the tax authorities that this condition is met.

Foreign PEs whose income is exempted under the branch exemption regime (see 6.1 Foreign Income of Local Corporations) are subject to CFC legislation if they are located in a jurisdiction that qualifies as low tax according to the above criteria.

The economic substance of foreign related entities is often looked at by the tax authorities and may trigger challenges.

A common tax challenge concerns the case where the tax authorities tackle the foreign tax residence of a foreign entity with little substance, claiming that such entity should be regarded as tax resident of Italy because it is actually managed by its Italian parent.

Alternatively, tax authorities may altogether disregard the foreign entity so that all its income and gains will be attributed to the Italian parent as if realised directly by the latter. In the recent practice of the tax authorities, some foreign subsidiaries of Italian parents were re-characterised as foreign PEs, due to the lack of a managerial independence.

The lack of substance of a non-resident company may also lead to a charge denying treaty benefits to the latter.

Capital gains made by resident companies on the sale of shareholdings in non-resident companies can be eligible for the 95% participation exemption (see 2.7 Capital Gains Taxation).

A general anti-avoidance rule empowers the tax authorities to challenge an arrangement or a series of arrangements which do not have economic substance and, although formally compliant with the wording of the law, have been put into place for the main purpose or one of the main purposes of obtaining an undue tax advantage having regard to all relevant facts and circumstances.

If a company’s turnover exceeds certain thresholds, tax audits are carried out by the competent regional directorate of the Revenue Agency and the company is monitored more strictly and more frequently.

Several measures recommended within the BEPS project were already part of the Italian tax system before 2015. Others have been added, particularly by implementation of the ATAD I and II Directives. For example:

  • Italy amended the domestic definition of permanent establishment, aligning it – to a large extent – to the recommendations included in the Final Report on BEPS Action 7;
  • even if a number of anti-hybrid provisions were already in place from 2004, in 2018 Italy introduced additional anti-hybrid provisions upon implementation of ATAD I and II; and
  • CFC and interest deduction rules were aligned with the ATAD principles (see 2.5 Imposed Limits on Deduction of Interest and 6.5 Taxation of Income of Non-local Subsidiaries Under CFC-Type Rules).

Italy is a signatory to the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS of November 2016. Such convention has not yet been ratified.

The Italian Government actively participated to the BEPS project (see 9.1 Recommended Changes).

Issues concerning fair taxation of multinationals in Italy are often within the domain of public discussion and under the media spotlight. Some initiatives (such as the introduction of a digital services tax) received public support.

In the last few years, Italy has introduced a number of favourable regimes meant to incentivise certain investments and behaviours of taxpayers, such as:

  • a Notional Interest Deduction regime. The regime is meant to incentivise the capitalisation of resident companies and Italian PEs. Under such provision a special allowance is granted for corporate income tax (IRES) purposes on certain qualifying equity increases, subject to a number of reductions. The deductible amount is equal to 1.3% of the net equity increases. The application of the Notional Interest Deduction benefit is subject to a number of conditions, including the requirement that the funds that constituted the net equity increases do not derive from investors that are located in States that do not adequately exchange information with Italy, or by investors that are controlled, also indirectly, by Italian resident companies (in order to eliminate any duplication of the benefit). The Notional Interest Deduction base is capped at the amount of the net equity of the company.
  • the Patent Box regime (see 2.2 Special Incentives for Technology Investments) originally introduced also with respect to trademarks (then carved out in compliance with BEPS recommendations).
  • the super-enhanced depreciation regime (see 2.3 Other Special Incentives) meant to incentivise investments in valuable and highly technological assets.
  • the branch exemption regime (see 6.1 Foreign Income of Local Corporations) was introduced a few years ago to boost the competitiveness of resident companies operating directly in foreign jurisdictions.

Such regimes are not expected to be (further) amended in the light of BEPS recommendations (as noted, the patent box has been already made compliant with BEPS recommendations).

See 9.4 Competitive Tax Policy Objective.

As mentioned at 9.1 Recommended Changes, Italy introduced a limited anti-hybrid legislation effective from 2004, which was meant to counteract the use of certain hybrid instruments. As of 2018, a fully-fledged anti-hybrid legislation was introduced in compliance with ATAD I and II.

There are no territorial tax regimes except for the optional application of the branch exemption regime described in 6.1 Foreign Income of Local Corporations.

Italian interest limitation rules apply in general to all interest expenses of resident companies and Italian PEs, regardless of whether the payee of the interest payments is Italian or foreign and related or not. The regime applicable to interest deduction is in line with Article 4 of ATAD I.

Italian law has featured CFC legislation since 2000. An illustration of the currently applicable rules is provided at 6.5 Taxation of Income of Non-local Subsidiaries Under CFC-Type Rules. A change of the current CFC regime could possibly derive from the decision to implement any measure stemming from the future wide convergence, at the international level, on the proposal recently put forward by the OECD in the context of Pillar Two of the Programme of Work for Addressing the Tax Challenges of the Digitalisation of the Economy agreed upon by the Inclusive Framework.

Pursuant to an established practice, Italian tax authorities apply Italian domestic anti-avoidance rules and principles to deny treaty benefits. The case law of the Supreme Court upholds this practice. It is, therefore, not expected that the recommendation on a treaty general anti-avoidance rule of Action 6 will have an impact on this practice.

Italian treaties do not generally include a limitation on benefits provision (the notable exception being the treaty with the United States). Furthermore, Italy did not opt to apply the Simplified Limitation on Benefits rule included in the MLI and, therefore, such rule should not be included in any of Italy’s Covered Tax Agreements (obviously, this conclusion should be further checked when Italy will ratify the MLI and deposit the final list of notifications).

The changes to the OECD Transfer Pricing Guidelines made pursuant to BEPS Actions 8 to 10 have not resulted in any dramatic change in the Italian regime. Indeed, the approach of the Italian tax authorities within tax audits was already essentially based on the substance over form principle.

Transfer pricing was and continues to be an area carefully and often scrutinised by the tax authorities during audits of companies of multinational groups.

As an EU Member State, Italy complies with the obligations on the exchange of information laid down by the Directive on the exchange of information (under Directive 2011/16/EU, so called DAC). Such exchange of information includes, inter alia, mandatory exchange of tax rulings and CRS with other Member States.

In 2015, Italy introduced Country-by-Country reporting obligations in line with BEPS Action 13 recommendations and in line with the DAC in relation to information concerning tax years that began on or after 1 January 2016.

Moreover, Italy is currently implementing the new provisions of the DAC concerning the automatic exchange of information on certain reportable cross-border arrangements (generally known as DAC 6 provisions).

See 9.13 Digital Taxation.

In 2017, the domestic law definition of permanent establishment has been amended in order to provide that a non-resident company shall be regarded as having a PE if it has “a significant and continuous economic presence in the Italian territory that has been arranged in such a way that does not give rise to a physical presence therein”. The provision seems loosely inspired by BEPS Action 1 Report. However, the exact scope of the provision and its relation with existing tax treaties (which do not include such a provision in their definition of a PE) is currently unclear.

In December 2019, Italy introduced a Digital Services Tax (DST), patterned after the European Commission Proposal of March 2018. The DST entered into force on 1 January 2020. Taxable persons shall make the first payment of the DST by 16 February 2021 on the taxable revenues that they realised during 2020 and shall submit the relevant tax return by 31 March 2021.

The DST is a tax on revenues stemming from the provisions of three types of services:

  • the placing on a digital interface of advertising targeted at users of that interface;
  • the making available to users of a multi-sided digital interface which allows users to find other users and to interact with them, and which may also facilitate the provision of underlying supplies of goods or services directly between users; and
  • the transmission of data collected about users and generated from users' activities on digital interfaces.

The DST is levied at the rate of 3% on the gross revenues (net of VAT) for the provision of such services that are to be regarded as realised in Italy according to specific territoriality rules based on the location of the users of the services and regardless of the location of the payers.

Like the European Commission’s proposal, DST should not apply to a certain number of provision of services and supply of goods such as, in particular, the provision of digital contents and e-commerce transactions.

The DST applies to both resident and non-resident entities, with or without an Italian permanent establishment, that meet these two dimensional thresholds in the calendar year preceding the one in which the DST should apply, either on a standalone basis or at the group level:

  • the total amount of worldwide revenues reported during the calendar year are not lower than EUR750 million; and
  • the total amount of revenues from the provision of the DST taxable services from Italian sources realised during the calendar year is not lower than EUR5.5 million.

There are no specific provisions dealing with the taxation of offshore intellectual property.

This is not applicable in this jurisdiction.

Maisto e Associati

Piazza Filippo Meda 5
20121 Milano

+39 02 77 6931

+39 027 769 3300

g.maisto@maisto.it www.maisto.it
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Maisto e Associati was established in 1991 and is an independent Italian law firm, specialised in tax law, with offices in Milan, Rome and London. Over the years, the firm has grown consistently in size and reputation and now has 57 professionals, including 12 partners and three counsels, with consolidated experience in managing complex domestic and multi-jurisdictional cases. Most of the work of the firm has an international dimension. Clients include national and international financial institutions, venture capital, private equity and real estate players, large corporations and multinationals, high net worth individuals and wealthy families. Most of the firm’s professionals participate in advisory bodies and study groups, are frequent speakers at congresses and contribute to numerous publications and to the most prestigious tax journals. Several firm members have substantial experience in international taxation issues, having worked in the Netherlands, Switzerland, the USA and the UK.

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