Italian businesses frequently carry out their activity through corporate structures.
Forms of Corporate Entities
A corporate entity may adopt one of the following forms:
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 an Srl is typically preferred for small and medium-sized enterprises. Both the Srl and SpA can have a single share/quota-holder.
A Sapa is characterised by the presence of two classes of shareholders:
Other business forms may include individual enterprises and tax transparent partnerships (see 1.2 Transparent Entities).
Corporate entities (SpA, Srl, Sapa, società cooperative and SE) 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 or Snc) and the limited partnership (società in accomandita semplice or Sas), which are both entitled to carry out business activities.
A third type of partnership, the simple partnership (società semplice), is mainly used as a 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.
The Snc is characterised by the unlimited liability of all of its partners, while the 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.
Partnerships are not subject to IRES, but 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 income tax purposes, regardless of distributions made and in proportion to their share in the partnership’s profit. As a general rule, subsequent profit distributions are not taxed in the hands of the partners.
Corporations and partnerships are regarded as being tax resident in Italy if they have one or more of the following connecting ties within the Italian territory, for the majority of their tax period:
The legal seat is where the entity’s registered office is situated, according to the deed of incorporation.
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 being 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 period for tax residence purposes, whenever one of the above criteria is satisfied for most part of the tax period, the company/partnership is regarded as being tax resident in Italy for the whole tax period. Conversely, if none of the criteria is met for the majority of the tax period, the company/partnership is regarded as a non-resident person for the whole period.
Any determination on tax residence in accordance with double tax treaties 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 only 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 being Italian sourced for the partners, while the income of non-resident partnerships is not.
Resident corporate entities are subject to 24% IRES on their worldwide income; they are also subject to IRAP, which is generally levied at a basic rate of 3.9% (such rate may vary, depending on the Region and the business sectors). Certain surcharges and increased rates apply to companies operating in specific industries (eg, the banking sector) for the purposes of both IRES and IRAP.
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 range from 23% up to 43% on income exceeding EUR50,000. Local surcharges apply. Individual entrepreneurs and 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 (with 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 Italian tax law. Such adjustments include the non-deductibility of expenses that do not pertain to the business activity and of 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, unless certain special regimes apply, trade marks and goodwill can be amortised up to one eighteenth of their cost for each tax period, while patents and other IP can be amortised up to one half of their cost. Furthermore, tax law sets out specific limitations for the deduction of bad debts. For instance, in any given tax year, the unsecured bad commercial debts of companies – other than banks, financial institutions and insurance companies – are tax deductible only up to 0.5% of the total receivables gross value, up to 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 and partnerships).
Up until tax year 2020, income from the exploitation of certain qualifying intangibles (eg, software and patents; trade marks were originally included, but were removed in 2017) could benefit from a patent box regime. A company could opt for the regime if it carried out R&D activities (directly or indirectly, by outsourcing to non-related companies, universities or other research institutions).
In general terms, the regime granted 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 could be defined in a ruling with the tax authorities. Under certain conditions, the patent box regime also applied to capital gains on the sale of the relevant intangibles.
Effective from tax year 2021, the patent box regime has been redesigned by the budget law for 2022. The new regime replaces the 50% exemption with a super-deduction regime whereby the company could benefit from an additional deduction from its taxable income in the amount of 110% of R&D expenses incurred for the purposes of certain qualifying intangibles. Specific interim rules apply for those who already have a patent box ruling in place.
A tax credit is available for certain qualifying R&D expenses. 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).
The Italian budget law for 2023 extended until 30 September 2023 the deadline for finalising investments in ”4.0” tangible assets that had been booked by 31 December 2022. For these assets, the tax credit can be up to 40% of the cost for the investment portion. On the other hand, for investments in ”4.0” tangible assets booked in 2023, a lower tax credit is recognised up to 20% of the cost for the investment portion.
Innovative start-ups are companies that satisfy specific requirements, such as having an R&D expenditure that amounts to at least 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 30% of the amount actually invested, with a maximum yearly tax benefit of EUR540,000; the amount in excess may be carried forward in the subsequent three fiscal years.
Under certain conditions, a tax credit is granted for investments in new tangible and intangible assets intended to be used for production facilities located in the Italian territory.
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:
Specific limitations apply for chartered ships (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).
Energy and Gas
With the aim of containing prices due to the energy crisis, a tax credit was introduced equal to 35% for non-energy intensive companies and 45% for all other companies (ie energy, gas and non-gas intensive companies) of the costs incurred for the electricity purchased, and effectively used, in the first quarter of 2023, if the costs per kWh of electricity have increased by more than 30% compared to the same period of the year 2019.
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:
The above loss carry-forward exclusions may be avoided by obtaining a specific ruling confirming the absence of any abuse of law.
With regard to blacklisted countries, expenses arising from transactions with companies or professionals located therein are not deductible up to their market value, unless the actual economic interest and the actual execution of the transactions is proven by the Italian resident company.
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. Moreover, interest income that exceeds interest expenses in a tax year may be carried forward to offset the 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:
In addition, non-resident companies with an Italian permanent establishment can be included in the fiscal unity as a consolidated entity (if resident in an EU/EEA member state).
The consolidating entity must own, from 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 the 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 which 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:
With regard to the third bullet point, companies in which the value of assets is mainly represented by real estate not used in the course of a business activity are deemed to not carry out a business activity. 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 to spread 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, if the capital asset has been held for at least three years.
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.
Among the most common transactions, the following are subject to Italian VAT:
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 may also apply to the sale of a business if real estate is included. In 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 the 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, certain financing transactions and bonds 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 taxes (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 is 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 generally operate in the form of Srls 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 carrying 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 individuals 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 stimulating 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, at the rate of 26%.
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 as described in 3.4 Sales of Shares by Individuals in Closely Held Corporations.
In general terms, Italian tax authorities are quite keen on auditing cross-border payments of dividends, interest and royalties to ensure that EU Directives or treaty benefits have been properly applied. In this way, there is increasing attention on tax audits on the satisfaction of the beneficial ownership requirement on the recipient, as well as on the potential abusiveness of structures that give rise to withholding tax exemptions or reductions.
Dividends paid to non-residents in respect of participations that are not connected with Italian permanent establishments 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.
Dividends paid from 1 January 2021 are not subject to tax if they are paid to collective investment vehicles that are established in EU member states or EEA member states and that are either compliant with Directive 2009/65/EC or whose managers are subject to surveillance in the States in which they are established, pursuant to Directive 2011/61/EU.
Dividends paid to EU and EEA pension funds are generally subject to 11% tax, which may be reduced to zero if certain conditions are met.
There is no withholding tax where the EU Parent-Subsidiary Directive applies.
Interest payments made to non-residents in respect of loans or instruments that are not connected with Italian permanent establishments are generally subject to a 26% withholding tax, which may be reduced by an 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 permanent establishments 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 an 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 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 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.
Finally, it is worth mentioning that, with specific regard to the right of the tax administration to counter abusive tax practices, the Italian Supreme Court has endorsed (see, for example, decision No 14756 of 2020 and decision No 3380 of 2022) the principles affirmed by the Court of Justice of the European Union in joined cases N Luxembourg 1 (c-115/16), X Denmark A/S (c-118/16), C Danmark I (c-119/16) and Z Denmark ApS (c-299/16), dealing with the application of the Interest and Royalties Directive.
Intercompany cross-border transactions have to be priced under 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 be taken 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:
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, if the functional and risk analysis confirms consistency with a limited-risk feature, such arrangements are treated as being in line with the arm’s length principle. However, as pointed out in 4.4 Transfer Pricing Issues, the 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 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, is generally aligned with the OECD Guidelines and includes an express reference to the arm’s length principle.
In the last few years, Italian tax authorities have significantly increased their attention towards transfer pricing matters both in the context of the ordinary operations of multinational groups and in the cases of business restructurings. This is also a reflection of the increased knowledge of the matter by tax auditors and general awareness on an international basis.
Over the past few years, the use of mutual agreement procedures – based on either the double tax treaties or the EU Arbitration Convention (90/436/EEC) – has increased as an alternative to, or in concurrence with, domestic litigation.
Recourse to the mutual agreement procedures is increasing following the recent implementation in Italy of EU Directive 2017/1852 of 10 October 2017, overcoming some critical issues with particular regard to the access, duration and effective conclusion of the procedure. The opportunity to gain effective elimination of double taxation together with the fact that under current rules most transfer pricing claims are entitled to penalty protection make the use of mutual agreement procedures increasingly popular.
The Italian tax authorities that take part in the mutual agreement procedures generally discuss the cases with the foreign competent authorities to achieve a resolution that is in line with the arm’s length standard.
Compensating adjustments are allowed under Italian tax law and practice.
On the one hand, it is generally accepted in Italy that the contracts regulating 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 became known only thereafter.
On the other hand, proper compensating adjustments (ie, adjustments 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, subject to the ordinary rules on corporate income taxation.
There are no significant differences between the taxation of Italian permanent establishments 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-sourced and, therefore, are subject to tax in Italy. The applicable rate is generally 26%. There are certain exceptions, such as the following:
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. Such threshold should be computed by taking into account all disposals occurring in any 12-month period.
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).
There is a new special provision for capital gains on participations realised by non-residents, if the value of the distributing company derives mostly from immovable property located in Italy: in this case, subject to certain exceptions, the capital gain is taxable in Italy according to domestic law.
In a change of control, the following consequences may arise:
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 permanent establishments.
Article 152(2) of the Income Tax Code explicitly states that the permanent establishment is treated as if it was 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, the 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 also subject to tax in the State of source, the Italian resident company is granted a foreign tax credit.
Resident companies that have permanent establishments abroad may also apply an optional branch exemption regime, instead of the tax credit method. The option must be exercised in the tax return relevant to the year in which the permanent establishment has been set up.
If the option is exercised, it is irrevocable and the regime will apply to all the foreign permanent establishments of the resident company.
The profits attributable to the foreign permanent establishment 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 permanent establishment.
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) permanent establishments 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 as apply 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 the condition that the payment is fully profit-contingent (ie, the amount distributed has been determined in 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.
The EU and the EEA
EU and EEA member states are never considered as low-tax jurisdictions. The applicable criteria 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; and
• 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 jurisdictions 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 have been subject to an “appropriate tax burden” since the time 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 also granted a credit for 50% of the corporate tax paid by the foreign entity.
The rules on the taxation of dividends from low-tax jurisdictions also apply to profits repatriated from permanent establishments under the branch exemption regime, under the same conditions explained above.
With effect from 1 January 2023, an optional regime has been introduced whereby a flat-rate tax may be paid on the profits and reserves of subsidiaries which are resident in privileged tax jurisdictions. If the option is exercised and the profits are subject to the flat tax, they will not be taxed in the hands of the Italian resident beneficial owner upon distribution. The rate of the flat tax is 9% for corporate taxpayers and 30% for individual entrepreneurs; under certain conditions, the rate may be reduced by 3 percentage points (6% or 27%); the tax is calculated in proportion to the shareholding held in the foreign company (and as it also applies to indirect shareholdings, in this case the de-multiplier effect of the shareholding must be taken into account).
If an Italian resident company has developed an intangible that is used by a foreign related company, such dealing is generally subject to transfer pricing legislation. Income from the use of intangibles or R&D expenses relevant to certain qualifying intangibles may benefit from the patent box regime described in 2.2 Special Incentives for Technology Investments.
CFC legislation applies if:
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 permanent establishments 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 a 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 have been re-characterised as foreign permanent establishments, due to the lack of 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 that do not have economic substance and, although formally compliant with the wording of the law, have been put in place with 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 the implementation of the ATAD I and II Directives. For example:
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 in the BEPS project (see 9.1 Recommended Changes). There are not yet any formal legislative initiatives in Italy concerning Pillar One and Pillar Two but it is expected that they will be implemented alongside the OECD and EU measures. The Pillar Two regimes will have to be conjugated with already existing CFC rules.
Italy, France, Germany, Spain and the Netherlands, in a joint statement on 9 September 2022, indicated their willingness to implement Pillar Two before unanimous agreement was reached, and the Directive was thus adopted. It is therefore reasonable to expect that the adoption of the Directive in Italy will take place shortly.
Issues concerning the fair taxation of multinationals in Italy are often within the domain of public discussion and under the media spotlight.
In the last few years, Italy has introduced a number of favourable regimes meant to incentivise certain investments and behaviours of taxpayers, such as the following.
Such regimes are not expected to be (further) amended in light of BEPS recommendations.
Being an EU member state, Italy is bound by the EU rules on State aids. Based on publicly available information, the European Commission has not challenged the lawfulness of any of the above-mentioned regime in the light of the State aid legislation.
See 9.4 Competitive Tax Policy Objective.
As mentioned at 9.1 Recommended Changes, Italy introduced limited anti-hybrid legislation effective from 2004, which was meant to counteract the use of certain hybrid instruments. Fully-fledged anti-hybrid legislation was introduced in 2018, in compliance with ATAD I and II. As a consequence of such legislation, there may be instances where expenses borne by Local Corporations could be non-deductible if connected to hybrid mismatches.
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 permanent establishments, 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; see 6.5 Taxation of Income of Non-local Subsidiaries Under Controlled Foreign Corporation-Type Rules for an illustration of the currently applicable 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. Therefore, the recommendation of a treaty general anti-avoidance rule of Action 6 is not expected 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 ratifies the MLI and deposits 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 arm’s length 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 – DAC). Such exchange of information includes, inter alia, the 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 implemented the 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 was amended to provide that a non-resident company shall be regarded as having a permanent establishment 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 relationship with existing tax treaties (which do not include such a provision in their definition of a permanent establishment) 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 March 2021 on the taxable revenues that they realised during 2020, and shall submit the relevant tax return by 30 April 2021.
The DST is a tax on revenues stemming from the provisions of three types of services:
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, the DST should not apply to the provision of certain services and the supply of certain 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 budget law for 2023 introduced a reporting obligation for VAT taxable persons who operate electronic platforms that facilitate indirect e-commerce. These entities are required to provide the Revenue Agency with data on suppliers and transactions carried out.
There are no specific provisions dealing with the taxation of offshore intellectual property.
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New Tax Legislation and the Consolidation of Regulatory Practice in Italy
There has recently been important progress in the Italian tax environment through the enactment of new pieces of legislation. In most cases the evolution has been along the lines of the various international developments that took place within the context of the OECD (BEPS Action Plan) and European Union.
Aside from the legal and administrative evolutions, in the last few years there has been an impressive consolidation of the tax authorities’ practice, also showing that authorities can now avail themselves of highly specialised departments (especially in certain areas, such as transfer pricing and international tax) and have access to an increasingly wide range of information about taxpayers and groups.
All in all, there are several areas where Italy may be quite attractive for investment of foreign capital given the combination of specific interesting incentives and the possibility to maintain a deep dialogue with tax authorities, thus obtaining, in many instances, advance certainty and therefore the prevention of tax risks.
The Ruling Practice of Italian Tax Authorities and the Possibility to Seek Advance Certainty/Risk Prevention
One of the main areas where the Italian tax administration has shown quite a significant step forward is connected to the possibility for taxpayers to submit ruling applications in order to obtain advance certainty on the correct interpretation of tax rules. This can be a valid tool to secure full certainty on the applicable tax regime.
Ordinary tax ruling practice
The system provides for an ordinary ruling procedure, covering several areas (interpretation of the tax law, qualification of a specific item of income, confirmation on the existence of the requirements necessary to be eligible for a specific tax regime, disapplication of specific anti-avoidance rules and evaluation on the abusiveness of a transaction) whereby any taxpayer can submit a request to the tax authorities to obtain the authorities’ opinion with respect to the actual case/transaction.
Depending on the residence, nature and size of the applicant taxpayer, the reply to the ruling applications is provided by the central body of the Revenue Agency or by the regional offices. In any event, a reply to the request is guaranteed within a specific timeline or, in the case of a lack of a reply, it is presumed that the solution proposed by the applicant is confirmed (ie, it is endorsed by the Revenue Agency). The timeline depends on the type of ruling and ranges between 90 and 120 days (with the possibility for authorities to have a 60-day extension in case they request additional information).
Ruling replies are generally (but not always) published on a redacted basis on the website of the Revenue Agency and thus contribute to the set of interpretative guidance provided by the tax administration.
Despite the publication, it is to be noted that the position taken in the ruling reply is binding for the Revenue Agency only with respect to the specific taxpayer which filed the application, to the extent that the relevant facts and circumstances are in line with the ones represented to the tax authorities in the application.
In several cases, where rulings affect international matters, rulings may also have to be exchanged by the Italian tax administration with other jurisdictions’ tax administration.
“New investments” rulings
Aside from ordinary rulings, taxpayers (both Italian and foreign) can apply for a specific ruling procedure with respect to “new investments” that exceed EUR20 million and have a beneficial impact on employment. Such ruling applications, that can refer to any issues connected with the “new investment” are handled by a specialised department of the Revenue Agency and can provide full certainty on the regime applicable to an overall investment (the procedure not only covers all the matters dealt with by ordinary tax rulings, but also questions concerning certain more factual issues – eg, existence of an Italian permanent establishment – may be submitted). Applicants filing for the “new investments” ruling can also have facilitated access to the co-operative compliance programme (ie, irrespective of the size of the applicant – see below).
In 2015, Italy introduced a “co-operative compliance” programme in line with the OECD standards. Groups and companies accessing this programme can benefit from a system of “enhanced co-operation” with the Italian tax administration. The system contemplates a regular flow of information between the group or company and a specific department of the Revenue Agency with the benefit of reduced terms for answers to interpretative queries, also within the context of ruling applications, and of reduction of penalties in case of challenges/mistakes.
The system is available to groups and companies that have an appropriate tax control framework in place. The regime is limited to quite a small range of companies so far (depending on the size or to specific conditions, like having filed the “new investments” ruling as mentioned above), even if the aim of the regime is to extend to a broader range of taxpayers over time. As to the size, for fiscal years 2022, 2023 and 2024, taxpayers with a turnover or revenues of not less than 1 billion euros are eligible for this regime.
Recent Developments in the Area of Transfer Pricing
In recent years, Italy has proven to be more aligned with international best practices and trends in the area of transfer pricing.
Starting with a decree in 2018, a new set of rules was enacted where the Italian tax legislation was brought up to speed with the most recent developments on transfer pricing and the Italian tax authorities set out several guidance documents generally confirming that the Italian approach vis-à-vis transfer pricing is aligned with the OECD practice and recommendations. In general, the Italian tax authorities fully endorsed the arm’s length principle as interpreted and analysed by the OECD and thus referred to the OECD Guidelines on transfer pricing.
In the same context, along the lines of the OECD BEPS Actions (albeit with some deviation), in 2020 the Italian tax authorities redesigned the rules governing transfer pricing documentation whereby, if an adequate set of documents (comprising Masterfile and Local File) is prepared in advance and maintained by the taxpayer and the taxpayer provides a formal advance communication, there is full protection from administrative penalties in case of transfer pricing adjustments.
In addition to the legislative changes, it is possible to record a regularly increased use of specific instruments for the prevention or resolutions of disputes by way of co-operation with tax authorities with:
Alignment With International Tax Evolutions
The gradual alignment of the Italian tax system with international developments has not been limited to the area of transfer pricing but was extended to all areas of international tax, where – in the last few years – it was possible to see the introduction of quite extensive reforms:
The introduction of all these changes was accompanied by public consultation procedures that gave rise to extensive guidelines from the Italian Revenue Agency. These changes are very much in line with the developments in most other European countries. Like in those countries, such rules have to be adequately taken into account given that their application could become quite complex and burdensome for companies.
Regarding expected developments, although there is not yet any specific position of the Italian Government or the Italian tax authorities on how the OECD Pillar One and Pillar Two initiatives will be implemented, it can be reasonably expected that the Italian legislature will align its legislation with these new initiatives, also in line with EU developments. This might also entail a revisitation, if not an abolition, of the currently applicable digital service tax that affects, if certain thresholds are met, all sectors that generate revenues from the placing on a digital interface of targeted advertising, the intermediation on digital platforms and the transmission of data collected on digital interfaces.
Available Tax Incentives
The legislative activity of the last few years also showed the introduction of several tax incentives, generally set out within the boundaries provided by OECD and EU rules, that had the aim of giving some boost to the economy and attracting/retaining investments in Italy.
Among the most relevant incentives, the following are worth mentioning.
Notional interest deduction
A specific tax benefit, in force (with different variations) since 2011, comes from the possibility to deduct, for corporate income tax purposes, a notional interest expense in connection with qualifying increases of the net equity of a company (including undistributed profits). This benefit, which has the effect of promoting the reinvestment of profits and reserves, can prove quite generous for newly set up companies (where in substance the entire amount of equity can qualify for the purposes of the notional interest deduction rules). The amount of the tax deduction is currently 1.3% of the qualifying net equity increases.
Incentives for R&D investments
As from 2022, a super-deduction regime has been introduced whereby a company can benefit from an additional deduction from its taxable income in the amount of 110% of R&D expenses incurred in connection with certain qualifying intangibles. Such rule enhances the deduction of costs linked with the creation of intangibles. The introduction of such measure was in combination with the abolition of the previously applicable “patent box” regime.
A further tax credit is available for certain qualifying R&D expenses. In order to benefit from the tax credit, eligible companies shall also meet certain record-keeping requirements (ie, tracing and tracking system and certification by a qualified auditor).
Incentives for new investments
Similarly, costs borne for qualifying new investments (mostly “highly technological” assets) are eligible for an enhanced deduction or tax credit mechanism that allows a super deduction benefit.
Incentives for innovative start-up companies
Innovative start-up companies are identified on the basis of certain specific conditions, including for instance the carrying out of an innovative activity or project and having an R&D expenditure that amounts to at least a certain figure established by law. Innovative start-ups are entitled to a number of tax benefits, among which the fact that companies investing in an innovative start-up company can deduct from their taxable income a portion of the investment made, subject to certain limitation.
Profit Repatriation – New Rules and the Attitude of Tax Authorities
One of the critical areas for investments in Italy from abroad has always been the repatriation of profits for foreign investors.
This is because in recent years, tax authorities have shown a quite aggressive approach in auditing and challenging dividend distributions to non-Italian shareholders arguing in several instances the inapplicability of EU Directives and double tax treaties. The attitude of tax authorities is to challenge that dividend distributions to non-Italian shareholders are not eligible for Italian withholding tax exemptions or reductions unless the shareholder of the Italian entity can be characterised as the beneficial owner of the dividends and not be classified as an artificial arrangement. As a consequence, many groups managing their investments with European regional holdings and investment funds channelling their investments in Italian target companies via intermediate EU holding companies have received tax claims on such withholding tax exposure. A similar approach has been taken on interest payments.
A significant part of these areas of risk has been removed by a recent law change whereby dividend distributions to, and capital gains realised by, European compliant UCIT funds and AIFs supervised in an EU or EEA State (with exchange of information) are exempt from withholding tax (or substitute tax for capital gains on the sale of shares). This change has been an important improvement for foreign funds investing in Italy.
In other cases, the audit practice of tax authorities is still focused on strictly assessing the existence of the conditions for application of EU Directives and tax treaties for the purposes of withholding tax exemptions and reductions, claiming the absence of the beneficial ownership conditions and more in general applying the general anti-abuse rules (eg, quite frequent application of the Italian general anti-abuse rule set forth in Article 10-bis of Law No 212 of 27 July 2000 (Italian GAAR) in share buy-back transactions).
In addition, another area where the attention of tax authorities focuses on tax audits is related to the international mobility of companies where tax authorities have sometimes challenged the proper application of the exit tax rules for those corporate taxpayers moving tax residence outside of Italy.
There have been several instances where tax authorities have challenged that the business model represented in contracts and documentation is not in line with the actual business model or transactions; in such cases, claims have concerned, for example, the identification of hidden permanent establishments in Italy or the assessment of higher taxes in connection with a deemed business restructuring for which the local entity should have, in the tax authorities’ claim, received a compensation.
Furthermore, it is possible to record an increased recourse to the Italian GAAR to challenge domestic and international reorganisations.
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