09 April 2020 - Article
Corporate income tax
Italian corporate income tax (imposta sul reddito delle società, or IRES) is due by resident companies on their worldwide income. A company is deemed to be resident within the Italian territory when it has any of the following elements located in Italy for the major part of the tax year (as per above, more than 183 days):
- Its registered office;
- Its administrative office (equivalent to the 'place of effective management' notion);
- Its principal activity and business.
Italian law also provides for a rebuttable presumption, introduced for anti-avoidance purposes. Precisely, unless proof of the contrary is given, foreign entities controlling an Italian company are deemed to be tax residents in Italy if either of the following conditions is satisfied:
- The foreign entity is directly or indirectly controlled by Italian resident entities or individuals;
- The majority of members of the board of directors managing the foreign entity are resident in Italy.
As for non-resident individuals, IRES is imposed on non-resident entities on their Italian-source income only.
Corporate tax rates
The IRES rate is 27.5 percent. A 6.5 percent surcharge (so called 'Robin Tax') was applied to companies operating in the areas of oil, gas and energy companies that, in the previous fiscal year, had revenues exceeding EUR 3 million and taxable income exceeding EUR 300.000.
However, please note that the Italian Constitutional Court declared the Robin Tax as unconstitutional with effect starting from February 2015.
Determination of business income
Generally speaking, both positive and negative components of an entity's income statement are taxed or deducted under the accrual principle.
Further, income items must be certain from a legal point of view and objectively determined or determinable. No deduction will be granted for items not following the certain and objective determination principle. Deduction or taxation of income will be deferred to consequent fiscal years when such criterion is met.
Generally, expenses are deductible as follows:
- Expenses are deductible if they relate to activities or assets producing revenue or other receipts that are included in income.
- Expenses are deductible in the tax year to which they relate (accrual basis rule).
Companies shall not deduct expenses derived from entering into transactions with enterprises and consultants resident in non-EU blacklist countries. However, such limitation does not apply when it is established that either of the following conditions is met:
- The foreign enterprise is effectively involved in an actual business activity in the country or territory in which it is located.
- The relevant transactions have a real business purpose and actually take place.
The Ministry of Finance issued a decree dated 23 January 2002, which identifies the countries included on the Italian blacklist for the above purposes.
Specific rules applies to entities that adopted International Financial Reporting Standards (IFRS) for Italian statutory financial reporting purposes. These provisions' purpose is to align income determination rules with IFRS.
Resident and nonresident companies are subject to a regional tax on productive activities (imposta regionale sulle attività produttive, or IRAP) on their Italian-source income.
There are different methods of calculation of IRAP tax base, strictly linked to the nature of the business carried out by the taxpayer. Provisions for liabilities and risks, as well as extraordinary items, will not be considered in determining the IRAP tax base.
IRAP is levied on a regional basis. The Italian regions are allowed to increase or decrease the standard IRAP rate up to 0.92 percent. Italian companies with permanent establishments (PEs) abroad are not subject to IRAP on the income earned through the mentioned PEs.
Italian IRAP has been highly criticised and represents a controversial tax in the view of may scholars. Each year debates arise on the possibility to reduce it or eliminate it.
Value-added tax (VAT)
Italian VAT (Imposta sul Valore Aggiunto, IVA) is provided for the supply of goods and services carried out in Italy by entrepreneurs, professionals, or artists and on importations carried out by anyone.
The Italian standard VAT rate is 22 percent. Reduced rates apply to specifically listed supplies of goods and services (for example, 4% for listed food, drinks, and agricultural products and 10% for electric power supplies for listed uses and listed drugs).
Further, certain supplies of goods and services expressly listed in the law are exempt from VAT (for example, hospital and medical care, education, insurance services, specific financial services, supply, leasing of particular immovable property). Other specifically listed transactions are also out of the VAT application scope (for example, transfer of money).
Recovery on input VAT on purchases of goods and services in relation to business activity is generally allowed. Certain limits exist in relation to specific items (e.g. cars, entertainment expenses) and to companies carrying out certain activities.
Certain deeds and contracts require filing with the local registration tax office, and consequently, the relevant tax will be levied.
Registration tax is due as a fixed amount or as a percentage of the value of the goods and/or rights that are the object of the contract, depending on the nature, form and object of the contract itself. Generally, transactions subject to VAT will not be taxed as in registration tax.
Corporate reorganisations (mergers and demergers)
In principle, company restructurings, such as mergers and demergers, are deemed as tax neutral. However, please note that, for financial accounting purposes, the transaction will result in the recognition of higher values of the assets or of goodwill. Companies can opt for partial or full recognition for tax purposes of the step-up in the financial accounting values of assets or of the goodwill arising from the corporate reorganisations, upon the condition that they pay a substitutive tax.
Such substitutive tax will be calculated on the step-up in taxable basis and will rely on progressive rates of 12 percent up to 16 percent.
Domestic tax consolidation ('Consolidato Fiscale')
Entities part of the same group can opt for domestic tax consolidation. A single IRES tax base will exist, which includes the taxable income and losses of each participating company. The tax consolidation does not operate for IRAP purposes.
In the event of an overall tax loss position arises, it can be carried forward and used against future consolidated taxable income. On the other hand, tax losses arising in fiscal years previous to the domestic tax consolidation election can be carried forward and used only by the company which generated the losses.
The taxable base of each company part of the group is entirely considered. No apportionment based on the percentage of control is allowed.
To be valid, the domestic tax consolidation regime must satisfy the following conditions:
- The consolidating entity must be an Italian tax resident company, and it must hold, directly or indirectly, more than 50% of the share capital of the consolidated entities (so called ‘legal control').
- The legal control must be in place from the beginning of the tax period for which the tax consolidation is applied for.
- All of the companies participating in the group must have the same year-end.
Upon satisfaction of specific requirements, Italian PEs of foreign companies can also participate as controlling entities in a tax group.
The consolidation arrangement is elective. Certain companies may select whether to be part or not, and it is not necessary for all the Italian group/sub-group entities to jointly elect for the tax consolidation.
Once the election is made, it cannot be revoked for the following three fiscal years.
Please note that very recently, through the final improvement of the Decree regarding the internationalisation of enterprises , the group of addressees entitled to consolidate tax bases has been expanded, in order to be in line with EU legislation. It is now possible for Italian subsidiary companies to apply for consolidato when they are subsidiaries of a foreign parent company located in the EU or in a country allowing exchange of information with Italy. Similarly, consolidato is allowed for Italian permanent establishments of foreign parent companies, when they are business income holders.
A worldwide tax consolidation group is also allowed when talking about foreign subsidiaries.
The taxable income derived from operations with non-resident corporations that directly or indirectly control or are controlled by an Italian entity (or by the same corporation controlling the Italian entity) corresponds in principle to the so called 'normal value' of the goods transferred, services rendered, and services and good received.
The normal value, according to Italian legislation and Court decisions (which follow the method provided for by the OECD), is to be intended as the average price paid under free market conditions for goods and services of the same kind, at the time and place in which the goods and services were purchased or performed.
On the base of the transfer pricing regulation provided by the OECD Guidelines, taxpayers will have to provide the Italian tax authorities with certain documentation to support the inter-company transaction drawn up in a specific format. Failure to submit documentation can result in an income assessment from the Italian tax authorities.
Ad-hoc international ruling procedures are available in order to agree transfer pricing methodology together with the tax authorities.
The agreement is binding in relation to the fiscal year of the agreement and for the following two fiscal years, unless significant changes in the circumstances occurred.
In relation to transfer pricing Italian legislation, the new Decree regarding the internationalisation of enterprises has introduced an historical clarification, according to which transfer pricing rules do not apply to domestic transactions between Italian resident subjects, but only relate to cross-border transactions. This interpretation goes against the firm position taken by the Italian Supreme Court supporting the application of domestic transfer pricing (last time as recently as 22 June 2015, in the decision n. 12844).
Latest news and going forward
Italy and its tax legislation offer many appealing measures for domestic and foreign taxpayers. Here are the main Italian provisions which effectively make the tax framework competitive on a worldwide level for both individuals and corporate entities:
a) Inheritance and gift tax: the Imposta di successione e donazione is chargeable on the taxpayer's worldwide assets for Italian tax residents. Foreign residents will be taxed on assets located in Italy. The rate of succession tax applied depends on the recipient of the asset according to the degree of kinship to the deceased. A variable rate of tax applies between 4% and 8% on the value of the asset dependant on the recipient. Immediate family may also benefit from a non-taxable threshold of €1 million per person. Italy, therefore, currently represents a tax haven given the low rates and high threshold for inheritance and gift tax purposes.
b) On 31st of July 2015, through the new 'Certainty Decree' ('_Certezza del Diritto_'), the former notion of tax avoidance has been eliminated and replaced with abuse of law. Under the new rules, abuse of law exists when a transaction '_lacks of economic substance, realises an undue tax advantage and the tax advantage is the main target of the operation put in place_'. Freedom of establishment and intra-group transactions, with a particular focus on big multinationals, are therefore encouraged under the new rules.
c) Italy has entered into more than 90 Double Tax Conventions ('DTC') for direct tax purposes, based on the OECD Model, with Countries from every continent. Moreover, Italy has entered into 7 DTCs for indirect tax purposes. This makes it very efficient for foreign taxpayers willing to invest or enter Italy under certain circumstances.
d) A Participation Exemption regime ('PEX') is in place for certain investments. According to this regime, capital gains realised by Italian entities on sales of shareholdings are 95% exempt from IRES. The following conditions must be met in order to benefit from the measure: (i) the shareholding was held uninterruptedly for at least 12 months prior to the sale; (ii) the investment was classified as financial fixed asset in the financial statements relating to the first fiscal year of uninterrupted ownership; (iii) the subsidiary carries on a commercial activity (e.g. investments in companies mainly performing management of their own real estate are not entitled to PEX benefits); (iv) the majority of the subsidiary's income was not generated in a low tax jurisdiction.
Ad-hoc PEX regimes are also provided for capital gains realised by Italian tax resident individuals.
e) In Italy, capital gains incurred on immovable property owned by individuals are not taxed if the individual has sold the property more than five years from the purchase. This benefit, however, does not apply on property owned by non-natural persons.
f) On the 6th of August 2015, the Italian Cabinet finally approved the Decree regarding the internationalization of enterprises (so called '_Decreto Internazionalizzazione_'). The measure aims at removing obstacles for the access to international markets and to establish a simple and transparent regulatory framework for foreign investors.
The new Decree introduces several provisions with strong impact on international taxation (e.g. transfer pricing, CFC rules).
g) The 2015 Finance Act, implementing the Italian Budget Law 2015, has introduced the Patent Box regime in Italy. This is a special tax incentive allowing reduced taxation for income derived from the exploitation or licensing of intangible assets by companies and commercial entities performing research and development activities (R&D). The Patent Box effectively aims to encourage the movement of intangible assets currently held abroad both by Italian and foreign companies to Italy and avoid the possible future relocation of such intangibles overseas to countries offering more favourable tax regimes.
Withers Studio Legale is uniquely qualified to assist you on Italian tax matters.
This article will be forthcoming in Tax Notes International.