09 November 2017
The 2016 Budget Law (so called 'Legge di Stabilità 2016'), Law no. 208 of 28 December 2015, was published in the Official Gazzette no. 302 of 30 December 2015. The Law offers many appealing provisions for domestic and foreign taxpayers and aims at increasing growth by easing the heavy tax burden both on individuals and corporations.
The relevant tax measures favorable for individual taxpayers can be summarized in the following points:
a. repeal of the local property tax on primary residences (the so called 'Tasi') as of fiscal year 2016, except for luxury residences (listed in the A/1, A/8 and A/9 cadastral categories). This will mean that 'Tari' (the local tax on environmental and waste services) will be the only local tax remaining on primary residences;
b. clearance of a significant number of income tax deductions, such as purchase by the end of 2016 of high energy performance class residences from construction companies. In this event, the Law recognizes an income tax deduction equal to 50% of the VAT due on the purchase. Other examples are property renovations or energy requalification of residences which are, respectively, granted a 65% and 50% income tax deductions.
c. possibility to step-up lands and unlisted shareholdings owned by natural persons (not in business regime), by paying by 30 of June 2016 an 8% substitute tax.
d. other new relevant tax measures are: the renewal of a 65% tax credit for gifts made in favor of cultural entities or show businesses; the abolition of tax on the ownership of leisure yachts; VAT reduction of 10% for a yachtsman's overnight stop in the so called 'marina resorts' (as provided for hotels).
On the other hand, companies can benefit from a great number of new tax disposals which may lead to bolstering the Italian economy and attracting foreign investors by, for instance, planning to lower the corporate tax rate, repealing the blacklist cost non-deduction rule, granting the opportunity to step-up certain business assets, enhancing the patent box regime and further important provisions. All of the main tax changes are more in depth and fully shown below.
1.1 Encourage investments in Italy by reducing the corporate income tax rate (paragraphs 61-64)
IRES (imposta sul reddito delle società) is the Italian corporate income tax due by resident companies on their worldwide income and by nonresident companies on their Italian-source income. After many years of tax burden, finally the Italian government decided to target the economic growth by reducing the corporate income tax. The 2016 Budget Law provides that, starting from fiscal year 2017 onwards, it will enter into force a reduction of the corporate income tax (IRES) rate from 27.5% to 24%.
Banks and other financial entities will compensate the corporate tax reduction with a 3.5% surtax to mitigate the consequences of the planned corporate tax rate decrease. Conversely, such financial taxpayer will benefit from a 100% deductibility of interest expenses (currently capped to 96%).
Moreover, from fiscal year 2017 onwards, the current 1.375% withholding tax applicable to dividends paid to whitelist EU/EEA resident companies will be reduced to 1.20%.
1.2. Facilitate business investments by allowing an extra-amortization on the purchase of certain tangible assets (paragraphs 91-94)
The 2016 Budget Law introduces the opportunity for companies and small business owners who invest in tangible assets, and whose amortization rate for tax purposes exceeds 6.5%, to benefit from an extra 40% amortization rate. Consequently, under such regime, the depreciable basis for corporate income tax purposes will be up to a total 140% of the acquisition cost. This measure is applicable only on assets that have been purchased or rented under a financial leasing contract during the period of 15 October 2015 to 31 December 2016 and does not involve the calculation of the advanced payments due for fiscal year 2015.
1.3. Shorter amortization period of intangible assets (paragraphs 95 and 96)
Business entities (excluding IAS adopter) can align the relevant tax bases to the higher accounting value of trademarks, goodwill and other intangible assets, derived from tax corporate reorganizations (such as mergers). The step-up requires an upfront payment of a 16% substitute tax. The 2016 Budget Law allows tax amortization of goodwill and trademarks over a period of five years (instead of 10 years provided by the previous rules). The new measures apply to reorganizations carried out as of fiscal year 2016.
1.4. Relevant tax benefit for sales or assignments of real estate and registered movable property to shareholders (paragraphs 115-120)
The Law provides the possibility for certain commercial partnerships and companies, to take advantage of opting for a more favourable tax regime (instead of applying the ordinary corporate tax IRES and IRAP) in two cases: (i) in the event of attribution or disposals to the shareholders of real estate or registered movable property (other than assets instrumental to the business); and (ii) in the case of transformation of the aforementioned entities into a non-commercial partnership (so-called, Società Semplice) if they have as their sole or main activity the management of the above assets.
This more beneficial tax regime consists in the application of an 8% substitutive tax (or 10.5% in case of 'dormant companies' or dummy companies) between the difference ofthe cost recognized for tax purposes and the fair market value related to the assets considered (under certain conditions, the relevant taxpayer may opt for the cadastral value). In case of transactions or assignments of the assets to the shareholders, the applicable Registration Tax is reduced by 50% while mortgage and cadastral tax are applied on a lump sum basis of €200.
It is worth noting that the transactions aforementioned are eligible for these measures when executed no later than 30 September 2016, and the shareholder shall result from the corresponding Register (if required) on 30 September 2015.
This tax benefit may be very worthwhile especially for individuals who would like to assign directly to themselves real estate (or other assets) owned though a dummy company. The assignment allows to avoid binding rules and the non-beneficial tax regime for dormant companies imposed by the Italian system which aims at discouraging the maintenance of such companies.
1.5. Step-up of business assets and participations (paragraphs 889-896)
The Law renews the opportunity to step-up business assets and participations owned by corporations and commercial entities that do not report under International Financial Reporting Standards (IFRS), by paying a substitute tax.
It is possible to step-up certain tangible and intangible assets (except immovable properties held by real estate trading companies), as well as qualifying shareholdings, if the mentioned assets are reported in the balance sheet relating to the period in course on 31 December 2014.
The equity reserve created as a consequence of the accounting step-up can be freely distributed by paying a 10% substitute tax.
The step-up should be reported in the balance sheet relating to the year 2015 and the new asset values are recognized for tax purposes starting from the third fiscal year subsequent by paying a substitute tax amounting to 16% for amortizable/depreciable assets and 12% for non-amortizable/non-depreciable assets.
1.6. More favourable regime of 'blacklist cost' deduction and abolition of “CFC blacklist” (paragraphs 142-144)
Under old rules, as modified by Legislative Decree no. 147/2015 (so-called '_Decreto internazionalizzazione_'), costs incurred for the purchase of goods and services from black list entities may be deducted up to the limit of the relevant fair market value. The deduction of any exceeding value is subject to the demonstration that the transaction responds to an effective business interest and that the transaction has been carried out. The Budget Law abrogates this rule as of fiscal year 2016. Consequently all the costs, without difference between blacklist and whitelist costs, may be deducted by following the more favourable ordinary rules.
With reference to the blacklist relevant for the application of the Controlled Foreign Companies (CFC) regime, the Law repeals the existing black list and introduces new criteria to identify black list entities. Starting from fiscal year 2016, foreign subsidiaries will be deemed as black list entities for CFC purposes if they have a nominal corporate income tax rate lower than 50% of the Italian rate. However, it is worth specifying that this rule does not apply to entities that reside in an EU/EEA country which grants an exchange of information agreement with Italy.
1.7. Revamp of the patent box regime (paragraph 148)
The patent box regime was introduced in Italy by the 2015 Finance Act and it 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 at encouraging 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.
The 2016 Budget Law limited the category of 'copyright works' to 'software protected by copyrights' among the eligible assets and specifies the possibility to consider as a single eligible asset several intangibles linked and jointly used to realise a particular good or product or process.
1.8. Tax credit cinema (paragraphs 331-334)
The 2016 Budget Law enhances the beneficial tax credit already provided by the 2008 Budget Law in favour of investments in the cinematographic industry. Under the new rules the tax credit is recognized not only for investments in the Italian territory for film productions but also in favour of investments in the distribution of films both in Italy and abroad. The tax credit can be claimed up to a maximum 40% rate of the expenses incurred for investments in new devices, machinery, but also renovations of space and related services.
1.9. Country by Country Reporting (CbCR) for multinationals (paragraphs 145-146)
Following the recommendations made in the OECD's base erosion and profit shifting (BEPS) project, the Law provides the obligation for multinational entities with a consolidated annual turnover of at least € 750 million, to submit to the Italian Tax Authority, an annual report showing elements, such as the amount of revenues, gross profit, taxes paid and accrued (and other indicators of effective economic activities).
The aforementioned annual report shall also be submitted by:
1. Italian parent companies of groups that are required to submit group consolidated financial statements; or that are not controlled by any other entities.
2. Italian resident companies, controlled by a foreign company that shall submit group consolidated financial statements in a country where the CbCR does not apply or in a country which does not provide an actual exchange of information on the CbCR.
The Law provides penalties from €10,000 to €50,000 in the event of omission or incomplete submission of the CbCR. Further rules will be issued by the Ministry of Economy and Finance within 90 days on the date of entrance into force of the Law (1 January 2016).
1.10. Broader deadline for VAT and income tax assessment (paragraphs 130-132)
The Law extended the usual deadline for the Italian Tax Authority to issue tax assessments. The extension operates starting from 1 January 2016 and is applicable to the subsequent tax periods.
Pursuant to the new provisions, a company or an individual that made violations for incorrect tax returns can be assessed by 31 December of the fifth year following the year of filing of the relevant tax return (instead of the previous term of the fourth year following the year of the filing of the tax return). Whereas, in case of failure to file any tax return, the statute of limitations is extended to seven years (instead of the five-year term stated by the old legislation).
The Law also repeals the doubling of the statute of limitations in case of criminal tax investigations. This contributes to increasing transparency and certainty, not only for the Italian tax system, but also benefits the relationship between the taxpayer and the Italian tax Authority.
1.11. New administrative tax penalties entering into force (paragraph 133)
The Budget Law moved forward to 1 January 2016 to enter into force the legislative decree no. 158/2015 that has amended a relevant number of legislative provisions regarding tax penalties. Pursuant to the 'favour rei' principle, the more favourable provisions of the new penalty regime will have retroactive effects for the years still open to the tax assessments.