Tax Planning

In evaluate: corporate tax planning developments in Italy

All questions

Local developments

i Entity selection and business operationsItalian entities

No significant changes have been introduced. The most commonly used corporate entities2 are:

  1. joint stock companies (SpA);3 and
  2. limited liability companies (Srl).4

This chapter focuses mainly on the above corporate entities.

Although less common, legal and tax-transparent entities exist.

Finally, Italy has specific regulations for investment funds and real estate investment funds that have a contractual form;5 however, they cannot carry on a pure business activity.

Tax residency

In principle, resident and non-resident corporate entities are subject to tax.6 Italian-resident7 corporate entities are subject to:

  1. Italian corporate income tax (IRES),8 currently applicable at the rate of 24 per cent (which might be increased by 3.5 per cent for banks and certain financial intermediaries); and
  2. Italian regional tax on business activities (IRAP),9 currently applicable at the basic rate of 3.9 per cent10 (which might be increased to 4.65 per cent for banks and other financial institutions and to 5.9 per cent for insurance companies).

As a general rule, Italian permanent establishments of non-resident companies have the same tax treatment as Italian corporate entities.

Italian collective investment schemes are liable to IRES, though exempt.

Inbound dividends

Dividends received by Italian-resident companies are subject to IRES in the year of payment as follows:

  1. only 5 per cent of the amount of the dividends distributed by Italian-resident companies is included in the company’s IRES-taxable base;11 and
  2. dividends received from non-resident entities are subject to the same tax regime under (a), provided that certain conditions are met.12

Italy provides for a specific transparency rule in respect of dividends paid to Italian non-commercial partnerships (società semplici). In particular, for tax purposes, dividends are considered to be paid directly to the persons with an interest in the relevant Italian non-commercial partnership: accordingly, the tax treatment of the dividend payment is the one applicable to such persons.

For companies resident in a country with a preferential tax regime, see ‘Anti-profit shifting measures’ in Section II.ii.

Under certain circumstances, dividends may also be subject to IRAP.

Capital gains

Capital gains deriving from disposals of participations by an Italian-resident company is subject to IRES. However, Italian tax law provides for a specific partial exemption according to which 95 per cent of the capital gain is exempt from IRES (the ‘participation exemption regime’, also known as PEX). The PEX regime is subject to conditions.13

In principle, for IRES tax purposes, (1) capital losses deriving from disposals of PEX participations are not deductible, whereas (2) those deriving from disposals of non-PEX participations are deductible.

Italy provides for a specific exemption in respect of capital gains on ‘qualified participations’14 in Italian-resident entities realised by collective investment funds (1) resident in the EU or the EEA (which allows for a satisfactory exchange of information) and (2) subject to regulatory supervision in their country of establishment pursuant to Directive No. 2011/61/EU.

Deductibility of interest expenses

In principle, an Italian-resident company is allowed to deduct interest and similar expenses15 for each fiscal year up to the sum of (1) the amount of interest income (and similar income) received in a given fiscal year and (2) the amount of exceeding interest income (and similar income) carried forward from the previous fiscal year and not yet offset (the net interest expenses).16 Net interest expenses are in turn deductible up to (1) 30 per cent of the Italian company’s gross operating margin, determined on the basis of the values provided for by the Italian tax law (ROL, which is similar to earnings before interest, taxes, depreciation and amortisation), and (2) 30 per cent of the exceeding ROL carried forward from previous fiscal years.

Excess ROL can be carried forward with a time limit of five fiscal years, and any excess of interest income not used against interest expenses in a given fiscal year can be carried forward without time limits.

Specific rules apply, among others, to Italian-resident companies electing for the domestic tax consolidation regime (see Section II.ii at ‘The IRES consolidation regime’).

Tax losses relief

Tax losses may be carried forward by Italian companies without time limit. Tax losses incurred in a given fiscal year can offset the corporate tax base of subsequent tax years up to 80 per cent of the latter amount. Tax losses cannot be carried back. The 80 per cent limitation does not apply to tax losses incurred in the first three fiscal years. Certain tax losses relief exclusions apply.17 No tax losses can be carried forward for IRAP purposes.

Certain tax incentives for Italian companies and investors

Special tax regimes are available.

Carried interest regime

To make Italy more attractive to fund management companies and managers, Italian tax law provides for an irrebuttable presumption under which the ‘carried interest’ derived by Italian employees and managers (eligible persons) of funds, management companies and other companies from financial instruments with enhanced economic rights qualifies as financial income or capital gain (generally subject to a 26 per cent substitute tax), rather than employment income (which is taxed at marginal rates up to 43 per cent). Such presumption applies only if certain requirements are met.18 If one or more requirements are not met, the carried interest is not automatically treated as employment income for tax purposes. Indeed, an analysis on the actual terms of the scheme is required to assess the nature of the carried interest.

Research and development super-deduction

Italy has recently repealed the Italian patent box regime19 and introduced a cost-based incentive regime that grants, upon election, a super-deduction for qualifying research and development (R&D) expenses incurred by companies for the creation or development of intangible assets. Under this regime, 210 per cent of R&D expenditure incurred in relation to copyrighted software, patents, trademarks, designs and models may be deducted for purposes of IRES and IRAP.20 The election21 for the mentioned regime may be made by (1) Italian companies carrying on R&D activities, even if outsourced to non-related companies, universities, research institutions or equivalent entities, aimed at producing qualifying intangibles; and (2) non-Italian-resident companies carrying on the above-mentioned activities in Italy through a permanent establishment, provided that they are resident in a jurisdiction that has signed a double tax treaty with Italy and that allows an actual exchange of information.

A company electing for the regime at stake may simultaneously claim a further 20 per cent R&D tax credit on eligible costs incurred up to an annual maximum of €4 million22 (see ‘Tax credits for new investments’ below).

Tax credits for new investments

A tax credit is granted for investments carried out by Italian-resident companies in new tangible and intangible assets. The tax credit varies from 6 per cent to 40 per cent of the acquisition cost, depending on the nature of the investment itself and the tax period in which it is made.23 Certain exclusions apply.

As of 2020, a tax credit is also granted for investments carried out by Italian-resident companies in R&D, ecological transition, high-technological innovation and designs. The tax credit varies from 5 per cent to 20 per cent of the investment, depending on the nature of the investment itself and the tax period in which it is made.

Tax incentives for entities investing in innovative start-ups and SMEs

Certain tax incentives are granted to, among others, entities investing in innovative start-ups and small and medium-sized enterprises (SMEs)24 (as defined under Italian law). IRES-taxable entities benefit from a deduction of 30 per cent of the invested amount (up to €1.8 million) per year from their IRES-taxable income (with a maximum tax benefit of €129,600 per year), provided that certain conditions are met.25

Step-up of Italian participations

Under Italian tax law, it is possible to elect for a step-up of participations in unlisted Italian-resident companies held on 1 January 2022 through the payment of a 14 per cent substitute tax. Certain requirements must be met. The substitute tax applies to the value of the participations, as it results from a third-party appraisal. Such option is granted, inter alia, to foreign entities investing in the mentioned companies. This election may result in being particularly advantageous for those foreign investors who, in case of divestment of the mentioned participations, are not eligible for any tax exemption relating to capital gains.

ii Common ownership: group structures and intercompany transactionsThe IRES consolidation regime

Italian tax law provides for the possibility of opting for a tax consolidation regime in the context of a group.

Italian-resident companies controlling other Italian-resident companies may elect, together with the relevant controlled entity, to include one or more of the controlled subsidiaries in a domestic tax consolidation regime. The tax consolidation regime is also available to Italian-resident companies that are controlled by the same non-resident company; in this case, the foreign holding company must appoint one of its Italian-resident subsidiaries as the consolidating company.

The tax consolidation regime allows for IRES income and losses of the adhering companies to be calculated on an aggregate basis (i.e., a consolidated taxable base is created for IRES purposes). This system allows taxable income to be offset with tax losses of companies that are party to the same perimeter of consolidation, giving the opportunity to reduce the overall tax due by the group.

Moreover, if certain conditions are met, the tax consolidation regime also allows companies to offset interest expenses against interest income of other companies and to transfer the 30 per cent ROL company’s excess.26

The transactions occurring between companies that are party to the tax consolidation regime remain subject to their ordinary tax regime.

The Italian controlled foreign companies regime

The Italian controlled foreign companies regime (the CFC regime) was amended to align the domestic legislation to the EU Anti Tax Avoidance Directive (ATAD).

The CFC regime applies if Italian tax-resident individuals, partnerships, companies and entities (as well as permanent establishment of foreign entities) control, directly or indirectly, foreign companies that:

  1. are resident for tax purposes in countries with an effective tax rate lower than 50 per cent of the Italian one; and
  2. more than a third of their income derives from ‘passive income’27 or from financial leasing, insurance, banking or other financial activities, or intra-group sales or supply of low value-adding goods or services.

If the conditions above are met, then the income of the CFC is attributed to the Italian controlling person (in proportion to its interest in the CFC) and taxed in its hands. The subsequent dividend distributions are not considered to be relevant for tax purposes up to the amount of income taxed by transparency. The CFC legislation does not apply where the relevant CFC carries out an economic activity in its country of establishment.

The branch exemption regime

Italian companies can exempt income and losses made by their permanent establishments (conditions apply). The option for the branch exemption regime applies to all the foreign permanent establishments and cannot be revoked. Profits of the foreign permanent establishment are taxed as dividends when distributed to the headquarters.

Domestic intercompany transactions

In principle, there is no law provision allowing the Italian tax authorities to challenge the price of domestic intercompany transactions for IRES purposes; however, there is case law stating that prices of intercompany transactions may be challenged where those prices are not in line with the fair market value.

Some limitations exist in respect of the possibility of carrying forward losses in the context of domestic mergers if certain requirements are not met. This rule is meant to discourage mergers with the sole or main purpose being the combination of profit-making companies, from one side, with companies that have tax losses, on the other side.

Italian tax law also provides for some measures to foster group restructurings. In particular, under certain specific conditions, the contribution of certain non-portfolio interest, the contribution of going concerns and the exchange of interest granting control over companies are tax neutral.

Anti-profit shifting measures

In order to contrast profit shifting, in addition to the CFC legislation described above, Italy has implemented a transfer pricing regulation that is consistent with the relevant OECD guidelines.

Other measures to avoid profit shifting relate to inbound and outbound flows of passive income. For example, dividends received by Italian-resident shareholders from subsidiaries resident in low-tax jurisdictions are fully subject to tax (instead of benefiting from a 95 per cent exclusion).

The effects of the above-mentioned provision may be mitigated to the extent that the Italian shareholder is able to prove that:

  1. the foreign company carries out a real economic activity (through the use of personnel, assets and premises) in its jurisdiction; or
  2. the holding in the foreign company does not have the effect of shifting or localising profits in low-tax jurisdictions.

Italy also has enacted the ATAD II anti-hybrid measures. In respect of profit shifting and outbound flows, this means that, for example, under certain circumstances, where a payment is deductible for an Italian taxpayer base but not included in the taxable base of the foreign recipient, then the deduction is denied in Italy.

iii Third-party transactionsAcquisition of participations or assets for cash

Share deals and assets deals are subject to different tax treatment for the acquisition of shares or quotas.

  1. The buyer may not be able to deduct for tax purposes depreciation of the shares or quotas.
  2. The seller realises a capital gain or a capital loss, depending on whether the sale price is higher or lower than the tax value of the disposed shares or quotas. Except for the special regimes illustrated in Section II.i at ‘Capital gains’, the relevant gain or loss becomes part of the IRES-taxable base of the seller. Under certain conditions, IRAP may also apply. Non-Italian tax residents may benefit from certain specific exemptions that are set out either in the domestic provisions or in the relevant tax treaty in force between Italy and the investor’s country of residence (for the impact of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (Multilateral Instrument) (MLI) on the tax treatment of capital gains deriving from the disposal of shares or quotas in certain companies, see Section III.iii).
  3. For the acquisition of shares, a 0.2 per cent financial transactions tax (IFTT) applies to the value of the transaction (i.e., the sale price of shares). A 0.1 per cent IFTT applies if the acquisition is executed on regulated markets or multilateral trading facilities. Certain exemptions apply.
  4. For the acquisition of quotas, a €200 lump sum transfer tax (imposta di registro) is due.
  5. Transfers of quotas and shares are exempt from VAT.

Tax treatment of the acquisition of a going concern

Regarding tax treatment of the acquisition of a going concern:

  1. the transaction is not tax neutral;
  2. the buyer enters all the relevant assets of the going concern at their current transaction values; tax amortisation will start again on the basis of the new values. The buyer may also become secondarily liable for the tax liabilities of the seller up to the value of the going concern;
  3. the seller, where a capital gain is realised, is subject to full taxation; no IRAP applies; and
  4. the transaction falls outside the scope of the VAT but it is subject to an ad valorem transfer tax, which is payable on the value of the assets net of any liabilities; registration tax rates vary depending on the assets (e.g., a 3 per cent transfer tax is due on the goodwill, and 9 per cent transfer tax is due on real estate assets. A €200 lump sum transfer tax applies to transfers of instrumental properties occurring in the context of the transfer of a going concern, provided that the relevant business and employment-level continuity is ensured).

Reorganisation transactions

A reorganisation between Italian-resident companies may be carried out via:

  1. a sale against consideration of shares or quotas (see above);
  2. a merger or a demerger; and
  3. a contribution of participations.

Mergers and divisions

Mergers and divisions carried out by Italian-resident companies are neutral for tax purposes (i.e., they neither represent a realisation of capital gains or losses on the assets owned by the participating company nor give rise to any taxable capital gain in the hands of the shareholder of the companies involved).28

For mergers and demergers, tax losses carry-forward and interest deductibility may be limited under certain anti-avoidance rules.

If certain further requirements and conditions are met, the tax neutrality regime depicted above also applies to intra-EU mergers and demergers.

Contribution of participations

In principle, the transaction under analysis is not tax neutral. Nonetheless, for a contribution of a participation under which the receiving company acquires, reaches or increases the control over the contributed company, in exchange for its own participation, no capital gain or capital loss arises, provided that the contributing company accounts for the participation received in exchange at the tax value of the contributed participation.29

As a result of the implementation of the EU Merger Directive, if certain requirements are met, the rollover regime applies to intra-EU contribution of participations. As a result, no capital gain or capital loss arises.

Tax treatment of outbound flows of incomeOutbound dividends

Dividends distributed by Italian companies to non-resident companies are, in principle, subject to withholding tax in Italy at the full rate of 26 per cent. A reduced rate (1.2 per cent) applies to dividends distributed to resident companies and subject to corporate income tax either in another EU Member State or in a state of the EEA. The full domestic withholding tax rate may (1) turn out to be zero under the Parent–Subsidiary Directive or (2) be reduced or zeroed under according to the applicable double tax treaty.

Italy provides for a specific exemption from withholding for dividends paid by Italian-resident entities to collective investment funds (1) resident in the EU or EEA (which allows for a satisfactory exchange of information) and (2) subject to regulatory supervision in their country of establishment pursuant to Directive No. 2011/61/EU.

Outbound interest payments

Any interest payment (other than those that are paid in connection with bank deposits or accounts) made by an Italian company to a foreign entity is subject to a final 26 per cent withholding tax. The full domestic withholding tax rate may, however, (1) turn out to be zero under the Interest and Royalties Directive or (2) be reduced or zeroed according to the applicable double tax treaty.

Outbound royalty payments

Any royalty payments made by an Italian company to a foreign entity are subject to a final withholding tax rate of 30 per cent. In certain cases, the taxable amount of the royalty payments is reduced by 25 per cent (with an overall tax burden of 22.5 per cent – i.e., 30 per cent of 75 per cent of gross royalties). The full domestic withholding tax rate may, however, (1) turn out to be zero under the Interest and Royalties Directive or (2) be reduced or zeroed under any applicable double tax treaty.

Funding structures

As to the choice between debt and equity as sources of funds for investing in Italy, the following points of attention should be considered from an Italian tax law perspective.

Debt financing

In principle, interest expenses borne by the Italian-resident company may be deducted from the IRES-taxable income in accordance with the limitations illustrated above.

For EU intra-group debt financing, the withholding tax exemption under the Interest and Royalties Directive (the I&R WHT Exemption) applies to interest payments made by the Italian-resident company to its EU participated company, provided that the relevant requirements are met.

For debt financing granted to Italian enterprises by, among others, EU banks, EU insurance companies and certain white-listed30 institutional investors, a withholding tax exemption is available for interest paid out of loans with certain features (the Loan WHT Exemption Regime).

Equity funding

With the view to strengthening the capitalisation of Italian companies, the Allowance for Corporate Equity31 (ACE) has recently been reinstated. ACE allows Italian-resident companies to deduct from their IRES-taxable income a 1.3 per cent ‘notional return’ on certain equity increases. Excess notional return can be either carried forward without time limits or converted into an IRAP tax credit. Certain anti-avoidance provisions apply.

Anti-avoidance rules

In addition to specific anti-abuse rules, Italian tax law provides for a general anti-abuse rule aimed at counteracting those transactions that, although formally in line with Italian tax law, do not have any economic substance and have been put into place for the essential purpose of obtaining undue tax benefits.

iv Indirect taxes

The Italian VAT system is in line with the relevant European directives. VAT applies to all the supplies of goods and services that are deemed to be carried out within the Italian territory.

The standard VAT rate in Italy is equal to 22 per cent, whereas, for certain kinds of goods and services, the reduced rates of 10 per cent or 4 per cent apply.

Under certain conditions, Italian VAT law allows VAT-taxable persons with financial, economic and organisational links to be treated as a single taxable person (i.e., to become a VAT group). The VAT group has a single VAT registration number, and supplies of goods and services occurring between members of a group are not considered to be relevant for VAT purposes.

In respect of merger leverage buyout transactions carried out in Italy, the Italian tax authorities highlighted that the relevant bid company needs to qualify as an ‘active’ holding company in order to deduct the input VAT charged on transaction costs. Should the holding company qualify as a ‘passive’ holding, the VAT will not be recoverable and it will represent a cost to be capitalised or recorded in the bid company’s profit and loss as an expense.32

Finally, Italy has recently introduced a plastic tax33 and a sugar tax,34 both of which will enter into force starting from 1 January 2023.

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