An extract from The Corporate Tax Planning Law Review – Edition 3
i Entity selection and business operationsItalian entities
No significant changes have been introduced. The most commonly used corporate entities2 are the following:
- joint-stock company (SpA);3 and
- limited liability company (Srl).4
This chapter focuses mainly on the above corporate entities. Although less common, legal and tax transparent entities exist.
Finally, Italy has got 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.
In principle, resident and non-resident corporate entities are subject to tax.6 Italian resident7 corporate entities are subject to the following:
- Italian corporate income tax (IRES),8 currently applicable at the rate of 24 per cent (which may be increased by 3.5 per cent for banks and certain financial intermediaries);9 and
- Italian regional tax on business activities (IRAP),10 currently applicable at the basic rate of 3.9 per cent11 (IRAP rate may 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.
Dividends received by Italian resident companies are subject to IRES in the year of payment as follows:
- only 5 per cent of the amount of the dividends distributed by Italian resident companies are included in the company’s IRES taxable base;12 and
- dividends received from non-resident entities are subject to the same tax regime under (a) provided that certain conditions are met.13
Italy has recently introduced a specific transparency rule with respect to dividends paid to Italian non-commercial partnerships (società semplici). In particular, for tax purposes, dividends are considered to be paid directly to the persons having 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 deriving from disposals of participations by an Italian resident company are 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 (participation exemption regime also known as PEX). The PEX regime is subject to conditions.14
In principle, for IRES tax purposes (1) capital losses deriving from disposals of PEX participations are not deductible, while (2) those deriving from disposals of non-PEX participations are deductible.
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 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 EBITDA); 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, while 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 asset management companies and managers, Italy 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 issued in the context of carried interest schemes qualifies as financial income or capital gain (generally subject to a 26 per cent substitute tax), rather than employment income (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.
Patent box regime
Under the Italian patent box regime,19 50 per cent of income20 deriving from the exploitation or the direct use of a software protected by copyright, patents, designs, models, processes, formulas and information relating to industrial, commercial or scientific know-how that is legally protected (Qualifying Intangibles) is not included in the IRES and IRAP taxable bases.
Furthermore, any capital gain deriving from the transfer of Qualifying Intangibles is not included in the seller’s IRES and IRAP taxable income, provided that at least 90 per cent of the consideration received by the seller is reinvested in the maintenance and development of other Qualifying Intangibles within the end of the second fiscal year following the transfer.
Tax credit for new investments
A tax credit varying from 6 per cent to 40 per cent is granted for investments carried out by Italian resident companies in new tangible and intangible assets between 16 November 2020 and 31 December 2021 (or by 30 June 2022 if a 20 per cent advance payment is made by 31 December 2020).21 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 6 per cent to 12 per cent of the investment depending on the nature of the investment itself.
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 SMEs (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.22
Step-up of Italian participations
Under Italian tax law, it is possible to elect a step-up of participations in unlisted Italian resident companies held on 1 January 2021 through the payment of an 11 per cent substitute tax. Certain requirements must be met. The substitute tax applies to the value of the participations because it results from a third-party appraisal. Such option is granted, inter alia, to foreign entities investing in the mentioned companies. This election may be particularly advantageous for those foreign investors who, in the 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 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.23
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 recently amended to align the domestic legislation to the EU Anti-Tax Avoidance Directive.
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:
- are resident for tax purposes in countries having an effective tax rate lower than 50 per cent than the Italian one; and
- more than one-third of their income derives from ‘passive income’24 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 (ITA) 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 prices are not in line with the fair market value.
Some limitations exist with respect to 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 having as a sole or main purpose 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, on top of the CFC legislation described above, Italy has implemented a transfer pricing regulation which 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:
- the foreign company carries out a real economic activity (through the use of personnel, assets and premises) in its jurisdiction; or
- the holding in the foreign company does not have the effect of shifting or localising profits in low tax jurisdictions.
Italy has also enacted the ATAD II anti-hybrid measures. With respect to 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 treatments. Tax treatment of the acquisition of shares or quotas:
- the buyer may not be able to deduct for tax purposes depreciation of the shares or quotas;
- 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. Save for the PEX regime (see 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 either set out 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 MLI on the tax treatment of capital gains deriving from the disposal of shares or quotas in certain companies, see Section III.iii). The 2021 Italian Budget Law introduced an exemption with respect to capital gains on ‘qualified’ participations25 in Italian resident entities derived by 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; and
- 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:
- for the acquisition of quotas, a €200 lump sum transfer tax is due; and
- 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:
- the transaction is not tax neutral;
- 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;
- the seller, where a capital gain is realised, is subject to full taxation; no IRAP applies; and
- the transaction falls outside the scope of the VAT but it is subject to an ad valorem transfer tax (imposta di registro), 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 reorganisation between Italian resident companies may be carried out via:
- a sale against consideration of shares or quotas (see above);
- a merger or a demerger; and
- 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).26
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 the participation received in exchange at the tax value of the contributed participation.27
As a result of the implementation of the EU Merger Directive, if certain requirements are met, the roll-over 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 either at the full rate of 26 per cent. A reduced rate (1.2 per cent) applies to dividends distributed to companies resident, and subject to corporate income tax, either in another EU member state or in a state of the European Economic Area. 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.
The 2021 Italian Budget Law introduced a specific exemption from withholding tax for dividends paid by Italian resident entities to collective investment funds (1) established in the EU or EEA, which allows for a satisfactory exchange of information; and (2) that are subject to regulatory supervision in their country of establishment pursuant to Directive No. 2011/61/EU (the exemption applies also in cases where the asset manager (rather than the relevant collective investment undertaking) is 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 it 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–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–Royalties Directive or (2) be reduced or zeroed under any applicable double tax treaty.
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.
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 institutional investors, a withholding tax exemption is available for interest paid out of loans, having certain features (the Loan WHT Exemption Regime).
With the view to strengthening the capitalisation of Italian companies, the Allowance for Corporate Equity28 (ACE) has been recently 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.
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 while, for certain kind 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 having 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.
With respect to MLBO transactions carried out in Italy, ITA highlighted that the relevant BidCo needs to qualify has 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 BidCo P/L as expenses.29
Finally, Italy has recently introduced a plastic30 and a sugar tax.31