Assessment: Developments in company tax planning in Italy

An excerpt from The Corporate Tax Planning Law Review – Issue 3

Local developments

i Company selection and doing business Italian companies

No significant changes were made. The most common business units2 are the following:

  1. Public limited company (SpA); 3 and
  2. Limited Liability Company (Srl) 4

This chapter mainly focuses on the bodies mentioned above. Although less common, there are legally and tax-transparent units.

Finally, in Italy there are special regulations for investment funds and real estate investment funds which have a contractual form5 but which cannot pursue pure business activity.

Tax residency

In principle, resident and non-resident corporations are subject to taxation6. Corporations resident in Italy are subject to the following rules:

  1. Italian Corporate Income Tax (IRES) 8, currently in force at 24% (which can be increased by 3.5% for banks and certain financial intermediaries); 9 and
  2. Italian regional business tax (IRAP) 10, which currently applies at the base rate of 3.9 percent11 (the IRAP rate can be increased to 4.65 percent for banks and other financial institutions and to 5.9 percent for insurance companies).

In principle, Italian permanent establishments of non-resident companies are treated in the same way for tax purposes as Italian corporations.

Italian collective investment schemes are subject to IRES but are exempt.

Incoming dividends

Dividends received from companies based in Italy are subject to the IRES in the year of payment as follows:

  1. only 5% of the amount of dividends paid by Italian resident companies are included in the company's IRES tax base; 12 and
  2. Dividends received from non-resident entities are subject to (a) the same tax regime provided certain conditions are met. 13

Italy recently introduced a special transparency rule for dividends paid to Italian non-commercial partnerships (società semplici). For tax reasons, dividends are considered to be paid directly to the persons involved in the Italian non-commercial partnership concerned; accordingly, the tax treatment of dividend payments applies to these persons.

For companies domiciled in a country with preferential tax arrangements, see “Profit shifting measures” in Section II.ii.

Dividends may also be subject to IRAP in certain circumstances.

capital gain

Capital gains from the sale of equity interests by an Italy-based company are subject to IRES. However, Italian tax law provides for a specific partial exemption, according to which 95 percent of the capital gain is exempt from the IRES (participation exemption regime, also known as PEX). The PEX regimen is subject to conditions. 14

In general, for IRES tax purposes, (1) capital losses from disposals of PEX interests are non-deductible, while (2) losses from disposals of non-PEX interests are deductible.

Deductibility of interest expenses

In general, an Italian resident company may deduct interest and similar expenses15 for each financial year up to: (1) the amount of interest income (and similar income) received in any given financial year; and (2) the amount of excess interest income (and similar income) carried forward from the previous financial year that has not yet been offset (the net interest expense) .16 The net interest expense is, in turn, deductible up to: (1) 30% of the gross operating margin of the Italian Company determined on the basis of the values ​​of the Italian Tax Law (ROL, similar to EBITDA); and (2) 30 percent of the excess ROL carried forward from prior fiscal years.

Excess ROL can be carried forward five fiscal years' notice, while excess interest income that was not used against interest expenses in any fiscal year can be carried forward indefinitely.

Specific rules apply, inter alia, to Italian resident companies that opt ​​for the domestic tax consolidation process (see Section II.ii under “The IRES Consolidation Regime”).

Relief in the event of tax losses

Italian companies can carry forward tax losses indefinitely. Tax losses incurred in a specific tax year can be offset against up to 80 percent of the latter amount against the corporate tax base for the following tax years. Tax losses cannot be repaid. The 80 percent limit does not apply to tax losses that arose in the first three financial years. Certain exclusions from tax loss relief apply.17 No tax losses can be carried forward for IRAP purposes.

Certain tax incentives for Italian companies and investors

There are special tax regulations.

Carried Interest Regime

In order to make Italy more attractive to asset management companies and managers, Italian tax law provides for an irrefutable presumption that the carried interest of Italian employees and managers (entitled persons) of funds, management companies and other companies is derived from financial instruments with extended economic rights Income spent as part of carried interest programs counts as financial income or capital gains (which are usually subject to a substitute tax of 26 percent) and not as income from gainful employment (taxed at marginal tax rates of up to 43 percent). This presumption only applies if certain conditions are met.18 If one or more conditions are not met, the carried interest is not automatically treated as income from gainful employment for tax purposes. Indeed, an analysis of the actual conditions of the scheme is required to assess the nature of the carried interest.

Patent box regime

According to the Italian patent box regulation19, 50 percent of the income20 comes from the exploitation or direct use of copyrighted software, patents, designs, models, processes, formulas and information relating to industrial, commercial or scientific know-how that is legally protected (qualifying intangible assets) is not included in the IRES and IRAP tax bases.

In addition, capital gains from the transfer of qualifying intangible assets are not included in the seller's taxable IRES and IRAP income provided that at least 90 percent of the consideration received from the seller is used to maintain and develop other qualifying intangible assets within. are reinvested at the end of the second financial year following the transfer.

Tax credit for new investments

A tax credit of 6 to 40 percent is granted for investments by Italian-based companies in new tangible and intangible assets between November 16, 2020 and December 31, 2021 (or by June 30, 2022 for an advance payment of 20 percent) December 31, 2020) .21 Certain exclusions apply.

From 2020, a tax credit will also be granted for investments by Italian-based companies in R&D, environmental transformation, high-tech innovation and design. The tax credit varies between 6% and 12% of the investment depending on the type of investment.

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

Certain tax incentives are granted, among others, to companies investing in innovative start-ups and SMEs (according to Italian law). Taxable IRES companies benefit from a deduction of 30 percent of the amount invested (up to € 1.8 million) per year from their taxable IRES income (with a maximum tax benefit of € 129,600 per year), provided certain conditions are met. 22nd

Increase in Italian holdings

According to Italian tax law, an increase in stakes in unlisted companies domiciled in Italy by January 1, 2021 by paying a substitute tax of 11 percent is optional. Certain requirements must be met. The substitute tax applies to the value of the participations, as it results from an external appraisal. This option is granted, among others, to foreign companies that invest in the companies mentioned. This choice can be particularly advantageous for foreign investors who cannot claim any tax exemption for capital gains in the event of a sale of the aforementioned investments.

ii Joint ownership: corporate structures and intra-corporate transactions The IRES consolidation regime

Italian tax law provides for the possibility of opting for tax consolidation within a group.

Italian resident companies that control other Italian resident companies may, together with the relevant controlled company, decide to include one or more of the controlled subsidiaries in a domestic tax consolidation system. Tax consolidation is also available for 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-based subsidiaries as the consolidating company.

The tax consolidation system enables the calculation of IRES income and losses of the affiliated companies on an aggregated basis (i.e. creating a consolidated tax base for IRES purposes). This system allows the taxable income to be offset against tax losses of companies belonging to the same scope of consolidation, which makes it possible to reduce the total tax payable by the group.

In addition, the tax consolidation system also allows companies under certain conditions to offset interest expenses against interest income from other companies and to transfer the surplus to the 30 percent ROL company. 23

The transactions between companies that are subject to the tax consolidation regime continue to be subject to their ordinary tax regime.

The Italian regime controlled foreign companies

The Italian regime for controlled foreign companies (the CFC regime) has recently been amended to align national legislation with the EU Anti-Tax Avoidance Directive.

The CFC regulation applies if natural persons, partnerships, companies and corporations (as well as permanent establishments of foreign corporations) who are tax resident in Italy directly or indirectly control foreign companies that:

  1. are resident for tax purposes in countries whose effective tax rate is lower than 50 percent than the Italian one; and
  2. more than a third of their income comes from “passive income” 24 or from finance leasing, insurance, banking or other financial activities, or intra-group sales or deliveries of goods or services with little added value.

If the above conditions are met, the income of the CFC will be attributed to the Italian controller (in proportion to their participation in the CFC) and taxed in their hands. The following dividend distributions are not considered to be tax-relevant up to the amount of the income taxed according to transparency. The CFC legislation does not apply if the CFC concerned carries out an economic activity in its country of establishment.

The exemption for branches

Italian companies can exempt income and losses from their permanent establishments (conditions apply). The option of exemption from establishment applies to all foreign permanent establishments and cannot be revoked. Profits from the foreign permanent establishment are taxed as dividends when they are distributed to the head office.

Domestic intercompany transactions

In principle, there is no legal provision that allows the Italian Tax Authorities (ITA) to contest the price of domestic intra-group transactions for IRES purposes; However, there is case law according to which prices of intra-group transactions can be challenged if the prices do not correspond to the fair value.

There are restrictions with regard to the possibility of carrying losses forward in domestic mergers if certain requirements are not met. This rule is intended to prevent mergers whose sole or primary purpose is to bring together for-profit companies on the one hand and companies with tax losses on the other.

Italian tax law also provides for some measures to promote corporate restructuring. In particular, under certain special conditions, the contribution of certain shares not belonging to the portfolio, the contribution of going concern and the exchange of interest that give control of companies are tax-neutral.

Measures against profit shifting

In order to counteract shifting profits, Italy has introduced a transfer pricing regulation in addition to the CFC legislation described above, which is in line with the relevant OECD guidelines.

Other measures to prevent profit shifting relate to inbound and outbound passive income, for example dividends received by Italian resident shareholders from subsidiaries residing in low-tax areas are fully taxed (rather than benefiting from a 95 percent exclusion).

The effects of the above provision can be mitigated to the extent that the Italian shareholder can demonstrate that:

  1. the foreign company carries out a real economic activity (through the use of staff, assets and premises) in its territory; or
  2. Participation in the foreign company does not lead to a shift or localization of profits in low-tax areas.

Italy has also adopted the ATAD II anti-hybrid measures. In terms of profit shifts and outflows, this means that in certain circumstances, for example, if a payment is deductible for an Italian tax base but not included in the tax base of the foreign recipient, the deduction will be refused in Italy.

iii Transactions with Third Parties Acquisition of equity interests or assets for cash

Share deals and asset deals are subject to different tax treatments. Tax treatment of the acquisition of shares or quotas:

  1. the buyer may not be able to deduct the depreciation of the shares or quotas for tax purposes;
  2. the seller realizes a capital gain or a capital loss, depending on whether the selling price is above or below the tax value of the shares or quotas sold. Other than the PEX scheme (see Section II.i under “Capital Gains”), the relevant gain or loss will become part of the seller's IRES tax base. IRAP can also apply under certain conditions. Non-Italian tax residents can benefit from certain specific exemptions set out either in national regulations or in the relevant tax treaty between Italy and the investor's country of residence (on the impact of the MLI on the tax treatment of capital gains from the sale of shares or quotas to certain companies, see Section III.iii). The Italian Budget Act 2021 introduced an exemption for capital gains from “qualifying” holdings25 in Italian resident entities originating from investment funds (1) domiciled in the EU or EEA, which allows for a satisfactory exchange of information and (2) in their country of establishment are subject to official supervision in accordance with Directive No. 2011/61 / EU; and
  3. a 0.2 percent financial transaction tax (IFTT) is charged on the value of the transaction (i.e. the selling price of the shares) when acquiring shares. An IFTT of 0.1 percent applies if the purchase is made on regulated markets or multilateral trading systems. Certain exceptions apply:
    • a flat-rate real estate transfer tax of € 200 is due for the acquisition of quotas; and
    • Transfers of quotas and shares are exempt from VAT.

Tax treatment of company acquisitions

For the tax treatment of the company acquisition:

  1. the transaction is not tax neutral;
  2. the buyer puts all relevant going concern assets at their current transaction values; Tax depreciation is resumed on the basis of the new values. The buyer can also be liable for the tax debts of the seller up to the amount of the enterprise value;
  3. the seller with whom a capital gain is realized is subject to full taxation; no IRAP applies; and
  4. the transaction does not fall within the scope of VAT but is subject to an ad valorem transfer tax (imposta di registero) payable on the value of the property minus any liabilities; The registration tax rates vary depending on the assets (e.g. 3 percent of the real estate transfer tax is due on the goodwill and 9 percent of the real estate transfer tax is due on the real estate assets).

Reorganization transactions

A restructuring between companies based in Italy can be carried out through:

  1. a sale against payment of shares or quotas (see above);
  2. a merger or split; and
  3. a participation fee.

Mergers and divisions

Mergers and divisions of Italian resident companies are tax neutral (i.e. they do not constitute a realization of capital gains or losses on the assets of the participating company, nor do they result in a taxable capital gain for the shareholder of the participating companies) .26

In the case of mergers and divisions, the tax loss carryforward and the deductibility of interest may be restricted in accordance with certain regulations to avoid tax avoidance.

If certain other prerequisites and conditions are met, the tax neutrality regime outlined above also applies to intra-community mergers and divisions.

Contribution of participations

In principle, the transaction examined is not tax-neutral. Nevertheless, when a participation is brought in, in which the acquiring company acquires, gains or increases control over the brought in company, there is no capital gain or loss of capital in exchange for its own participation, provided that the bringing in company accounts for the participation received in exchange using the tax value of the investment brought in. 27

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

Tax treatment of outbound income streams Outbound dividends

Dividends paid by Italian companies to non-resident companies are generally subject to either the full rate of 26 percent of withholding tax in Italy. A reduced rate (1.2 percent) applies to dividends distributed to companies that are resident in another EU member state or in a member state of the European Economic Area and are subject to corporation tax. The full domestic withholding tax rate can (1) be equal to zero according to the Parent-Subsidiary Directive or (2) be reduced or set to zero according to the applicable double taxation treaty.

The Italian Budget Act 2021 introduced a specific exemption from withholding tax on dividends paid by Italian resident entities to investment funds (1) established in the EU or EEA, which allows for a satisfactory exchange of information; and (2) who are subject to prudential supervision in their country of establishment in accordance with Directive No. 2011/61 / EU (the exception also applies in cases in which the asset manager (and not the collective investment undertaking concerned) is subject to prudential supervision in their Country of establishment in accordance with Directive 2011/61 / EU.

Outgoing Interest Payments

All interest payments (other than those paid in connection with bank deposits or accounts) by an Italian company to a foreign company are subject to a 26% final withholding tax. However, the full domestic withholding tax rate may (1) be zero under the Interest License Directive or (2) be reduced or zero under the applicable double taxation treaty.

Outgoing royalty payments

All royalty payments made by an Italian company to a foreign company are subject to a final withholding tax rate of 30 percent. In certain cases, the tax base of the license fees is reduced by 25 percent (with a total tax burden of 22.5 percent – i.e. 30 percent of 75 percent of the gross license fees). However, the full domestic withholding tax rate may (1) be zero in accordance with the Interest License Directive or (2) be reduced or zero in accordance with an applicable double taxation treaty.

Funding structures

With regard to the choice between debt and equity as sources of financing for investments in Italy, the following points must be observed from an Italian tax law perspective.

Debt financing

In principle, interest expenses borne by the Italian resident company can be deducted from IRES taxable income subject to the restrictions set out above.

In the case of intra-group debt financing in the EU, the withholding tax exemption under the Interest and License Fees Directive (the I&R WHT exemption) applies to interest payments made by the Italian-based company to its EU-based company, provided the relevant requirements are met.

For debt financing granted to Italian companies by, among others, EU banks, EU insurance companies and certain institutional investors, a withholding tax exemption for interest paid on loans with certain characteristics is available (the WHT exemption regime for loans).

Equity financing

In order to strengthen the capitalization of Italian companies, the equity allowance28 (ACE) was recently reintroduced. ACE enables Italian resident companies to deduct a “notional return” of 1.3 percent from their IRES taxable income for certain equity increases. Excess “notional returns” can either be carried forward indefinitely or converted into an IRAP tax credit. Certain anti-circumvention provisions apply.

Anti-circumvention rules

In addition to specific rules on combating abuse, Italian tax law provides a general rule on combating abuse, which aims to counteract transactions that are formally in accordance with Italian tax law, but have no economic content and the main purpose of obtaining unjustified tax advantages.

iv Indirect Taxes

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

The normal VAT rate in Italy is 22 percent, while the reduced rates of 10 percent or 4 percent apply to certain goods and services.

Under certain conditions, Italian VAT law allows VAT payers with financial, economic and organizational ties to be treated as a single taxable person (i.e. becoming a VAT group). The VAT group has a unique VAT identification number and supplies of goods and services between members of a group are not considered relevant for VAT purposes.

With regard to MLBO transactions conducted in Italy, ITA emphasized that the BidCo concerned must have an “active” holding company in order to deduct the input tax levied on transaction costs. If the holding company is considered to be a "passive" investment, the VAT is not refundable and represents an expense to be capitalized or recognized in the BidCo income statement.29

Finally, Italy recently introduced a plastic tax30 and a sugar tax.31

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