|Corporate Income Tax Rate (%)||27.5 (a)|
|Capital Gains Tax Rate (%)||1.375 / 27.5 (b)|
|Branch Tax Rate (%)||27.5 (a)|
|Withholding Tax (%)|
|Dividends||0 / 1.375 / 26 (c) (d)|
|Interest||0 / 12.5 / 26 (e) (f)|
|Royalties from Patents, Know-how, etc.||0 / 22.5 / 30 (f) (g)|
|Branch Remittance Tax||0|
|Net Operating Losses (years)|
a) The corporate income tax (imposta sul reddito delle società, or IRES) rate is 27.5%. However, the 2016 Budget Law provides that, except for banks and other financial entities, the IRES rate will be reduced to 24%, effective from the 2017 fiscal year (fiscal years beginning after 31 December 2016). A 6.5% surcharge (increasing the total tax rate to 34%) had been imposed on oil, gas and energy companies with revenues exceeding EUR3 million and taxable income exceeding EUR300,000, with reference to the preceding year (for 2011 to 2013, the surcharge was 10.5%, increasing the total tax rate to 38%). During 2015, the Italian Constitutional Court declared such surcharge unconstitutional and consequently repealed the surcharge without retroactive effect. A local tax on productive activities (imposta regionale sulle attività produt-tive, or IRAP) is imposed on the net value of production. For further details regarding IRAP, and various changes introduced during 2015, see Section B.
b) For details concerning capital gains taxation, see Section B.
c) Withholding tax is not imposed on dividends paid to resident companies. The 26% rate applies to dividends paid to resident individuals with non-substantial participations (for information on substantial and non-substantial participations, see the discussion of capital gains taxation in Section B). The 26% rate applies to dividends paid to nonresidents. Nonresidents may be able to obtain a refund of the withholding tax equal to the amount of foreign tax paid on the dividends. However, the maximum refund is 11/26 of the withholding tax paid. Tax treaties may provide for a lower tax rate. Effective from 1 January 2008, a 1.375% rate applies under certain circumstances (see Section B). If either the treaty or the 1.375% rate applies, the 11/26 tax refund cannot be claimed.
d) Under the European Union (EU) Parent-Subsidiary Directive, dividends distributed by an Italian subsidiary to an EU parent company are exempt from withholding tax, if among other conditions, the recipient holds 10% or more of the shares of the subsidiary for at least one year. See Section B.
e) The 0% rate applies under certain circumstances to interest derived by nonresidents on the white list (see Section B) from treasury bonds, bonds issued by banks and “listed” companies, “listed” bonds issued by “non-listed” companies, nonbank current accounts and certain cash pooling arrangements and in other specific cases. The term “listed” refers to a listing on the Italian exchange or on an official exchange or a multilateral system for exchange of an EU or European Economic Area (EEA) country. Such ex changes are also included in the Italian white list. The 26% rate applies to interest derived by residents and nonresidents from corporate bonds and similar instruments and from loans, in general. The 26% rate also applies as a final tax to interest paid to residents on bank accounts and deposit certificates. The rate applicable to interest paid on treasury bonds issued by the Italian government and by white-list countries is reduced to 12.5%. For resident individuals carrying on business activities in Italy and resident companies, interest withholding taxes are advance payments of tax. In all other cases, the withholding taxes are final taxes. For further details, see Section B.
f) No withholding tax is imposed on interest and royalties paid between associated companies of different EU member states if certain conditions are met. For details, see Section B.
g) The withholding tax rate of 30% applies to royalties paid to nonresidents. However, in certain circumstances, the tax applies to 75% of the gross amount, resulting in an effective tax rate of 22.5%. These rates may be reduced under tax treaties.
h) Loss carryforwards are allowed for corporate income tax purposes only. Losses incurred in the first three tax years of an activity may be carried forward indefinitely. Losses incurred in the following years can also be carried forward indefinitely but can only be used against a maximum amount of 80% of taxable income. Anti-abuse rules may limit loss carryforwards.
Taxes on corporate income and capital gains
Corporate income tax. Resident companies are subject to corporate income tax (imposta sul reddito delle società, or IRES) on their worldwide income (however, effective from the 2016 fiscal year, an elective branch exemption regime is available; see Section E). A resident company is a company that has any of the following located in Italy for the majority of the tax year:
- Its registered office
- Its administrative office (similar to a “place of effective management” concept)
- Its principal activity
Unless they are able to prove the contrary, foreign entities controlling an Italian company are deemed to be resident for tax purposes 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.
Nonresident companies are subject to IRES on their Italian-source income only.
Rate of corporate tax. The IRES rate is 27.5%. A 6.5% surcharge (increasing the total tax rate to 34%) had been imposed on oil, gas and energy companies that, in the preceding fiscal year, had revenues exceeding EUR3 million and taxable income exceeding EUR300,000 (from 2011 to 2013, the surcharge was 10.5%, increasing the total tax rate to 38%). On 9 February 2015, the Italian Constitutional Court issued decision No. 10/2015, which declared that the surcharge was unconstitutional and consequently the surcharge was repealed, without retroactive effect. The Italian Budget Law for 2016 (Law No. 208/2015) provides a reduction of the applicable IRES rate from 27.5% to 24%, effective for 2017 and subsequent years. The rate for banks and other financial entities will remain at 27.5%.
Local tax. 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. For manufacturing companies, IRAP is imposed at a standard rate of 3.9% on the “net value of production” (see below). However, different rates apply to the following:
- Corporations and entities granted concession rights other than those running highways and tunnels: 4.2%
- Banks and other financial entities: 4.65%
- Insurance companies: 5.9%
- Public administration entities performing business activities: 8.5%
In addition, each of the 20 Italian regions may increase or decrease the rate of IRAP by a maximum of 0.9176 percentage point, and companies generating income in more than one region are required to allocate their tax base for IRAP purposes among the various regions in the IRAP tax return.
The IRAP tax base is the “net value of production,” which is calculated by subtracting the cost of production from the value of production (that is, in general, revenue less operating costs). However, certain deductions are not allowed for IRAP purposes, such as the following:
- Certain extraordinary costs (but certain extraordinary income is not taxable).
- Bad debt losses.
- Labor costs (excluding certain compulsory social contributions and a fixed amount of the wages, in application of the so-called Cuneo Fiscale). However, under the 2015 Budget Law, labor costs incurred for employees hired on a permanent basis are fully deductible for IRAP purposes, beginning with the fiscal year including 31 December 2015.
- Interest expenses (but interest income is not taxable). However, banks, insurance companies and financial holding companies can deduct 96% of interest expenses and are taxed on 100% of interest income.
In addition, special rules for the calculation of the tax base for IRAP purposes apply to banking institutions, insurance companies, public entities and non-commercial entities.
Resident companies and nonresident companies with a permanent establishment in Italy. In general, capital gains derived by resident companies or nonresident companies with a permanent establishment (PE) in Italy are subject to IRES and IRAP (gains derived from sales of participations and extraordinary capital gains derived from transfers of going concerns are excluded from the tax base for IRAP purposes). Capital gains on investments that have been recorded in the last three financial statements as fixed assets may be electively taxed over a maximum period of five years.
Italian corporate taxpayers (that is, companies and branches) may benefit from a 95% participation exemption regime (that is, only 5% is taxable) for capital gains derived from disposals of Italian or foreign shareholdings that satisfy all of the following conditions:
- The shareholding was classified as of the first financial statements closed during the holding period as a long-term financial investment.
- The Italian parent company holds the shareholding for an uninterrupted period of at least 12 months before the disposal.
- The subsidiary actually carries on a business activity (real estate companies are assumed not to be carrying on a business activity; therefore, they can satisfy this requirement only under certain limited circumstances).
- The subsidiary is not resident in a tax haven (a jurisdiction on the blacklist; for additional information regarding gains from blacklist participations, see Dividends).
The last two conditions described above must be satisfied uninterruptedly through the three financial years before the year of the disposal.
If the conditions described above are not satisfied, capital gains on the sale of shares are fully included in the calculation of the tax base for IRES purposes.
In general, capital losses on shares are deductible. However, an exception is made for capital losses on participations that would benefit from the 95% participation exemption. These losses are 100% nondeductible. However, losses from sales of participations not qualifying for the participation exemption are nondeductible up to the amount equal to the exempt portion of the dividends received on such participations during the 36 months preceding the sale.
Nonresident companies without a PE in Italy. Most tax treaties prevent Italy from levying taxation on nonresidents deriving capital gains from the sale of Italian participations.
If no treaty protection is available, capital gains derived from sales of a substantial participation in Italian companies and partnerships are subject to tax in Italy, but 50.28% of such gains is exempt. As a result, 49.72% of the gain is taxable at the corporate income tax rate of 27.5%, and the effective tax rate is 13.67%. A “substantial participation” in a company listed on a stock exchange requires more than 2% of the voting rights at ordinary shareholders’ meetings or 5% of the company’s capital. For an un listed company, these percentages are increased to 20% and 25%, respectively.
Capital gains on “non-substantial participations” are subject to a substitute tax of 26%. However, certain exemptions to the 26% rate may apply under domestic law, such as for the following:
- A nonresident (including a person from a tax haven) selling listed shares
- Nonresident shareholders resident in white-list jurisdictions under specified circumstances
Administration. Income tax returns must be filed by the end of the ninth month following the end of the company’s fiscal year. Companies must make advance payments of their corporate and local tax liability based on a forecast method or a specified percentage of the tax paid for the preceding year. For the fiscal years including 31 December 2015 or 31 December 2016, the advance payment for corporate income tax (and local tax) purposes for all companies is 100% of the corporate income tax (and local tax) due for the preceding fiscal year.
Statute of limitations. The 2016 Budget Law introduces a change to the statute of limitations rules. Under the new measures, a company may be subject to a tax assessment up to the end of the fifth year following the year of filing of the relevant tax return (the previous term was the fourth year following the year of the filing of the tax return). In addition, the statute of limitations is now extended to seven years for a failure to file any tax return (the previous term as five years). The 2016 Budget Law repealed the doubling of the statute of limitations in the case of criminal tax investigations. The new rules apply to tax assessments issued with reference to the 2016 fiscal year and subsequent years.
Tax rulings. Several tax ruling procedures are available in Italy.
Taxpayers may request in advance ordinary tax rulings to clarify the application of tax measures to transactions if objective uncertainty exists regarding the tax law. The request for an ordinary tax ruling must include the identification data for the taxpayer, a description of the transaction and a list of applicable measures, circulars and court decisions.
Legislative Decree No. 156/2015 reorganized the tax-ruling procedures. In particular, effective from the 2016 fiscal year, the following are the main categories of rulings:
- Ordinary ruling (interpello ordinario), concerning the application of statutory provisions with objectively unclear interpretations
- Probative ruling (interpello probatorio), concerning the valuation and the fulfilment of the requirements necessary to qualify for specific tax regimes
- Anti-abuse ruling (interpello antiabuso), concerning the application of the abuse of law legislation to actual cases
- Exempting ruling (interpello disapplicativo), concerning the relief from application of specific anti-avoidance rules (for example, limitations to deductions or tax credits)
An international ruling scheme specifically deals with transfer pricing (advance pricing agreements [APAs] may be concluded for transfer-pricing issues), cross-border payments (interest, dividends and royalties), PE issues (including the determination of the existence of a PE) and the newly introduced patent box regime (see below). An international ruling is binding for the fiscal year in which the ruling is entered into and for the following four fiscal years, unless material changes in legal or economic circumstances arise. A rollback effect applies in certain circumstances and subject to certain limits (for other information regarding the international ruling scheme, see Advance Tax Agreements for Companies with International Operations).
Advance Tax Agreements for Companies with International Operations. Legislative Decree No. 147/2015 (the Internationalization Decree) revised and expanded the scope of a specific type of tax agreement (formerly called the International Ruling) available for companies with international operations.
International Rulings were already available for taxpayers to reach agreements with the tax authorities on the following:
- Transfer-pricing issues (through the conclusion of APAs)
- Cross-border flow matters
- Attribution of profits to domestic and foreign PEs
- Existence of PEs
Under the revised rules, the International Ruling is renamed the Advance Tax Agreement for Enterprises with International Activities and its scope is extended to the following:
- Agreements on asset bases in the case of inbound and outbound migrations
- For companies that participate in the Cooperative Compliance Program (CCP, see Cooperative Compliance Program in Section E), agreements on the fair market value of costs incurred with respect to blacklist entities (blacklist costs) for deduction purposes
In principle, the Advance Tax Agreement is valid for five years, which consists of the year in which it is signed and the following four years, to the extent that the underlying factual and legal circumstances remain unchanged.
During the period of the validity of the agreement, the tax authorities may exercise their power of scrutiny only with respect to matters that are not covered in the Advance Tax Agreement.
In addition, the new provision explicitly regulates rollback effects.
Advance tax ruling for new investments. A new type of ruling is introduced for investments of at least EUR30 million that have a significant and durable impact on employment with respect to the particular business activity.
The ruling provides the taxpayer an advance confirmation of the tax treatment of the entire investment plan (including the various envisaged transactions to achieve the plan) as well as, if needed, assurance on whether a going concern is formed. In addition, the ruling may also confirm the absence of any abusive behaviors, the existence of prerequisites to exclude the application of anti-avoidance provisions or recognition of access to specific tax regimes.
The authorities must respond within 120 days with the possibility to extend the term by an additional 90 days if additional information is requested. If no response is provided by the end of these time periods, it is deemed that the administration implicitly agrees with the interpretation provided by the taxpayer. The position expressed in the ruling is binding on the tax authorities and remains valid as long as the factual and legal circumstances addressed in the ruling remain unchanged.
Taxpayers conforming to the ruling response may also take advantage of the CCP, regardless of their turnover threshold. This measure will enter into force as of the date on which certain implementing regulations are enacted. Such regulations should be issued within 60 days after the entry into force of the Internationalization Decree.
Dividends. Dividends distributed to Italian entities and branches subject to corporate income tax are 95% excluded from corporate taxation regardless of the source (domestic or foreign) of such dividends and are taxable on a cash basis.
The Internationalization Decree modified the taxation of blacklist dividends. Under the old rules, dividends derived by Italian companies from blacklist subsidiaries were subject to the following regime:
- Full taxation (versus ordinary 95% dividend exemption) was applied in the case of direct or indirect participations in blacklist companies unless an exemption applied.
- Exemption treatment could be obtained through an advance ruling based on the fact that the foreign income had been subject to an adequate level of tax abroad.
- Exemption treatment was also applied to dividends derived from blacklist companies to the extent that the relevant foreign income had been already taxed at the level of the Italian shareholder under flow-through taxation principles set forth by controlled foreign company (CFC) rules (for information regarding the CFC rules, see Section E).
- If an exemption from the CFC rules had been previously achieved through a positive advance ruling specifically based on the fact that the foreign entity has proper business substance (first exemption), the dividend income was still subject to full taxation and no credit was recognized for any taxes paid by the blacklist company.
The Internationalization Decree introduces the following ameliorative rules:
- Full taxation applies only to blacklist dividends derived directly from participations in blacklist subsidiaries or indirectly through controlled foreign white-list subsidiaries with blacklist participations.
- An exemption may now be obtained even without an advance ruling if, during an audit process, the taxpayer can document that the foreign income has already been subject to an adequate level of tax abroad.
- If an exemption from the CFC rules had been previously allowed through a positive ruling based on the first exemption mentioned above and if the dividend is actually paid, the Italian shareholder is subject to full taxation but is allowed an underlying tax credit for any taxes paid abroad by the blacklist subsidiary. Rules similar to those provided for blacklist dividends apply to capital gains derived from the disposal of blacklist participations.
The new provisions apply to dividends and capital gains derived in or after 2015.
A 26% withholding tax is imposed on dividends paid by Italian companies to nonresident companies without a PE in Italy (double tax treaties may provide for lower rates). Nonresidents may obtain a refund of dividend withholding tax equal to the amount of foreign tax paid on the dividends, but the maximum refund is 11/26 of the withholding tax paid. Dividends paid by Italian entities (out of profits accrued in the fiscal year following the one in progress on 31 December 2007 and in subsequent fiscal years) to entities established in an EU member state or in an EEA country included in the white list are subject to a reduced withholding tax rate of 1.375%. If the 1.375% rate applies, the 11/26 tax refund can not be claimed.
In consideration of the reduction of the IRES rate to 24% for the 2017 fiscal year and future years, the 2016 Budget Law provides that the current 1.375% withholding tax applicable to dividends paid to white-list EU/EEA resident companies will be reduced to 1.2%.
Companies from EU member states that receive dividends from Italian companies may be exempted from the dividend withholding tax or obtain a refund of the tax paid if they hold at least 10% of the shares of the payer for at least one year. A similar provision is available for Swiss recipients under certain circumstances on the basis of Article 15 of the EC-Switzerland tax treaty of 2004.
For nonresident companies with a PE in Italy, dividends may be attributed to the Italian PE for tax purposes. In this case, the dividend is taxed at the level of the PE, and no withholding tax applies.
Withholding taxes on interest and royalties. Under Italian domestic law, a 26% withholding tax is imposed on loan interest paid to nonresidents. Lower rates may apply under double tax treaties.
A 30% withholding tax applies to royalties and certain fees paid to nonresidents. In certain circumstances, the tax applies to 75% of the gross amount, resulting in an effective tax rate of 22.5%. Lower rates may apply under double tax treaties.
As a result of the implementation of EU Directive 2003/49/EC, interest payments and qualifying royalties paid between “associated companies” of different EU member states are exempt from withholding tax. A company is an “associated company” of a second company if any of the following circumstances exist:
- The first company has a direct minimum holding of 25% of the voting rights of the second company.
- The second company has a direct minimum holding of 25% of the voting rights of the first company.
- An EU company has a direct minimum holding of 25% of the voting rights of both the first company and the second company.
Under the EU directive, the shareholding must be held for an un interrupted period of at least one year. If the one-year requirement is not satisfied as of the date of payment of the interest or royalties, the withholding agent must withhold taxes on interest or royalties. However, if the requirement is subsequently satisfied, the recipient of the payment may request a refund from the tax authorities.
To qualify for the withholding tax exemption, the following additional conditions must be satisfied:
- The recipient must be a company from another EU member state that is established as one of the legal forms listed in Annex B of the law.
- The company must be subject to corporate tax without being exempt or subject to a tax that is identical or similar.
- The recipient must be the beneficial owner of the payment.
An interest and royalty regime similar to the above-mentioned EU Directive 2003/49/EC applies under certain circumstances to recipients residing in Switzerland on the basis of Article 15 of the EC-Switzerland tax treaty of 2004.
Domestic withholding taxes on interest and royalties may be re duced or eliminated under tax treaties. An exemption also applies to interest derived by nonresidents on the white list under certain circumstances (see footnote [e] in Section A).
Tax on financial transactions. A domestic tax on financial transactions (so-called “Tobin Tax,” which is also known as the “Italian Financial Transaction Tax”) is imposed on certain financial transactions regardless of where the transactions are executed and the nationalities of the parties. The tax is imposed on the following types of transfers:
- Transfers of shares and participating financial instruments issued by Italian resident entities (including the conversions of bonds into shares but excluding the conversion of bonds into newly issued shares in the case of the exercise of options of existing shareholders)
- Transfers of other instruments representing the above shares and participating financial instruments
- Derivatives transactions that have as a main underlying asset the above shares or participating financial instruments
- Transactions in “derivative financial instruments” in shares and participating financial instruments or in such instruments whose value depends mostly on the value of one or more of the above financial instruments
- Transactions in any other securities that allow the purchase or sale of the above shares and participating financial instruments or transactions that allow for cash regulations based on the shares
The tax on financial transactions also applies to high-frequency trading transactions executed on Italian financial markets if conditions listed in the Ministerial Decree issued on 21 February 2013 are met. Specific exemptions and exclusions are also provided by this decree (for example, the tax does not apply to new issues of shares or on intercompany transactions).
The tax is levied at the following rates, which depend on the type of transaction and relevant market:
- Transactions in shares and participating financial instruments are subject to a 0.1% tax if executed on a regulated market or a multilateral trading facility established in an EU member state or in an EEA member state allowing an adequate exchange of information with Italy. The rate is 0.2% in all other cases.
- Transactions in derivatives and other financial instruments relating to shares and participating financial instruments are subject to a fixed tax ranging from EUR0.01875 to EUR200, depending on the type of instrument and the value of the agreements. If derivative contracts are executed on a regulated market or multilateral trade facility, the tax is reduced to 20% of these fixed amounts.
- High-frequency trading transactions are subject to a 0.02% tax on the counter-value of orders automatically generated (including revocations or changes to original orders). The tax is applied in addition to the tax on financial transactions due on transfers of shares and participating financial instruments as well as on transactions in the relevant derivative instruments.
The tax on financial transactions on share transactions is due from the transferee only, while the tax applicable to transactions in derivatives is due from each party to the transaction.
The tax payment must be made in accordance with the following rules:
- By the 16th day of the month following the month in which the transfer of the ownership occurred (if effected through the Centralized Management Company [Società di Gestione Accentrata], by the 16th day of the second month following the transaction date) for the following:
— Shares and participating financial instruments issued by Italian resident entities
— Instruments representing such shares and participating financial instruments
- By the 16th day of the month following the month in which the contract is concluded (if effected through the Centralized Management Company, by the 16th day of the second month following the transactions date) for the following:
— Derivatives that have as a main underlying asset the above shares or participating financial instruments
— “Derivative financial instruments” in shares and participating financial instruments
— Instruments whose value depends mostly on the value of one or more of the above financial instruments
— Other securities that allow the purchase and sale of the above shares and participating financial instruments or that allow for cash regulations (settlements) based on such financial instruments
- By the 16th day of the month following the month in which the annulment or amending order is sent for the high-frequency trading transactions executed on Italian financial markets
Exit tax. The transfer of tax residence abroad qualifies as a taxable event in Italy. As a result, any unrealized capital gains must be computed on the basis of the fair market value principle and taxed immediately. The transfer of tax residence is not considered a taxable event only to the extent that the assets related to the Italian business are attributed to an Italian PE of the migrating company.
Under recently adopted rules, as an alternative to an immediate levy, Italian companies shifting their tax residence to other EU or EEA white-list countries may elect either to defer exit taxation to the moment of actual realization or to pay the tax due in six an nual installments.
If taxation is deferred to the moment of actual realization, periodical information filings by the migrated company with the Italian tax authorities are required so that the tax authorities are in a position to monitor the events related to the migrated assets. The installment election exempts a taxpayer from any filing obligations. Both the deferral and the installment elections trigger interest payments and require the submission of proportioned guarantees if a serious and significant danger for the collection of taxes (specific guarantee exclusions are provided for by the law) exists. The following must also be considered:
- The moment of actual realization of the gains related to the migrated assets must be identified in accordance with ordinary Italian tax principles. Specific rules are applicable to identify the moment of actual realization of the following:
— Assets and rights that can be subject to the amortization process (including intangible assets and goodwill) — Shares and financial instruments
In any case, the gains related to the migrated assets are deemed realized after 10 years from the end of the fiscal year in which the transfer of the tax residence occurs.
- Mergers and other reorganizations do not interrupt the tax deferral if the migrated company remains a resident of a country described above and if the migrated assets are not transferred to a resident of a country other than a country described above.
The Internationalization Decree clarifies that the above regime also applies to the transfer to any EU member state or any qualifying EEA country of specific assets of an Italian PE to the extent that those assets constitutes a going concern.
Inbound migration. The Internationalization Decree provides that tax migration of companies from a white-list jurisdiction to Italy entails the tax step-up of the company’s assets and liabilities at fair market value.
For entities migrating to Italy from a blacklist jurisdiction, the tax basis of the assets is considered equal to the lower of the acquisition cost, the book value or the fair market value, while the tax basis of the liabilities is equal to the higher of these items. Alternatively, such companies may elect for a tax ruling in which they reach agreement with the Italian tax authorities on the relevant tax values (see Administration).
Patent box regime. The 2015 Budget Law introduced a favorable tax regime for income generated through the use of qualified intangible assets, such as industrial patents, models and designs capable of being legally protected, trademarks, know-how and other intellectual properties.
Taxpayers performing activities related to such intangibles are eligible, under a specific election, for a reduction of the IRES and IRAP tax base equal to 30% (2015), 40% (2016) and 50% (2017 and subsequent years) of the income derived from the use of the qualifying assets. The exemption applies to income earned both from the licensing of the intellectual property to a related or unrelated party and from the direct exploitation of the asset. An advance ruling may be required if certain circumstances exist, as a prerequisite to access the regime.
Capital gains derived from the disposal of the qualifying assets can be exempted if at least the 90% of the cash received from the disposal is used to maintain or develop other qualifying intangible assets before the end of the second fiscal year following the year in which the disposal took place.
The beneficial regime is valid for five fiscal years after the year of the election.
Foreign tax relief. A foreign tax credit may be claimed for foreign-source income. The amount of the foreign tax credit cannot exceed that part of the corporate income tax, computed at the standard rate, that is attributable to the foreign-source income. Accordingly, the foreign tax credit may be claimed up to the amount that results from prorating the total tax due by the proportion of foreign-source income over total income.
If income is received from more than one foreign country, the above limitation on the foreign tax credit is applied for each country (per-country limitation). Excess foreign tax credits may be carried forward or back for eight years.
For corporate groups that elect the worldwide tax consolidation (see Section C), an Italian parent company may consolidate profits and losses of its foreign subsidiaries joining the tax group and compute a single group tax liability. Such group tax liability may be offset by a direct foreign tax credit granted to the resident parent company with respect to taxes paid abroad by foreign subsidiaries that are members of the tax group.
The Internationalization Decree provides important clarifications concerning foreign taxes eligible for a tax credit.
Determination of business income
General. To determine taxable income, profits disclosed in the financial statements are adjusted for exempt profits, nondeductible expenses, special deductions and losses carried forward. Exempt profits include interest on government bonds issued on or before 30 September 1986 and income subject to Italian withholding tax at source as a final tax.
The following general principles govern the deduction of expenses:
- Expenses are deductible if and to the extent to which they relate to activities or assets that produce revenue or other receipts that are included in income.
- Expenses are deductible in the fiscal year to which they relate (accrual basis rule). Exceptions are provided for specific items, such as compensation due to directors, which is deductible in the fiscal year in which it is paid.
The 2016 Budget Law provides that companies are no longer subject to limitations in deducting expenses incurred in transactions with enterprises and consultants resident in blacklist countries.
Inventories. Inventory is normally valued at the lower of cost or market value for both fiscal and accounting purposes. For determination of “cost,” companies may select one of the various methods of inventory valuation specifically provided in the law, such as first-in, first-out (FIFO); last-in, first-out (LIFO); or average cost.
Banks and other financial entities can deduct only 96% of interest expenses for both IRES and IRAP purposes.
Depreciation and amortization allowances. Depreciation at rates not exceeding those prescribed by the Ministry of Finance is calculated on the purchase price or cost of manufacturing. Incidental costs, such as customs duties and transport and installation expenses, are included in the depreciable base. Depreciation is computed on the straight-line method. Rates for plant and machinery vary between 3% and 15%.
In general, buildings may be depreciated using a 3% annual rate. Land may not be depreciated. If a building has not been purchased separately from the underlying land, for tax purposes, the gross value must be divided between the non-depreciable land component and the depreciable building component. The land component may not be less than 20% of the gross value (increased to 30% for industrial buildings). As a result, the effective depreciation rate for buildings is 2.4% (2.1% for industrial buildings).
Purchased goodwill may be amortized over a period of 18 years. Know-how, copyrights and patents may be amortized in accordance with financial statements, but over at least two fiscal years. The amortization period for trademarks is 18 years.
Research expenses and advertising expenses may be either entirely deducted in the year incurred or written off in equal installments in that year and in the four subsequent years, at the company’s option.
Amortization allowances of other rights may be claimed with reference to the utilization period provided by the agreement.
The 2016 Budget Law introduces 40% extra depreciation (resulting in a total of 140% tax depreciation) for new tangible assets whose depreciation rate for tax purposes exceeds 6.5%. To qualify for the measure, the assets must be purchased or rented under a financial leasing contract during the period of 15 October 2015 through 31 December 2016. Real estate assets, pipelines, rolling stock and airplanes are excluded from the measure.
Provisions. The Italian tax law provides a limited number of provisions.
Bad and doubtful debts. A general provision of 0.5% of total trade receivables at the year-end may be made each year until the total doubtful debt provision reaches 5%. Bad debts actually incurred are deductible to the extent they are not covered by the accumulated reserve. In this regard, losses on bad debts are deductible for corporate income tax purposes only if they derive from “certain and precise” elements and if the debtor has been subject to a bankruptcy procedure or insolvency procedure. The Internationalization Decree provides that, effective from the 2015 fiscal year, the deduction for bad debt losses is allowed with respect to foreign bankruptcy and insolvency procedures, to the extent that they are equivalent to the Italian procedures and that the relevant foreign country allows a satisfactory exchange of information. “Certain and precise elements” are deemed to exist if one of the following conditions is met:
- The bad debt is not more than EUR2,500 (or EUR5,000 in the case of companies having a turnover not less than EUR100 million) and has been unpaid for at least six months.
- The right to collect the credit has expired. Under Article 2946 of the Italian Civil Law, the ordinary right to collect a credit expires after 10 years.
- The credit has been deleted from the financial statements in application of the relevant accounting rules.
For banks and financial entities, Law Decree No. 83/2015 repealed the rules concerning the tax deductibility of bad debt writedowns and bad debt losses arising from the transfer of receivables.
Redundancy and retirement payments. Provisions for redundancy and retirement payments are deductible in amounts stated by civil law and relevant collective agreements.
Limitations on interest deductions. For companies other than banks and other financial entities, the deductibility of net interest expenses is determined in accordance with an Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) test. Under this test, net interest expenses (that is, interest expenses exceeding interest income) are deductible only up to 30% of EBITDA and the excess can be carried forward indefinitely and used in the fiscal years in which 30% of EBITDA is higher than the net interest expense for the year. In addition, spare EBITDA capacity, which arises if the net interest expenses are less than 30% of EBITDA, is available for carryforward. For tax consolidations, excess interest expenses of a group company may be offset with spare EBITDA capacity of another group company. For this purpose only, the EBITDA capacity of foreign subsidiaries can also be taken into account.
The 2016 Budget Law provides changes in the deductibility of interest expenses for banks and other financial entities.
Specific rules apply to a domestic tax group if an excess of net interest expenses at the level of one entity may be deducted by the group and if other members have a corresponding amount of spare EBITDA.
The Internationalization Decree introduces further changes on interest expense deductions, including, but not limited to, the following:
- Dividends received from foreign controlled subsidiaries are included in EBITDA of Italian companies for the purposes of computing the 30% EBITDA cap for the net interest expense deduction.
- The use of the EBITDA of foreign intragroup entities is longer allowed for interest expense deduction purposes.
- Limitations on the deduction of interest expenses arising from bonds issued by certain non-qualified companies are repealed.
The above rules are effective from the 2016 fiscal year.
Foreign-exchange losses. Gains and losses resulting from the mark-to-market of foreign currency-denominated debts, credits and securities are not relevant. An exception is provided for those hedged against exchange risk if the hedging is correspondingly marked-to-market at the exchange rate at the end of the fiscal year.
Relief for losses. For corporate income tax purposes only, losses may be carried forward with no time limit and deducted from income of the following periods for a total amount equal to 80% of taxable income (or a lower value if the tax-loss amount does not reach 80% of the amount of taxable income for the fiscal year).
Losses incurred in the first three years of an activity may also be carried forward for an unlimited number of tax periods, and the limit of 80% of taxable income does not apply. The three-year time limit is computed from the company’s date of incorporation. In addition, to qualify for an unlimited loss carryforward, such losses must derive from a new activity; that is, companies within the same group may not have previously carried out the activity.
Restrictions on tax losses carried forward apply if ownership of the company is transferred and if the company changes its activity.
The company resulting from or surviving after a merger may carry forward unrelieved losses of the merged companies to offset its own profits. In general, tax losses carried forward may not exceed the lower of the net equity at the close of the last fiscal year or the net equity shown on the statement of net worth prepared for the merger of each company involved in the merger. This limitation is applied on a company-by-company basis. Contributions to capital made in the 24 months preceding the date of the net worth statement are disregarded. Special rules further limit the amount of the losses that can be carried forward. Additional measures combat abuses resulting from the use of losses with respect to mergers, demergers and the transparency regime (see Consortium relief).
Notional interest deduction. The Italian notional interest deduction (allowance for corporate equity, or ACE) grants Italian enterprises (including Italian branches of foreign businesses) a deduction from taxable income corresponding to an assumed “notional return” on qualifying equity increases contributed after the 2010 fiscal year. In particular, Italian resident companies are permitted to deduct from their net taxable income (that is, after applying any tax loss carryforward) an amount corresponding to a notional return on the increase in equity as compared to the equity as of the end of the 2010 fiscal year (New Equity). For Italian PEs of nonresident companies, the benefit is computed on the increase in the relevant endowment fund (for a PE, the endowment fund is equivalent to the share capital). The ACE deduction may offset the net tax base but it cannot generate a tax loss. Any excess ACE can be carried forward or converted into tax credits for IRAP purposes.
The New Equity is the result of an algebraic sum of positive and negative equity adjustments occurring after 2010. The following are positive adjustments:
- Contributions in cash
- Non-distribution of profits (the reserves that are not available are not qualified for equity increases)
- The waiver of credits by shareholders and the offset of credits by shareholders (credits are receivables that the shareholders have in favor of the company)
The following are negative adjustments:
- Assignments to shareholders.
- For adopters of International Financial Reporting Standards (IFRS), an equity reduction subsequent to a buy-back of own shares is considered up to the limit of any profits set aside as an available reserve.
Statutory losses do not qualify as negative equity adjustments for ACE purposes because they do not represent a voluntary act of assignment to the shareholders. However, the value of the New Equity on which the ACE deduction must be computed cannot be higher than the net equity of the entity at the end of each fiscal year (which is affected by the statutory losses).
For 2014, 2015 and 2016, the rate of the notional return is fixed at 4%, 4.5% and 4.75%, respectively. For subsequent years, the Ministry of Finance will determine the percentage annually on the basis of the average return on Italian public debt securities. Newly listed companies benefit from a 40% increase in the basis on which the benefit is computed with reference to any equity increase occurring in the year of the listing and in the following two years.
The positive effect of an equity increase in a given year will permanently qualify as New Equity in subsequent years (in principle, securing a permanent ACE deduction). This also applies to any reduction resulting from a negative adjustment.
Specific rules apply to a domestic tax group if an excess of ACE at the level of one entity may be surrendered to the group and used to offset the income generated by other members.
Anti-avoidance rule. Certain events are deemed to generate an undue duplication of the benefit with respect to the same contribution of cash and consequently trigger a corresponding decrease of the equity basis on which the benefit is calculated. In principle, the events identified by the anti-avoidance provision include the following:
- Cash contributions to related companies
- Financings with respect to related companies
- Acquisitions of controlling participations in related companies
- Acquisitions of businesses from related parties
In addition, cash contributions from nonresident blacklisted entities do not qualify for the benefit.
Non-operating companies. Italian resident companies and PEs of nonresident companies are deemed to be “non-operating companies” if the total of their average non -extraordinary revenues (proceeds from the ordinary activities of a company as shown on its financial statements) and increases in inventory are less than the sum of the average of the following during the preceding three years:
- 2% of the book value of the company’s financial assets
- 6% of the book value of the company’s real estate assets
- 15% of the book value of the company’s other long-term assets
The following companies are also deemed to be non-operating companies:
- Companies that incurred tax losses for five consecutive fiscal years
- Companies that incurred tax losses for four consecutive fiscal years and in the fifth fiscal year generated income in an amount lower than the minimum resulting from the application of the percentages described in the next paragraph
If the company qualifies as a non-operating company, its taxable income cannot be lower than the sum of the following items (minimum income):
- 5% of the book value of the company’s financial assets for the year
- 75% of the book value of the company’s real estate assets for the year
- 12% of the book value of the company’s other assets for the year
Non-operating companies may not generate tax losses. Previous tax losses (that is, those incurred when the company was operating) cannot be offset against the minimum income. In the (unlikely) event that the taxable income exceeds the minimum, only 80% of the amount exceeding the minimum can be offset.
The income of non-operating companies is subject to corporate income tax at a rate of 38% (rather than the ordinary 27.5% rate). IRAP (see Section B) also applies.
Non-operating companies that are in a value-added tax (VAT) credit position may no longer take the following actions:
- They may not claim such VAT for a refund.
- They may not use the VAT to offset other tax payments due.
- They may not surrender the VAT to other group companies.
- They may not carry forward the VAT.
Companies can be exempted from the above-mentioned regime, for both income tax and VAT purposes, if they prove to the tax authorities that they were not able to reach the minimum income requirements because of extraordinary circumstances (an advance ruling must be obtained for such a determination). Certain companies are specifically excluded from the non-operating companies’ regime (for example, listed groups, companies with 50 or more shareholders, companies with an amount of business income greater than the total assets value and companies that become insolvent or enter into an insolvency procedure).
Groups of companies. Groups of companies may benefit from tax consolidation and consortium relief. These regimes allow the offsetting of profit and losses of members of a group of companies.
Domestic tax consolidation. Italian tax consolidation rules provide two separate consolidation systems, depending on the residence of the com panies involved. A domestic consolidation regime is available for Italian resident companies only. A worldwide consolidation regime, with slightly different conditions, is available for multinationals.
To qualify for consolidation, more than 50% of the voting rights of each subsidiary must be owned, directly or indirectly, by the common Italian parent company.
For a domestic consolidation, the election is binding for three fiscal years. However, if the holding company loses control over a subsidiary, such subsidiary must be immediately excluded from the consolidation. The tax consolidation includes 100% of the subsidiaries’ profits and losses, even if the subsidiary has other shareholders. The domestic consolidation may be limited to certain entities, leaving one or more otherwise eligible entities outside the group filing election. Tax losses realized before the election for tax consolidation can be used only by the company that incurred such losses. Tax consolidation also allows net interest expenses (exceeding 30% of a company’s EBITDA) to be offset with spare EBITDA capacity of another group company.
Dividends paid within a domestic consolidation are subject to the ordinary 1.375% tax at the level of the recipient.
Horizontal consolidation. To comply with Case C-40/13 of the Court of Justice of the EU, the Internationalization Decree introduces the possibility of electing a domestic tax consolidation between two or more Italian sister companies with a common parent residing in any EU or EEA country that provides adequate exchange of information with Italy. These new measures are effective from the 2015 fiscal year.
Under the new measures, a nonresident parent company can designate an Italian resident subsidiary to elect for a tax-consolidation regime together with each resident company controlled by the same foreign entity.
In addition, the horizontal consolidation may also include Italian PEs of EU and qualifying EEA companies to the extent that the nonresident company with a PE in Italy is controlled by the same parent company.
Consortium relief. Italian corporations can elect consortium relief if each shareholder holds more than 10% but less than 50% of the voting rights in the contemplated Italian transparent company. Under this election, the subsidiaries are treated as look-through entities for Italian tax purposes and their profits and losses flow through to the parent company in proportion to the stake owned. These profits or losses can offset the shareholders’ losses or profits in the fiscal year in which the transparent company’s fiscal year ends. Tax losses realized by the shareholders before the exercise of the election for the consortium relief cannot be used to offset profits of transparent companies.
Dividends distributed by an eligible transparent company are not taken into account for tax purposes in the hands of the recipient shareholders. As a result, Italian corporate shareholders of a transparent company are not subject to corporate income tax on 5% of the dividends received (in all other circumstances this would mean an effective tax rate of 1.375%).
The election does not change the tax treatment of dividends distributed out of reserves containing profits accrued before the exercise of the election.
The consortium relief election is binding for three fiscal years and requires the consent of all the shareholders.
The consortium relief election may be beneficial for joint ventures that are not eligible for tax consolidation because the control test is not met. In addition, the election is also available for nonresident companies that are not subject to Italian withholding tax on dividend payments (that is, EU corporate shareholders qualifying under the EU Parent-Subsidiary Directive). If both EU corporate shareholders qualifying under the EU Parent-Subsidiary Direc tive and Italian corporate shareholders hold an Italian subsidiary, the EU corporate shareholders would want to elect consortium relief to allow the Italian corporate shareholders to benefit from tax transparency.
Group value-added tax. For groups of companies linked by more than a 50% direct shareholding, net value-added tax (VAT; see Section D) refundable to one group company with respect to its own transactions may be offset against VAT payable by another, and only the balance is required to be paid by, or refunded to, the group.
Other significant taxes
The following table summarizes other significant taxes.
|Nature of tax||Rate|
|Value-added tax, on goods, services and imports|
|Other rates||4% / 10%|
|Municipal tax (Imposta Unica Comunale, or IUC); includes real property tax (Imposta Municipale Unica, or IMU), tax on municipal services (Tassa per Servizi Indivisibili, or TASI) and tax on garbage disposal (Tassa per Rifiuti, or TARI)
IMU; imposed on Italian property’s re-evaluated cadastral value; rates may be modified by municipal authorities; not applicable to principal home; payable by the owner of
the real property; ordinary rate
|TASI; imposed on both the real estate owner
and real estate user; rates may be modified
by municipal authorities; ordinary rate
|TARI; imposed on the user||Various|
|Social security contributions (2015 rates);
includes mandatory social contribution,
Pension Fund contribution and Health
Assistance Fund contribution; rates depend
on the employer’s sector of economic activity
|Mandatory social contributions; payable by employers with more than 50 employees; includes pension (IVS) and other minor contributions; payable on gross remuneration Employers (overall rates)|
|Workers and office staff||9.49%|
|(For employees who have no social security record before 1 January 1996, the above pension contributions payable by employers and employees are calculated on gross remuneration capped at EUR100,324.) Additional contribution payable to the Pension Fund for Industrial Executives (PREVINDAI); based on gross remuneration capped at EUR150,000|
|Additional contribution payable for
industrial executives to the Health
Assistance Fund (FASI)
|Employers||quarterly EUR468+318 / annual EUR1,872 + 1,272|
|Employees||quarterly EUR240 / annual EUR960|
|Tertiary and commerce sector (trade,
services and activities complementary
and auxiliary to industrial production
and the agricultural sector)
|Mandatory social contributions; includes
pension and other minor contributions;
payable on gross remuneration by
employers with more than 200 employees
|Employers (overall rates)|
|Workers and office staff||9.49%|
|(For employees who have no social security
record before 1 January 1996, the above
pension contributions payable by employers
and employees are calculated on gross
remuneration capped at EUR100,324.)
Additional pension and health assistance
contributions; payable by employees
Pension fund (FON. TE.); payable on
remuneration base for the severance
payment fund (TFR)
|Employers||EUR120 per year|
|Employees||EUR24 per year|
|Mandatory insurance premium for injuries
or professional diseases; payable by employers;
the rate depends on the professional risk related
to the employment activity performed by
the individual (income cap of approximately
EUR29,682.90 applies to executives)
Foreign-exchange controls. The underlying principle of the foreign-exchange control system is that transactions with nonresidents are permitted unless expressly prohibited. However, payments by residents to foreign intermediaries must be channeled through authorized banks or professional intermediaries. In addition, transfers of money and securities exceeding EUR10,000 must be de clared to the Italian Exchange Office. Inbound and outbound investments are virtually unrestricted.
Transfer pricing. Italy imposes transfer-pricing rules on transactions between related resident and nonresident companies. Under these rules, intragroup transactions must be carried out at arm’s length. In principle, Italian transfer-pricing rules do not apply to domestic transactions. However, under case law, grossly inadequate prices in these transactions can be adjusted on abuse-of-law grounds (for example, transactions between a taxpaying company and another company with net operating losses on the verge of expiring).
No penalty applies as a result of transfer-pricing adjustments if Italian companies complied with Italian transfer-pricing documentation requirements, allowing verification of the consistency of the transfer prices set by the multinational enterprises with the arm’s-length principle. Such documentation consists of the documents called the following:
- Country Specific Documentation
The Masterfile collects information regarding the multinational group and it must be organized in the following chapters.
|Chapter||Information in chapter|
|1||A general description of the multinational group|
|2||Multinational group structure (organizational and operational)|
|3||Business strategies pursued by the multinational group|
|6||Functions performed, assets used and risks assumed|
|8||Transfer-pricing policy of the multinational group|
|9||Relationships with the tax administrations of the
EU member states regarding Advance Pricing
Arrangements (APAs) and transfer-pricing rulings
The submission of more than one Masterfile is allowed if the multinational group carries out several industrial and commercial activities that are different from each other and regulated by specific transfer-pricing policies.
The Country Specific Documentation contains information regarding the enterprise and it must be organized in the following chapters and annexes.
|Chapter||Information in chapter or annex|
|1||General description of the enterprise|
|3||Enterprise’s organisation chart|
|4||General business strategies pursued by the enterprise and potential changes compared to the previous tax years|
Annex 1 Flowchart describing the transaction flows, including those falling outside the scope of the ordinary management activities
Annex 2 Copies of written contracts on the basis of which the transactions referred to in Chapters 5 and 6 are regulated
The Internationalization Decree further clarifies that the transfer-pricing rules described above do not apply to transactions between resident entities.
Country-by-Country Reporting. The 2016 Budget Law introduced a new Country-by-Country Reporting (CbCR) obligation for multinational entities. Entities subject to this obligation must submit an annual report indicating the amounts of revenues, gross profits, taxes paid and accrued, and other indicators of effective economic activities.
Italian parent companies of certain groups and certain Italian resident companies controlled by a foreign company are subject to the CbCR obligation.
Italian parent companies are subject to the CbCR obligation if their groups meet the following conditions:
- They are required to submit group consolidated financial state‑
ments. These are groups that exceed two of the following two
of the following thresholds for two consecutive years:
— Total assets of EUR20 million
— Turnover of EUR40 million
— 250 employees
- They had consolidated annual turnover in the preceding fiscal year of at least EUR750 million.
- They are not controlled by other entities.
Italian resident companies controlled by a foreign company are subject to the CbCR obligation if they are required to submit group consolidated financial statements in a country where the CbCR does not apply or in a country that does not allow exchange of information regarding the CbCR.
In the case of a failure to submit a report or an incomplete submission of a report, penalties apply from EUR10,000 to EUR50,000.
Further implementing rules will be issued within 90 days after the date of entry into force of the 2016 Budget Law, which is 1 January 2016.
Cooperative Compliance Program. An elective Cooperative Compliance Program (CCP) is introduced for selected taxpayers that have adopted an adequate internal audit model to manage and control their tax risks with the purpose of promoting communication and cooperation between taxpayers and tax authorities.
Taxpayers that adhere to the CCP can benefit from certain advantages such as the following:
- Agreements on tax positions before the filing of the return
- Quicker rulings (45 days)
- No need for guarantees for tax refunds
- Reduction of applicable penalties to half of the minimum in the case of assessments concerning tax risks timely communicated by the taxpayer
Taxpayers that file a request to adhere to the CCP should receive an answer within 120 days.
In the case of a positive answer, admission to the regime is effective as of the fiscal year in which the request is filed and continues until the taxpayer files an end notice.
The tax authorities may exclude taxpayers from the CCP if during any of the years following the taxpayers’ admission, the taxpayers no longer meet the CCP’s requirements.
Taxpayers should adopt a collaborative attitude with Italian tax authorities by timely disclosing transactions that may be deemed to be aggressive tax planning, by promptly responding to any request and by promoting a corporate culture adhering to principles of fairness and respect of tax laws.
Controlled foreign companies. The Internationalization Decree introduces important changes to the controlled foreign company (CFC) regulations. Under the old rules, the income of a CFC was attributed to the Italian parent under a flow-through taxation principle if the subsidiary was located in a blacklist country, unless an advance ruling was obtained under one of the following exceptions:
- The foreign entity carried out as a main activity an actual industrial or commercial activity in the market of the state or territory in which it was located (first exemption).
- The participation in the foreign entity did not have the purpose to allocate income to countries or territories with a privileged tax regime (that is, the income is subject to an adequate level of tax in white-list jurisdictions).
The CFC legislation also applied to non-blacklist subsidiaries if both of the following circumstances existed:
- The effective tax rate applicable to the income of the foreign white-list entity was lower than 50% of the applicable Italian corporate tax rate.
- More than 50% of the foreign entity’s gross revenues had a “passive income” nature.
In this scenario, CFC rules did not apply if the taxpayer proved through a tax ruling that the foreign company was not an artificial arrangement to obtain undue tax savings.
The Internationalization Decree makes some changes to the above rules. The ruling procedure to avoid the applicability of the CFC legislation is no longer mandatory, but it remains as an optional procedure. The conditions required for the exemption from the regime can now be proved during the tax audit process. Accordingly, tax assessments concerning the CFC regime cannot be issued if the taxpayer has not been given the opportunity to provide evidence of one of the mentioned exemptions within 90 days from the clarification request.
In the absence of a positive ruling (and provided that the flow-through taxation has not been applied), the Italian parent needs to disclose in its tax return the ownership of the shares triggering the application of the CFC rule. Specific penalties of up to EUR50,000 apply for a failure to make such disclosure.
In addition, the Internationalization Decree provides that the CFC rules apply only to controlled companies, as opposed to the old legislation, which also applied to non-controlled subsidiaries under qualifying participations.
The new rules are effective from the 2015 fiscal year.
The 2016 Budget Law repeals the existing relevant blacklist for the application of the CFC regime and introduces new criteria to identify blacklist entities.
Effective from the 2016 fiscal year, foreign subsidiaries are considered blacklist entities for CFC purposes if they have a nominal corporate income tax rate lower than the 50% of the Italian rate. The CFC rules do not apply to EU and EEA resident entities that provide an adequate exchange of information with Italy.
In addition, the maximum applicable tax rate related to the CFC income attributed and assessed by the Italian shareholder is now equal to the ordinary IRES rate, instead of 27% under the previous rules.
The Ministry of Finance issued a decree dated 21 November 2001, which identifies the countries on the blacklist.
Anti-avoidance legislation. Legislative Decree No. 128/2015 repealed the preexisting anti-avoidance provision (Art. 37-bis of Presidential Decree No. 600/1973) and introduced a written rule on “abuse of law,” which replaces the unwritten principle developed by the Italian jurisprudence in recent years.
The newly introduced rule applies to all direct and indirect taxes with the exclusion of custom duties.
The rule defines “abuse of law” as “one or more transactions lacking any economic substance which, despite being formally compliant with the tax rules, achieve essentially undue tax advantages.”
Transactions are deemed to lack economic substance if they imply facts, actions and agreements, even related to each other, that are unable to generate significant business consequences other than tax advantages. As indicators of lack of economic substance, the anti-avoidance rule refers to cases in which inconsistency exists between the qualification of the individual transactions and their legal basis as a whole and cases in which the choice to use certain legal instruments is not consistent with the ordinary market practice.
Tax advantages are deemed to be undue if they consist of benefits that, even if not immediate, are achieved in conflict with the purpose of the relevant tax provisions and the principles of the tax system.
Notwithstanding the above, the anti-avoidance rule establishes that no abuse of law exists if a transaction is justified by non-negligible business purposes (other than of a tax nature) including those aimed at improving the organizational and managerial structure of the business.
Taxpayers can submit ruling requests to the Italian authorities to verify whether any envisaged or realized transactions are considered abusive. The application must be filed before the deadline for the relevant tax return submission or before the satisfaction of other tax obligations associated with the transactions.
It is now specifically provided that challenges based on the new anti-avoidance rule (that is, other than those based on tax evasion or the implication of specific tax crimes) do not trigger criminal law consequences.
Debt-to-equity rules. For information regarding restrictions on the deductibility of interest, see Section C.
Mergers and acquisitions. Mergers of two or more companies, demergers and asset contributions in exchange for shares are, in principle, tax-neutral transactions. Under the law, companies undertaking mergers, demergers and asset contributions in exchange for shares may step up the tax basis of the assets by paying a step-up tax at rates ranging from 12% to 16%. Different types of step-up elections are available for tax purposes.
Foreign PEs of Italian entities and Italian PEs of foreign entities. The Internationalization Decree introduces changes to the law regarding foreign PEs of Italian entities and Italian PEs of foreign entities, which are described below.
Foreign PEs of Italian entities. The Internationalization Decree introduces an election to exempt income generated through foreign PEs. For branches located in a blacklist country, CFC rules apply unless one of the available CFC exemptions is met. The election is irrevocable and involves automatically all of a com-pany’s PEs (that is, “all in or all out”). The relevant election must be made at the time of creation of the first PE.
The exemption regime is effective from the 2016 fiscal year. Implementing regulations need to be enacted.
With respect to existing PEs, the election must be made by the end of the second fiscal year following the fiscal year of the effective date of the new provisions (2016 fiscal year), and it should not give rise per se to taxable gains or losses. Recapture rules apply with respect to any tax losses derived through the PEs in the years before the election.
After the election is made, the Italian company must separately disclose the income of the foreign PEs in the tax return.
Italian PEs of foreign entities. The Internationalization Decree revises the method of attribution of income to Italian PEs in line with the “Authorized Organisation for Economic Co-operation and Development (OECD) Approach.” The PE income is determined according to the ordinary rules for resident companies and on the basis of a specific statutory account prepared according to the Italian accounting principles applying to resident enterprises with similar features.
Accordingly, the Internationalization Decree also repeals certain provisions providing for PE “force of attraction.” In addition, dealings between Italian PEs and foreign headquarters are explicitly subject to Italian transfer-pricing rules. In this respect, a PE is treated as separate and independent from its headquarters, and profits attributed to the PE are those that the branch would have earned at arm’s length as if it were a “distinct and separate” entity performing the same or similar functions under the same or similar conditions, determined by applying the arm’s-length principle. A branch “free capital” (fondo di dotazione) is also attributed to the PE on the basis of OECD principles.
Methods to quantify the branch free capital of a PE will be clarified by one or more upcoming regulations of the Director of the Italian Tax Agency within 90 days from the date of effectiveness
of the Internationalization Decree. The Internationalization Decree also specifies that tax authorities cannot apply penalties to assessments issued before the issuance of such regulations. The new rules are effective from the 2016 fiscal year.
Treaty withholding tax rates
|Dividends (1) (%)||Interest (%)||Royalties (%)|
|Algeria||15||0/15 (d)(e)(z)||5/15 (o)|
|Argentina||15||0/20 (d)(e)(z)||10/18 (h)|
|Armenia||5 / 10 (a)||0/10 (b)(d)||7|
|Austria||15||0/10 (d)(e)(z)||0/10 (i)|
|Azerbaijan||10||0/10 (yy)||5/10 (xx)|
|Bangladesh||10 / 15 (a)||0/10/15 (d)(e)(y)||10|
|Belarus||5 / 15 (a)||0/8 (d)(e)(z)||6|
|Brazil||15||0/15 (d)||15/25 (k)|
|Canada||5 / 15 (a)||0/10 (d)(e)(z)||0/5/10 (h)|
|Côte d’Ivoire||15 / 18 (t)||0/15 (d)||10|
|Denmark||0 / 15 (a)||0/10 (ee)(mm)||0/5 (nn)|
|Egypt||26 (cc)||0/25 (d)(e)(z)||15|
|Estonia||5 / 15 (a)||0/10 (d)(uu)||5/10 (kk)|
|Finland||10 / 15 (a)||0/15 (d)(e)(z)||0/5 (o)|
|France||5 / 15 (a) (gg)||0/10 (d)(e)(z)(ee)||0/5 (o)|
|Georgia||5 / 10 (a)||0||0|
|Germany||10 / 15 (a)||0/10/15 (d)(e)(z)(ee)(ff)||0/5 (l)|
|Ghana||5 / 15 (a)||10||10|
|Greece||15||0/10 (d)(e)(z)||0/5 (m)|
|SAR (ddd)||10 (ccc)||0/12.5 (d)(ccc)||15 (ccc)|
|Iceland||5 / 15 (a)||0||5|
|India||15 / 25 (a)||0/15 (d)(e)||20|
|Indonesia||10 / 15 (a)||0/10 (d)(e)(z)||10/15 (x)|
|Israel||10 / 15 (a)||10||0/10 (o)|
|Japan||10 / 15 (a)||10||10|
|Kazakhstan||5 / 15 (a)||0/10 (d)(e)(z)||0/10 (hh)|
|Korea (South)||10 / 15 (a)||0/10 (d)(e)(uu)||10|
|Kuwait||5 / 20 (a)||0||10|
|Latvia||5 / 15 (a)||0/10 (d)||5/10 (kk)|
|Lebanon||5 / 15 (aaa)||0||0|
|Lithuania||5 / 15 (a)||0/10 (d)(e)(z)||5/10 (kk)|
|Macedonia||5 / 15 (a)||0/10 (d)(e)(z)||0|
|Malaysia||10 (ww)||0/15 (d)||15|
|Malta||15||0/10 (d)(e)(z)||0/10 (m)|
|Mauritius||5/15 (a)||0/20 (dd)||15|
|Mexico||15||0/15 (d)(e)(z)||0/15 (l)|
|Morocco||10/15 (a)||0/10 (d)(e)(z)||5/10 (o)|
|Netherlands||5/10/15 (c)||0/10 (d)(e)(z)||5|
|New Zealand||15||0/10 (d)(e)(z)||10|
|Oman||5/10 (pp)||0/5 (oo)||10|
|Pakistan||15/25 (a)||0/30 (d)(e)(z)||30|
|Philippines||15||0/10/15 (d)(e)(z)||15/25 (zz)|
|Qatar||5/15 (a)||0/5 (d)(e)(z)||5|
|Saudi Arabia||5/10 (a)||0/5 (d)(e)(z)||10|
|Singapore||10||0/12.5 (d)(z)||15/20 (n)|
|Slovak Republic||15||0||0/5 (bbb)|
|Slovenia||5/15 (a)||0/10 (d)(e)(z)||5|
|South Africa||5/15 (a)||0/10 (d)(e)(z)||6|
|Spain||15||0/12 (d)(e)(z)||4/8 (o)|
|Sri Lanka||15||0/10 (d)(e)(z)||10/15 (q)|
|Sweden||10/15 (a)||0/15 (d)(e)(z)||5|
|Switzerland (eee)||15||12.5 (rr)||5|
|Syria||5/10 (a)||0/10 (qq)||18|
|Thailand||15/20 (a)||0/10 (d)(e)(j)||5/15 (h)|
|Tobago||10/20 (a)||0/10 (z)||0/5 (bb)|
|Tunisia||15||0/12 (d)(e)||5/12/16 (r)|
|Ukraine||5/15 (a)||0/10 (ll)||7|
|USSR (u)||15||0/26 (ii)||–|
|Kingdom||5/15 (a)(gg)||0/10 (e)(ee)||8|
|United States||5/15||0/10 (aa)||0/5/8 (s)|
|Venezuela||10||0/10 (b)(z)||7/10 (p)|
|Vietnam||5/10/15 (f)||0/10 (d)(e)(z)||7.5/10 (jj)|
|Zambia||5/15 (a)||0/10 (d)||10|
|Non-treaty countries||26 (ss)||26 (ss)||22.5/30 (ss)|
(1) Dividends paid by Italian companies to EU parent companies are exempt from
withholding tax if the recipient company holds a participation of at least 10% in the distributing company for an uninterrupted period of at least one year. Otherwise, a 1.375% dividend withholding tax rate applies under domestic law to dividends paid to EU and EEA subject-to-tax companies.
(a) The lower rate applies to corporate shareholders satisfying the following qualifying tests:
- Armenia: at least 10% of the capital (equal to at least USD100,000 or the equivalent value in other currency) for 12 months
- Bangladesh, Canada, Estonia, India, Kazakhstan and Lithuania: at least 10% of the capital
- Denmark, Qatar and Saudi Arabia: at least 25% of the capital for 12 months before the date the dividend is distributed
- Finland: more than 50% of the capital
- France: more than 10% of the capital for 12 months
- Belarus, Georgia, Germany, Indonesia, Israel, Korea, Macedonia, Mauritius, Moldova, Morocco, Pakistan, Slovenia, Syria, Trinidad and Tobago, United Arab Emirates and Zambia: at least 25% of the capital
- Ghana: at least 10% of the capital
- Iceland: beneficial owner is a company (other than a partnership) owning at least 10% of the capital for at least 12 months
- Japan: at least 25% of the shares with voting rights for six months
- Kuwait: at least 25% of the capital
- Latvia: beneficial owner is a company (other than a partnership) owning at least 10% of the capital
- South Africa: at least 25% of the capital for 12 months ending on the date the dividend is declared
- Sweden: at least 51% of the capital
- Thailand: at least 25% of the shares with voting rights
- Ukraine: at least 20% of the capital
- United Kingdom: at least 10% of the shares with voting rights for 12 months
b) The 0% rate applies to interest paid to or by a government.
c) The 5% rate applies to corporations that beneficially own more than 50% of the voting rights of the shares for the 12-month period ending on the date of declaration of the dividend. The 10% rate applies to the gross amount of the dividends if the beneficial owner is a company that is not entitled to the application of the 5% rate and that has held at least 10% of the voting shares of the company paying the dividends for the 12-month period preceding the date of declaration of the dividends. The 15% rate applies in all other cases.
d) Interest paid to a “government” or central bank is exempt. The term “government” refers to the central government and any other local authority entirely owned by the state that receives interest on behalf of the central authority.
e) Interest paid by a contracting state is exempt. Under the Philippines treaty, the loan must involve the issuance of bonds or financial instruments similar to bonds.
f) The 5% rate applies to dividends paid to corporations that beneficially own at least 70% of the capital of the payer. The 10% rate applies to dividends paid to corporations that beneficially own at least 25% but less than 70% of the capital of the payer. The 15% rate applies to other dividends.
g) The 5% rate applies if the recipient of the dividend is a corporation that beneficially owns more than 10% of the capital of the payer and if the value of the participation of the recipient is at least USD100,000 or an equivalent amount in another currency. The 10% rate applies to other dividends.
h) The lower rate is for the use of or right to use literary, artistic and scientific copyrights. Under the Canada treaty, the lower rate applies only to literary and artistic copyrights.
i) The higher rate applies if the recipient has an investment exceeding 50% of the capital of the payer.
j) The 10% rate applies only if the payer is engaged in an industrial activity and the interest is paid to a financial institution (including an insurance company). The exemption also applies to bonds issued by a contracting state.
k) The 25% rate applies to trademark royalties only.
l) The lower rate applies to royalties for literature, plays, and musical or artistic works. Under the Germany treaty, royalties for films and recordings for television qualify for the lower rate. Under the Canada treaty, such royalties do not qualify for the lower rate. Under the Mexico treaty, royalties for films and recordings for television and radio do not qualify for the lower rate.
m) The lower rate applies to royalties paid for literary, artistic or scientific works and for films and recordings for radio or television.
n) The lower rate applies to patents, trademarks, trade names or other intellectual property.
o) The lower rate applies to royalties from the use of copyrights on literary, artistic or scientific works (excluding cinema and television films).
p) The lower rate applies to royalties paid for the use of, or the right to use, copyrights for literary, artistic or scientific works, including cinematographic films and recordings for radio and television broadcasts.
q) The lower rate applies to royalties paid for literary and artistic works, in clud-ing films and recordings for radio and television.
r) In the case of royalties for the use of trademarks, films and industrial, com mercial or scientific equipment, the withholding tax rate is 16%; for the use of copyrights for artistic, literary and scientific works, the rate is 5%. In all other cases, the rate is 12%.
s) The 0% rate applies to royalties for copyrights of literary, artistic or scientific works (excluding royalties for computer software, motion pictures, films, tapes or other means of reproduction used for radio or television broadcasting). The 5% rate applies to royalties for the use of, or the right to use, computer software or industrial, commercial, or scientific equipment. In all other cases, the 8% rate is imposed on the gross amount of the royalties.
t) The 18% rate applies if the dividends are paid by a company that is resident in Côte d’Ivoire and that is exempt from tax on its income or not subject to that tax at the normal rate. The 15% rate applies in all other cases.
u) In general, the USSR treaty is honored by the Commonwealth of Independent States (CIS), except for Kazakhstan, but CIS members have different positions on the treaty. Italy and Kazakhstan have entered into a tax treaty (see rates in table). Tajikistan and Turkmenistan continue to apply the USSR treaty.
v) The treaty with the former Yugoslavia applies to Bosnia and Herzegovina, Mon tenegro and Serbia. Italy has entered into new tax treaties with Croatia, Macedonia and Slovenia.
w) An exemption applies to the following:
- Interest on loans that are not in the form of bearer securities if the interest is paid to the following: the other contracting state; its political or administrative subdivisions; or its local authorities
- Interest paid to credit institutions of the other contracting state if the interest is paid on loans that are not in the form of bearer securities and if the loans are permitted under an agreement between the governments of the contracting states
x) The 10% rate applies to royalties and commissions paid for the use of or right to use the following: industrial, commercial or scientific equipment; or information concerning industrial, business or scientific know-how. The 15% rate applies to other royalties.
y) The 10% rate applies to interest paid by banks and other financial entities (that is, insurance companies). The 15% rate applies to other interest.
z) Interest paid on loans made in accordance with an agreement between the governments of the contracting states is exempt. Under the Mexico treaty, the loan must have a term of at least three years.
(aa) Interest withholding tax is not imposed if any of the following circumstances exist:
- The interest is beneficially owned by a resident of the other contracting state that is a qualified governmental entity and that holds, directly or indirectly, less than 25% of the capital of the person paying the interest.
- The interest is paid with respect to debt obligations guaranteed or insured by a qualified governmental entity of that contracting state or the other contracting state and is beneficially owned by a resident of the other contracting state.
- The interest is paid or accrued with respect to a sale on credit of goods, merchandise, or services provided by one enterprise to another enterprise.
- The interest is paid or accrued in connection with the sale on credit of industrial, commercial, or scientific equipment.
(bb) The lower rate applies to royalties for literature, musical and artistic works. (cc) The 26% rate is the rate under Italian domestic law for dividends paid to nonresidents.
(dd) These are the rates under Italian domestic law. Under the treaty, the rate is 0% if the interest is paid to a Mauritian public body or bank resident in Mauritius.
(ee) Exemption is provided for interest paid in connection with the following:
- Credit sales of industrial, commercial or scientific equipment
- Credit sales of goods delivered from one enterprise to another enterprise (ff) A 15% rate, which is contained in the dividend article, applies to payments on profit-sharing loans and to silent partners. The 10% rate applies in other circumstances.
(gg) A refund may be available for the underlying tax credit with respect to business profits attached to the dividends.
(hh) If a resident of a contracting state receives payments for the use of, or the right to use, industrial, commercial or scientific equipment from sources in the other contracting state, the resident may elect to be taxed in the contracting state in which the royalties arise as if the property or right for which the royalties are paid is effectively connected with a PE or fixed base in that contracting state. If such election is made, no withholding tax is imposed on the payments.
(ii) The treaty exempts the following types of interest:
- Interest on bank credits and loans
- Interest on current accounts and deposits with banks or other credit institutions
The 26% rate is the withholding tax rate under Italian domestic law.
(jj) The lower rate applies to fees paid for technical assistance services. The higher rate applies to royalties paid for the use of the intangibles.
(kk) The 5% rate applies to royalties paid for the use of industrial, commercial or scientific equipment.
(ll) The treaty provides the following exemptions:
- Interest paid by the government or its local authorities
- Interest paid to the government of the other contracting state or its local authorities or other entities and organizations (including credit institutions) wholly owned by the other contracting state or its local authorities
- Interest paid to other entities and organizations (including credit institutions) if the interest is paid on loans permitted under an agreement between the governments of the contracting states
(mm) The treaty provides the following exemptions:
- Interest paid by the state of source, its political or administrative subdivisions or its local authorities
- Interest paid on loans granted, guaranteed or secured by the government of the other contracting state, by its central bank or by other entities and organizations (including credit institutions) wholly owned by the other contracting state or under its control
(nn) The lower rate applies to royalties paid for the use of, or the right to use, copyrights for literary, artistic or scientific works, excluding cinematographic films and other audio and visual recordings.
(oo) The treaty provides the following exemptions:
- Interest paid by the government or a local authority thereof
- Interest paid to the government, a local authority thereof or an agency or instrumentality (including a financial institution) wholly owned by the other contracting state or a local authority thereof
- Interest paid to any other agency or instrumentality (including a financial institution) with respect to loans made under agreement entered into between the governments of the contracting states
(pp) The 5% rate applies to companies (other than partnerships) that hold directly at least 15% of the capital of the payer of the dividends. The 10% rate applies to other dividends.
(qq) The treaty provides the following exemptions:
- Interest paid to a contracting state, a local authority thereof, or a corporation having a public status, including the central bank of that state
- Interest paid by a contracting state or local authority thereof, or any corporation having a public status
- Interest paid to a resident of a contracting state with respect to debt obligations guaranteed or insured by that contracting state or by another person acting on behalf of the contracting state
- Interest paid with respect to sales on credit of industrial, commercial or scientific equipment or of goods or services between enterprises
- Interest paid on bank loans
(rr) Effective from 1 July 2005 a 0% rate may apply under the agreement between Switzerland and the EU. The rates shown in the table are the withholding tax rates under the Italy-Switzerland double tax treaty. Subject to fulfillment of the respective requirements, the taxpayers may apply either the Switzerland-EU agreement or the Italy-Switzerland double tax treaty.
(ss) See Section A.
(tt) The exemption applies to interest paid to a resident of the other contracting state with respect to debt claims indirectly financed by the government of that other contracting state, a local authority, the central bank thereof or a financial institution wholly owned by the government of the other contracting state.
(uu) The lower rate applies to interest related to loans that are guaranteed by the government or a local authority. Under the Korea treaty, the guarantee must be evidenced by an agreement contained in an exchange of letters between the competent authorities of the contracting states.
(vv) The 15% rate applies to dividends paid by a company established in Italy to a Cyprus resident beneficiary. Dividends paid by a company established in Cyprus to an Italian resident beneficiary are exempt from withholding tax in Cyprus.
(ww) The 10% rate applies to dividends paid by an Italian company to a Malaysian resident. Dividends paid by a Malaysian company to an effective beneficiary resident in Italy are exempt from tax in Malaysia if the beneficiary is subject to tax on the dividends in Italy.
(xx) The 5% rate applies to royalties for the use of, or the right to use, computer software or industrial, commercial, or scientific equipment. In all other cases, the rate for royalties is 10%.
(yy) The treaty provides an exemption from withholding tax for the following types of interest payments:
- Interest paid by the state of source, its political or administrative subdivisions or its local authorities
- Interest paid on loans granted, guaranteed or secured by the government of the other contracting state, by its central bank or by other entities and organizations (including credit institutions) wholly owned by the other contracting state or under its control
- Interest paid or accrued in connection with the sale on credit of industrial, commercial, or scientific equipment
(zz) The 15% rate applies if the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and to royalties with respect to cinematographic films or tapes for television or broadcasting. The 25% rate applies in all other cases.
(aaa) The 5% rate applies if the recipient company has owned at least 10% of the capital in the Italian company for at least 12 months.
(bbb) The 5% rate applies to royalties paid for the following:
- The use of, or the right to use, patents, trademarks, designs or models, plans, and secret formulas or processes
- The use of, or the right to use, industrial, commercial or scientific equipment that does not constitute immovable property, as defined in Article 6 of the treaty
- Information concerning experience of an industrial, commercial or scientific nature
(ccc) The treaty contains a specific anti-abuse provision. If the main purpose or one of the main purposes of the transaction is to benefit from the lower treaty rates, the lower rates may be denied.
(ddd) On 10 August 2015, the income tax treaty between Italy and the Hong Kong Special Administrative Region (SAR) entered into force. The treaty is in effect with respect to Italian tax for years of assessment beginning on or after 1 January 2016. Under the treaty, the Hong Kong SAR has been removed from the Italian blacklists (for both cost deductions and for CFC purposes).
(eee) On 23 February 2015, Italy and Switzerland signed a protocol to their double tax treaty as well as a road map for the continued dialogue in tax and financial matters.