This country-specific Q&A provides an overview to tax laws and regulations that may occur in Italy.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax
How often is tax law amended and what are the processes for such amendments?
In Italy the annual Stability Law (which includes The Budget Law provisions), issued towards the end of any given year, normally includes changes to the tax provisions. In addition, there might be specific acts which amend or introduce a specific rules or provisions. Moreover, amendments to tax law are sometimes hidden in bills predominantly dealing with other areas of law.
The Stability Law normally defers the implementation of new rules to decrees issued by the Government, or to instructions to be issued by the Tax Authorities. Therefore, full implementation of new laws may entail a long process and the need of different levels of regulations.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
In Italy, the principal procedural obligation of a taxpayer is to file annual tax returns. Returns have to be filed no later than 30 September of the year following that of reference. The filing is made through electronic means. Since salary and wages are subject to employer tax withhold and reporting, often employees are not obliged to file an income tax return, provided they have not received any income from sources other than dependent services.
As a matter of principle, tax relevant records must currently be kept and stored until the 31st December of the fifth year following that in which the relevant tax return was filed (or 7th year in case of omission to file it), or in any case until the statute of limitation has expired. Depending on the nature of the records and whether or not the records relate to business income, more specific rules apply. For private individual taxpayers the record keeping rules are not that strict.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The highest authority dealing with tax matters in Italy is the Agenzia delle Entrate, which is an Agency directly dependant on the Ministry of Finance.
The Agenzia delle Entrate is organized at Central Level (in Rome) with offices dealings with the interpretation of the law and implementation of administrative regulations, as well as with certain ruling requests (international affairs and substantial investments). Local offices of the Agenzia delle Entrate are then organized in the Regions and in the Municipalities, on the basis of territoriality competence rules. Such offices have audit and assessment authority, receive payment of taxes and look after the regularity of tax payments. The local offices are also responsible for certain ruling requests, and for request of annulment of tax assessments, and settlement procedures.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Yes, in case the appeal procedure at the administrative level is not successful, the taxpayer may file a court action with the responsible local tax court. The appellate court and highest Italian court dealing with tax matters is the Supreme Court of Cassation (Corte di Cassazione). Decisions of a local tax court can be appealed first at Regional level and, afterwards, before the Supreme Court of Cassation only for specific topics listed in the civil procedural code.
A tax dispute is normally therefore composed of three levels, since the lower degrees courts are two (Commissione Tributaria Provinciale and Commissione Tributaria Regionale) and there is also a possible appeal before the Supreme Court of Cassation. The procedures at the lower degree courts generally last three years, whilst obtaining a decision from the Supreme Court of Cassation may take few years.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Corporate income tax (IRES) and regional tax on productive activities (IRAP) prepayments are due on 30 June and 30 November. The amount of the prepayment is generally determined on the basis of an income estimation grounded on the previous year income. Not all taxpayers are, however, obliged to make prepayments.
Generally, appealing a tax assessment does not avoid that the underlying tax becomes due and enforceable. Only in case of a suspension of payment, the taxpayer does not have to pay the assessed taxes whilst the appeal is pending. In case the appeal is not successful, the full tax, the penalties and the interest become due again.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
Pursuant to article 68 of Presidential Decree no. 600/1973 officers of the Italian Tax Authorities must ensure that any information concerning the tax assessment of a taxpayer is kept confidential. It is a criminal offence to breach this obligation by disclosing information (art. 326 of the Criminal Code).
However, officers of the Italian Tax Authorities are by the same article 68 authorized to disclose the abovementioned information to certain other public officers involved or interested in the same tax assessment, as well as upon Court order.
The above mentioned confidentiality duty does not apply to the information included in the tax returns filed by the taxpayer.
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
Yes, Italy is a signatory of the Common Reporting Standard and has implemented it in its domestic legislation (jointly with the bilateral agreement entered into with the Government of the United States for the FATCA implementation).
A public register of beneficial ownership has not been included in the CRS implementation rules for the time being.
Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?
Italian tax legislation already includes many rules that are shown in the list of the OECD recommendations on BEPS, such as CFC-rules, an interest deduction barrier, anti-avoidance rules, TP rules, enhanced tax cooperation and transparency.
The Italian Government and Italian Tax Authorities are committed to implement the OECD recommendations on BEPS matters with a view to contrasting international tax evasion and are working on the adoption of new legislation (e.g. on the taxation of the digital economy distortions). Moreover, in recent years, Italian Tax Authorities have already focused their attention and subject to tax audits some of the major digital economy multinationals (such as eBay and Google) on the basis of the existing anti-abuse rules.
Is there a GAAR and, if so, how is it applied?
Yes, Italian tax law operates a GAAR which applies to all taxes, both direct and indirect, with the sole exclusion of custom duties.
With Legislative Decree no. 128/2015, the Italian Government enacted a GAAR replacing and widening the anti-avoidance rule previously in force and taking into account the anti-abuse principles developed over the last decade by the Italian Supreme Court.
The new GAAR defines as an abuse of law "one or more transactions lacking any economic substance which, despite being formally compliant with the tax rules, achieve essentially undue tax advantages".
A transaction is deemed to lack economic substance when they imply facts, actions and agreements, even related to each other, that are unable to generate significant business consequences other than tax advantages. The GAAR:
- identifies the following as elements proving the lack of economic substance: inconsistency between the qualification of the individual transactions and their legal basis as a whole and the choice of legal instruments which are not consistent with the ordinary market practice; and
- states that a tax advantage is undue where it consists 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.
The GAAR clarifies that no abuse of law can be challenged when a transaction is justified by not-negligible business purposes (other than of a tax nature) including those aimed at improving the organizational and managerial structure of the business.
According to the GAAR, tax abusive transactions do not give rise to criminal liability, but are subject to administrative penalties.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
- Taxation of business profits
Business profits derived by a corporation are subject to corporate income tax at a rate of 24% (banks and financial institutions are also subject to a surcharge at 3.5%) and to regional tax on productive activities, normally levied at 3.9% (subject to variations depending on the region in which the business is located and on the nature of the activity performed, e.g. insurance and banking business are subject to a higher tax rate).
Business profits derived by individuals are subject to personal income tax at a progressive rate going up to a maximum rate of 43% (plus regional and municipal surcharges for an overall rate ranging approx. between 2% and 4%, depending on the region and municipality of residence), plus regional tax on productive activities.
- Taxation of employment income and pensions
Employment and pension income is taxed at progressive rates going up to 43% (plus regional and municipal surcharges for an overall rate ranging approx. between 2% and 4%, depending on the region and municipality of residence). Tax deduction are (within certain limits) available for both employment and pension income in different amounts. Income tax is in both cases levied through withholding tax applied by respectively the employer or the pension entity.
- VAT (or other indirect tax)
Supplies of goods and services are generally subject to VAT. The standard Italian VAT rate is 22%. Reduced rates of 10% or 4% apply to specific goods and services.
- Taxation of savings income and royalties
Income from capital investments having a financial nature, such as interest income, earned by private individuals is normally taxed at a flat rate of 26% which is typically collected by way of withholding at source. However, (direct/indirect) investment in government bonds and similar securities is subject to a reduced rate of 12.5%.
Interest paid by an Italian withholding agent to not resident recipient is subject to withholding tax at the basic rate of 26%, which can however be reduced/zeroed by either domestic taxation, the applicable Tax Treaty or the Directive 2003/49/EC of 3 June 2003 provided that the conditions set out by the relevant legislations are met.
Royalties paid to a non-resident by an Italian withholding agent are subject to withholding tax at 30% on 75% of the royalties paid out (triggering a final withholding tax at 22.5%). Such domestic rate may be reduced/zeroed under the applicable Tax Treaty or under the Directive 2003/49/EC of 3 June 2003.
- Taxation of income from land
Real estate properties located in Italy are subject to a property tax (IMU) levied at the basic rate of 0.76% which can be increased by the relevant Municipality where the property is located. Such tax is not due on the primary abode of the owner. The ownership of real estate property also triggers the duty to pay a service tax (TASI) and a waste tax (TARI).
If the real estate property is held by a private individual and is not leased no further income tax is due on the same. Conversely, if the property is leased, progressive individual income taxes are due on the highest between: (i) the cadastral income of the property and (ii) 95% of the rentals referring to the relevant tax period (even if not actually collected, save for limited exceptions) - no deduction of specific expenses related to the property is granted, but a 5% flat reduction. However, individuals can opt for the payment of a fixed tax (normally at 21%) to be applied to rented real estate located in Italy (so-called cedolare secca).
If the real estate property is held by a corporate entity, the relevant income forms part of the business income.
- Taxation of capital gains
Capital gains derived by private individuals from the sale of shares are taxed as follows. If the shares sold or transferred:
- do not exceed (1) 2% of voting rights or 5% of share capital in the case of listed shares (so-called qualified shareholding) or (2) 20% of voting rights or 25% of share capital in case of other participations (so called non-qualified shareholding), capital gains are taxed at a flat rate of 26%;
- are qualified shareholding as they exceed the above mentioned thresholds, individual income tax progressive rates apply on 49.72% of realised gain.
Capital gains derived by private individuals from the sale of real estate is taxed at progressive tax rates. However, no capital gain tax applied if the real estate were owned for more than five years at the date of sale or, even if the sale occurs before the elapsing of the 5-year term, if it has been used as primary abode of the seller for most of the period of ownership.
Capital gain arising from the sale of a shareholding by a corporate taxpayer is exempt from corporate tax limitedly to 95% of the capital gain realised (so-called "participation exemption" regime), whilst the remaining 5% is subject to the ordinary corporate income tax rate of 24% (which therefore triggers an actual tax burden on the full capital gain equal to 1.2%), provided that the relevant requirements are. If they are not met, capital gains arising in favour of an Italian company or branch resulting from the sale of its shareholding (whether in an Italian or foreign company) will be included in its taxable income and be subject to normal income tax.
Capital losses relating to shareholdings which would have qualified for the capital gain exemption, as well as expenses directly linked to them, are not deductible for corporate tax purposes. Conversely, capital losses from the sale of shares which do not meet the requirements of the "participation exemption" regime are deductible, subject to certain limits such as capital losses not being tax-deductible up to the amount of the tax-exempt dividends (or advanced dividends) received in the 36 months preceding the sale and realisation of the capital loss.
- Stamp and/or Capital duties.
As a general principle, Italian registration tax applies at rates ranging between €200 and 9% on the economic content of any deed/agreement formed and executed in Italy (in the form of a notarial deed or of a private deed), unless the deed/agreement falls entirely within the scope of VAT or certain other exceptions apply. Registration tax is also due on capital contributions in Italian companies at the same rates, depending on the nature of the asset contributed.
- Taxation of business profits
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Yes, business income both for IRES purposes and individual income tax purposes are in principle computed on the basis of the profits and loss account outcome, determined in accordance with Italian accounting principles.
However, the determination of the final taxable basis is carried out by applying certain adjustments provided for by Italian income tax law.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities?
Yes, Italian tax legislation recognises as taxpayers various types of entities irrespective of their legal form. For example, companies are considered autonomous taxpayers and are themselves subject to the tax payment obligations. Conversely, partnerships are deemed as transparent entities for income tax purposes and their income are automatically passed-on and taxed in the hands of partners. Also trusts and investment funds are considered as taxable persons, generally subject to corporate income tax.
Is liability to business taxation based upon a concepts of fiscal residence or registration?
Yes, in principle taxation depends on the fiscal residence in Italy of the taxpayer.
A company is deemed to be resident in Italy if it has: (i) its registered office; (ii) its administrative office; or (iii) the main purpose of its business in Italy for the majority of the tax year (i.e. at least 183 days). Italian resident companies are taxed according to the worldwide income taxation.
Business income of non-Italian resident companies is taxed in Italy only in case income is produced through an Italian permanent establishment of the foreign company. Italian resident individuals are taxed in Italy on the basis of the worldwide taxation principle. Business income generated by non-Italian resident individuals is subject to taxation in Italy only if attributable to an Italian fixed basis.
Individuals are deemed to be resident in Italy, if for the majority of the tax year, they are registered to the Italian Civil Registry or they maintain in Italy their domicile or civil residence.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Italian tax legislation does not provide any special/favourable tax regime applicable to enterprises zones as a whole for financial services or co-ordination centres. However, certain investments carried out in specific areas (i.e. Campania, Puglia, Basilicata, Calabria, Sicilia, Molise, Sardegna, Abruzzo) can benefit from a tax credit for both individual and corporate income tax purposes aimed at encouraging the economic growth of such areas.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
Starting from fiscal year 2015, the Italian legislator introduced the Patent Box regime, an optional tax regime allowing the non-taxability of a portion of the income by the direct use of certain eligible IP rights or by their granting to third parties.
Italian resident companies, individual entrepreneurs and certain non-resident companies having a permanent establishment in Italy can benefit from the tax regime provided that they carry out R&D activities aimed at developing, maintaining and increasing the IP rights value.
The tax benefit consists in the exclusion from the income taxes taxable basis of a portion equal to 50% of the income generated from (i) the direct or the indirect use of or (ii) from the transfer of certain eligible IP rights.
With reference to the income generated from the exploiting of the IP rights, the calculation of the portion of the income which could benefit from the favourable taxation regime depends on whether the taxpayer directly (self-exploiting of the IP) or indirectly (granting of the assets to third parties against the payment of a royalty) exploits the IP rights. In the first case, the taxpayer must apply for a tax ruling by filing a request to the Italian Revenue Office. In case of intragroup use of the IP rights, the application for the tax ruling is discretionary.
The portion of income which could benefit from the favourable tax regime must be determined having regard to a specific ratio between qualified R&D expenses and the overall expenses connected with the eligible IP rights.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
Yes, Italian tax legislation provides for the tax consolidation regime. Italian companies and Italian branches of a foreign company belonging to the same group can opt for the tax consolidation. Furthermore, option for such regime is now available also to Italian sister companies having a common foreign parent ("consolidato tra sorelle").
Whether a "group" exists will depend on whether the "control requirement" is satisfied (as defined in Article 2359 of the Italian Civil Code). The "control" must have existed since the beginning of each financial year in relation to which the controlling company or the subsidiary has opted for the consolidation.
The option for the tax consolidation allows the determination, at the controlling company’s level, of a “consolidated” taxable income equal to the sum of all the Italian taxable income (or tax losses) of the companies included in the tax consolidation.
In determining the aggregate taxable income, regardless of the level of interest held in the subsidiaries, the parent company must aggregate the total net income of each subsidiary which has opted for the tax consolidation. The distribution of dividends among companies included in the tax consolidation is subject to the ordinary regime (95% tax exempt if the requirements for the participation exemption are met), while the compensation granted to those companies which transfer tax benefits to the consolidation (eg losses, deductible interest expenses etc.) is fully tax exempt. Tax losses incurred before the exercise of the option for the tax consolidation can only be used by the company that incurred those losses.
Is there a CFC or Thin Cap regime?
Italian tax law provides for a Controlled Foreign Companies ("CFCs") regime. According to CFC regime, profits realised by a foreign company which is directly or indirectly controlled (as defined in Article 2359 of the Italian Civil Code) by an Italian resident company or individual are deemed for tax purposes as profits of the Italian controlling company or individual if the foreign company resides in a non-EU or non-EEA Country with which Italy did not sign an Exchange of Information Agreement and whose tax legislation provides a nominal corporate income tax rate lower than 50% of the nominal income tax rate applicable in Italy (the so called "Tax Haven Countries").
In addition, the CFC rule also applies when the non-resident entity is not located in a Tax Haven Country provided the following criteria are met:
- the non-resident entity is subject to an effective tax rate lower than 50% of the effective tax rate applicable in Italy; and
- more than 50% of the non-resident entity’s income arises from (i) passive income, or (ii) the provision of intercompany services.
Provided that certain conditions are met, the taxpayer can prevent the application of the CFC rules.
Italian tax legislation does not contain a Thin-Cap rule; however, limits on the deduction of interest expenses apply. Interest expenses are always deductible in an amount equal to the interest income received by the company. Any excess balance may only be deducted for tax purposes up to 30% of EBITDA. Interest expenses not deductible in any fiscal year as a result of exceeding the above threshold can be deducted in subsequent years without any time limit, provided that in those years the relevant current year interest expenses are less than 30% of the current EBITDA.
Moreover, the general rule on interest expense deduction provides that if the interest expense for a relevant year was lower than 30% of EBITDA, that part of EBITDA not used in such year for the purposes of deducting interest expenses can be carried forward so as to increase the following year’s EBITDA (thus increasing the amount of interest expenses able to be deducted).
Starting from 2017, no limits will apply in relation to the deduction of interest expenses to companies operating in the financial industry.
Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Business income of an Italian resident company arising from transactions entered into with a non-Italian resident company belonging to the same group is determined on the basis of the normal market value (arm's length value) of the goods transferred, services rendered, or goods and services received as opposed to the value actually agreed by the parties, if an increase in the taxable income would arise from so doing.
Starting from 2010, transfer pricing documentation duties have to be fulfilled by taxpayers. Transfer pricing documentation (Country File and Master File) must comply with certain formal and substantial requirements set out by the Italian Tax Authorities. In case the taxpayer duly prepared the transfer pricing documentation and, during a tax audit report, provide the same documentation to the Tax Auditors, no penalties could apply even in the case transfer pricing adjustments are assessed. On the contrary, if the taxpayer fails to prepare the transfer pricing documentation, in case of transfer pricing adjustments, penalties could apply.
In line with OECD BEPS recommendations, Italy implemented the Country by Country Reporting provisions.
Italian tax legislation provides for unilateral/bilateral Advance Pricing Agreement aimed at agreeing in advance with the Italian tax administration the correct transfer pricing methodology applicable to transactions carried out with related parties.
Furthermore, Italian government is in the process of implementing the EU Directive provisions providing the automatic exchange or information of tax rulings and APAs.
Italian Tax Authorities have not officially released any official position on the Starbucks and Apple decisions, but Italian press reported that Italian Tax Authorities are focusing on the audit of digital economy multinationals.
Are there any withholding taxes?
An Italian company or branch must levy withholding tax on the following payments:
- salaries and wages paid to employees;
- remuneration paid to individuals for professional services or other activities of an independent nature; and
- returns on capital paid to individuals or foreign companies not having a branch in Italy (subject to certain exceptions).
Accordingly, a Withholding Tax Agent Return must be filed annually, showing the various types of payments and the related withholding tax levied for the previous year.
Salaries are subject to withholding tax at individual income tax progressive rates, remunerations paid to individual for professional services and the like are subject to a fixed 20% withholding tax on the gross amount paid, savings income are subject to a flat withholding tax of 26% (save for limited exception, see reply 10).
In the past the EU Commission challenged the withholding tax regime applicable to dividends payable to EU holding companies and the Italian government aligned the domestic legislation to the EU principles.
Are there any recognised environmental taxes payable by businesses?
Yes. Italian tax legislation provides several excise duties on the consumption of certain natural resources, like mineral and lubricating oils and electricity, as well as local taxes imposed by municipalities, in relation to municipal services received in connection with garbage disposal.
In addition, Italian Law provides for a compulsory contribution to be paid by packaging manufacturers and users to consortium CONAI for the disposal of packaging materials.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Italian tax legislation provides that dividends arising in favour of an Italian company or branch from its shareholding in another Italian or foreign company are in principle exempt from tax as to 95% of their amount, resulting in only 5% of the amount of any such dividend being subject to IRES.
In principle, dividends paid to non-Italian shareholders are subject to a withholding tax at a 26% rate, reduced by the applicable double taxation treaty, if any.
However, dividend payments from an Italian subsidiary made to an EU holding company are not subject to Italian withholding tax, provided that the EU Parent-Subsidiary Directive conditions are met (including anti-abuse provisions).
Italian withholding tax also applies to dividends distributed to EU holding companies which do not meet the EU Parent-Subsidiary Directive requirements. In such a case, withholding tax is levied at 1.2% on dividends distributed to EU or EAA white-list holding companies.