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-3rd-edition/
How often is tax law amended and what are the processes for such amendments?
According to Constitutional principles, new tax legislation can be introduced only by Law which shall be approved by both houses of the Parliament. The Parliament can approve a law setting forth the guidance and framework of new tax provisions and delegating the Government to implement them (in such a case, the Government will issue a Legislative Decree). In cases of exceptional urgency and necessity, the Government may approve, without prior consent of the Parliament, Law Decrees introducing new tax provisions. A Law Decree shall, in any case, be approved by the two chambers of the Parliament within 60 days from when it is issued.
The Ministry of Finances can issue decrees aimed at introducing implementing provisions when so required by law provisions.
Tax law is usually amended each year. Particularly the main new provisions are usually introduced by the Budget Law presented by the Government and approved by the Parliament in December every year.
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?
Companies shall submit their annual tax return relevant to corporate income tax, Regional Tax on Productive Activities (IRAP) and VAT by the end of the nine month after the end of their tax year. The tax year of companies coincides with their financial year.
For tax purposes, companies shall keep and maintain daily accounts, inventory accounts, VAT register as well as any other necessary account until the statute of limitation for the assessment of the relevant taxes is expired.
Individuals shall file their tax return every year. The tax year of individuals is the calendar year. The deadline is usually the end of September of the year following the relevant calendar year.
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 competent tax authorities are the following:
- Revenue Agency (Agenzia delle Entrate): the agency has jurisdiction on the administration (including collection) of all direct and indirect taxes (such as corporate and personal income taxes; regional tax on productive activities and registration tax and VAT respectively).
- Customs and Monopolies Agency (Agenzia delle Dogane e dei Monopoli): the agency provides customs services and administers customs and excises duties. The agency is also the regulatory body competent for gaming activities.
- Government Property Agency (Agenzia del Demanio): the agency is tasked with the administration of real estate properties owned by the State.
- Financial Police (Guardia di Finanza) has special powers to ensure tax compliance and may carry out tax audits.
Several procedures grant taxpayers the possibility to obtain clearance from the tax authorities before completing a transaction or entering into an arrangement. The main procedures are the following:
- General advance rulings. A ruling may be asked to the tax authorities in order to obtain (i) advance clearance on the interpretation or application of tax law in a specific case (interpretative and characterisation rulings); (ii) confirmation on whether, based on a certain set of evidences, certain regimes (such as CFC or sham companies legislation) shall be applied to a certain case; (iii) advance clearance on the application of the GAAR to a specific case; (iv) disapplication of a specific anti-abuse regime that would be otherwise applicable.
General advance rulings provides for an effective instrument to obtain advance clarification on the Italian tax ramifications associated with a specific situation. Indeed, the tax authorities must reply to the ruling application within 90 days (in the case of interpretative and characterisation rulings) or 120 days (in all other cases). A ruling is binding on the tax authorities, but only in respect of the requesting taxpayer. If no reply is given within 90 or 120 days, it is assumed that the tax authorities agree with the interpretation of the requesting taxpayer.
- International tax ruling. Multinational companies can request a ruling from a specific unit of the tax authorities on matters relevant to cross-border transactions (such as transfer pricing legislation or attribution of profits to permanent establishments). The international tax ruling is binding on both parties for five tax years. The Italian tax authorities send a copy of the ruling to the competent authorities in the relevant states of the taxpayers involved in the ruling for transparency purposes.
- Ruling for new investments. Taxpayers who wish to make new investments in Italy for a value exceeding EUR30 million, which have a positive impact on employment, can use this special ruling procedure. Under this procedure, Italian and foreign investors can obtain advance rulings on the following matters: Applicable tax regime; Transfer pricing; Absence of abuse; Other material tax issues of the proposed investment based on the investment business plan. The tax authorities must reply within 120 days. A reply is binding on the tax authorities, but only in respect of the requesting taxpayer. If no reply is given within 120 days, it is assumed that the tax authorities agree with the interpretation of the requesting taxpayer.
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?
Tax disputes (including assessment notices, denial of tax refunds, denial of application of preferential tax regimes) can be brought before courts. Particularly, with reference to tax disputes, the Italian judicial system features three judicial degrees. Jurisdiction for the first two degrees in tax related matters, is attributed to Provincial and Regional tax courts respectively. The third degree is under the jurisdiction of a specific section of the Supreme Court (Corte di Cassazione) specialized to deal with tax cases.
The length of the judicial procedure depends on the degree. Such length can be estimated as 2 years each for the procedures before the Provincial and the Regional tax courts and 4 years before the Supreme Court.
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?
Income taxes are usually to be paid in three moments of the year: a first advance payment by the end of the sixth month of the relevant tax year; a second advance payment by the end of the eleventh month of the relevant tax year and the balance payment by the end of the sixth month following the end of the relevant tax year. The advance payments are computed on the basis of the tax payments of previous years. Such deadlines may be postponed. It is possible to pay the relevant amounts of taxes in instalments (in such a case, interest is due).
In the case of assessment notices issued by the tax authorities, additional taxes as well as penalties and interest are usually to be paid within 60 days from receipt of the notice. In the case the assessment notice is appealed, the taxpayer is required to make provisional partial payment of the tax in dispute. In certain instances, e.g., transfer pricing adjustments for which the taxpayer wishes to require a MAP, the taxpayer can claim the suspension of collection.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
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?
Taxpayer data are recognized as highly confidential and, in principle, cannot be shared by the tax authorities with others (including other public bodies) except in specific cases provided for by the law. In cases not provided for by the law, the data can be shared with other public bodies if they are necessary for the functioning of the requesting body.
Italy is a signatory to the Common Reporting Standard. Being one of the early adopters, the provisions of the CRS entered into force on January 1, 2017.
The legislative Decree No. 90 of 2017 which implemented the provisions of the Directive (EU) 2015/849 of the European Parliament and of the Council on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing provides for the introduction of a public register of beneficial ownership which shall include data relevant to beneficial owners of companies and other entities and arrangements (including trusts).
What are the tests for residence of the main business structures (including transparent entities)?
Persons other than individuals are considered resident of Italy for income tax purposes if (at least) one of the following criteria is located in Italy, for the for the major part of the tax year:
a. legal seat (sede legale). It consists of the location where, according to the deed of incorporation of the company, its registered office is located,
b. main object (oggetto principale). It is located where the company undertakes its overall activity including the day-to-day operations (not only the highest management functions under the seat of management criterion). The assessment of the location of the main object is a question of fact;
c. place of management (sede dell’amministrazione). This criterion is generally understood as the place where the management and control functions of the company are actually localized and the managerial decisions concerning the company or the entity are taken (the criterion is broadly similar to the OECD notion of place of effective management). The assessment of the location of the seat of administration is a question of fact.
Italian legislation does not envisage a part-year residence rule. Consequently, it is sufficient to meet one of the criteria above for the major part of the year to be considered tax resident for the whole tax year. On the other hand, if none of the three criteria is met for the major part of the year, the company is considered non-tax resident for the whole tax year.
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Italian tax authorities tend to have a strict approach and are also usually keen on verifying cross-border transactions of companies of multinational groups. Particularly, the challenges most often raised by the tax authorities are the following:
- Assessment of tax residence of foreign holding companies. In these cases, the tax authorities challenge the residence status of the foreign entity claiming that, on the basis of an analysis of all facts and circumstances, it shall be considered tax resident of Italy because its main object or place of management (see answer No. 7 above) are to be located in Italy.
- Existence of an Italian permanent establishment. In these cases, the tax authorities claim that the Italian operations of the foreign company determine the existence of an Italian permanent establishment and tax them accordingly.
- Transfer pricing.
- Denial of the treaty WHT rates due to lack of beneficial ownership condition and denial of dividend WHT exemption in case of abuse of the European Directives.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Controlled foreign corporation (CFC) rules may apply to Italian resident persons controlling non-resident companies, partnerships or other entities established in jurisdictions (other than EU Member States and EEA Member States) where the nominal tax rate is lower than 50 per cent of the Italian nominal tax rate. They may apply also in respect of companies, partnerships or other entities established outside the above jurisdictions if (i) the CFC is subject to a foreign effective tax rate lower than 50 per cent of the effective tax rate that would have applied if the CFC were resident of Italy, and (ii) the CFC realizes profits that qualify as passive income or profits from intra-group services for more than 50 per cent.
Italy repealed its thin cap regime as from tax year 2008. Italy applies an interest limitation regime whereby, in each tax year, companies can deduct interest expenses up to the amount of their interest income. The excess can be deducted for an amount equal to 30% of EBITDA of the relevant year. The excess 30% EBITDA as well as the interest expenses non-deductible in a given tax year can be carried forward and used or deducted in following tax years.
Italy applies transfer pricing legislation largely consistent with the OECD arm’s length standard. The legislation has been recently endorsed in order to reflect the latest changes to the OECD Transfer Pricing Guidelines and the tax authorities usually make reference to such Guidelines. As above indicated (see answer to question 1 above), a taxpayer may apply for a unilateral advance pricing agreement. If the other country involved in the cross border transactions signed a double tax treaty with Italy, the taxpayer can apply for a bilateral advance pricing agreement.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
A GAAR was introduced in 2015 providing that an arrangement or series thereof shall be considered abusive if:
- They lack economic substance;
- Although being compliant with law provisions, they essentially realise undue tax advantages.
The application of the GAAR is often raised by the tax authorities and litigated in courts.
Have any of the OECD BEPs recommendations been implemented or are any planned to be implemented and if so, which ones?
No specific plans to implement the BEPS Recommendations have been designed. However, it shall be considered that Italian tax legislation already includes provisions broadly in line with the OECD BEPS Recommendation (such as the limits on the deduction of interest) and will implement the provisions of the anti-tax avoidance Directives (ATAD I and II).
In your view, how has BEPS impacted on the government’s tax policies?
Italy participated to the works of the OECD on the BEPS initiative and is likely to implement BEPS related measures. From an international perspective, Italy signed the OECD Multilateral Convention and included some of the measures recommended by the OECD in some of its most recent tax treaties (such as the treaty with Chile).
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?
Income realized by companies tax resident of Italy is always qualified as business income and subject to corporate income tax at the rate of 24%. Furthermore, Italian resident companies are subject to IRAP (Tax on Regional Productive Activities) at a rate of 3.9% which may be increased up to 4.2% (higher rates apply to insurance, banking and holding companies).
Non resident companies are taxed on their income from Italian sources as follows. Business profits if realized through an Italian permanent establishment are subject to corporate income tax and IRAP at the same rates applicable to resident companies.
Employment income and pensions received by individuals tax resident of Italy are subject to personal income tax. Employment income paid to non-resident individuals is subject to personal income tax in Italy if realized through an employment activity carried out in Italy. Pensions paid to non-resident individuals are taxed in Italy if paid by a resident person or by any body of the Italian State. Personal income tax is levied at progressive tax rates up to 43% on income exceeding 75,000 Euro.
Outbound interest and dividend payments are subject to withholding tax in Italy at 26% rate if paid by companies tax resident of Italy.
Non-residents owning Italian real estate are subject to tax on (usually) 95% of the rents. If the property is not rented, no income tax is due.
Capital gains realized by non resident persons are taxed in Italy if stemming from the sale of assets located in Italy as well as from participations in companies resident of Italy. Some capital gains are not subject to tax in Italy when realized by non-resident. Particularly, under certain conditions, capital gains from the sale of non-substantial participation (i.e., up to 2%) in resident companies whose shares are listed.
Registration tax is due in relation to contracts and other legal proceedings brought for registration in Italy. The tax is typically due on the purchase of Italian real estate.
VAT is applied according to the European Directives.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Business tax is levied on a tax base rendered by the application of certain determined downward or upward adjustments to the revenue profits computed according to accounting purposes as reported in their financial statements. Different rules apply to companies that draft their financial statements according to Italian GAAP and to those that apply IFRS.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Companies can be incorporated in the form of società per azioni, società in accomandita per azioni, società a responsabilità limitata are considered taxable entities and subject to corporate income tax. The incorporation as società per azioni is required in order to carry out certain business activities (such as banking) while società a responsabilità limitata are usually used to carry out small-medium businesses.
Partnerships can be set up in the form of società in nome collettivo, società in accomandita semplice or società semplice and they are all transparent for income tax purposes, so that partners are taxed on their share of the partnership’s profits regardless of whether the partners are resident or non-resident of Italy. Societa’ in nome collettivo and societa’ in accomandita semplice are generally used to run small and medium size businesses; income accrued with these partnership and imputed to the partners is always classified as business income. Societa’ semplici are generally used for succession planning purposes and as holding companies of certain particular assets given the flexibility as to the rules applicable to their government and the fact that the income imputed to the partners does not lose its original qualification.
Trusts can be qualified as (i) taxable entities (ii) transparent entities: when their beneficiaries are clearly identified and have a right to the income of the trust (such as a right to claim the distribution of an income); in such a case a trust is considered transparent and the income is imputed to the beneficiaries to the extent of their respective rights to the said trust income; (iii) disregarded entities: this is typically the case when the settlor or beneficiaries have, de facto, significant powers in relation to the management of the trust assets. The income and gains of a disregarded trust are imputed to the settlor or beneficiaries, depending on the circumstances, and taxed in their hands as if they received them directly.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
Liability to income tax depends on the tax residence of the company. For the relevant test please see above answer to question 7. Non resident companies are taxed in Italy on the income attributed to their Italian permanent establishments and on other income sourced in Italy under general rules.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Are there any particular tax regimes applicable to intellectual property, such as patent box?
In 2014 Italy has introduced a patent box regime, mostly based on international OECD standards. In essence the regime provides for a partial exclusion from taxation of the business income derived from certain qualifying intangible assets. Taxpayers may activate a ruling procedure with the tax authorities in order to agree in advance the criteria relevant to the application of the regime in their specific case.
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?
A fiscal consolidation regime has been introduced since 2004. The regime is available to:
- Italian resident companies controlled by an Italian resident parent company;
- Italian resident companies controlled by a non resident parent company with an Italian permanent establishment, provided that the parent company is tax resident of a jurisdiction with an agreement for the exchange of information with Italy;
- Italian resident companies controlled by a parent company tax resident of an EU or EEA member State;
- Italian non-resident companies with an Italian permanent establishment can be included in the fiscal in the consolidation perimeter as controlling company (if resident in a State that signed a tax treaty with Italy) or as controlled company (if resident in a EU/EEA State).
Are there any withholding taxes?
Italy levies withholding taxes (WHT) on the following outbound payments:
- Dividends: dividends paid to non-resident companies are usually subject to a 26% WHT which may be reduced by the applicable double tax treaty. Dividends paid to companies resident of an EU or EEA member State are subject to a 1,2% WHT. A WHT exemption may be obtained where the Parent Subsidiary Directive applies;
- Interest: interest payments made to non-resident companies are usually subject to a 26% WHT which may be reduced by the applicable double tax treaty. Some exemption from WHT are provided for certain interest payments received by non resident companies. For example: (i) no WHT is levied on interest from certain bonds paid to persons tax resident of jurisdictions with an effective exchange of information with Italy; (ii) no WHT is levied on interest from Italian current accounts; (iii) no WHT is levied on interest payments made in relation to long-term (more than 18 months) loan arrangements granted by certain companies or entities. A WHT exemption may be obtained where the Royalties Directive applies;
- Royalties: royalties paid by Italian companies or individuals to nonresident beneficiaries are usually subject to a withholding tax rate of 22.5% (i.e.: 30% of 75% of gross royalties) which may be reduced by the applicable double tax treaty. A WHT exemption may be obtained where the Royalties Directive applies.
Are there any recognised environmental taxes payable by businesses?
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Dividend income received from resident companies is 95% exempt from corporate income tax. The same 95% exemption applies to dividend income paid by non-resident companies provided that:
- The paying company is not resident of a tax privileged jurisdiction (i.e., a non-EU/EEA member State with a nominal tax rate lower than 50% of the Italian nominal tax rate); and
- The paying company is not on-distributing profits it received from a controlled company tax resident of a privileged jurisdiction; and
- The payment is fully non-deductible in the country of residence of the paying company. If the payment qualifies for the Parent Subsidiary Directive, the 95% exemption applies to the extent the payment is non-deductible in the country of residence of the paying company.
If the paying company is resident in a tax privileged jurisdiction, a 50% exemption may apply if such company carries out an effective trade in their State of residence.
If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?
In addition to the patent box regime already mentioned, Italy grants and R&D tax credit equal to 50% of certain qualifying R&D expenses provided that the total expenses over the year are over 30,000 Euro. The R&D tax credit can never exceed 20 million in very given tax year.
Italy features a Notional Interest Deduction regime available to resident companies and Italian permanent establishment of non-resident companies. Particularly, under such regime, companies may claim a deduction corresponding to the net increase in the equity employed in the entity, multiplied by a rate yearly determined by the Italian Ministry of Finance. Specific anti-avoidance rules apply.
A super-deduction and an iper-deduction regimes are available in respect of certain assets purchased by 31 December 2017. Under the super-deduction regime companies can determine the amount of tax deductible depreciations on the basis of 140% of the acquisition cost of the assets. Such percentage is increased to 250% for assets qualifying for the iper-deduction regime (typically, high tech assets).
Finally, it is worth mentioning that individuals carrying out an employment in Italy ma benefit from a 50% exemption on their employment income provided that:
- They graduated from university;
- They worked abroad for at least 24 months before moving to Italy;
- They become tax resident of Italy.
The 50% exemption applies from the first period of Italian tax residence and the following 4.