Italian Parliament approves 2017 budget law

Transcription

1 16 December 2016 Global Tax Alert Italian Parliament approves 2017 budget law EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 7 December 2016, the Italian Parliament approved the budget law for 2017 (the Law) which is expected to be published in the Official Gazette by the end of the year and will enter into force on 1 January The most relevant tax measures contained in the Law relate to: Corporate tax rate provisions Extension of extra-amortization of certain tangible and intangible assets Extension and enhancement of the research and development (R&D) tax credit Option to elect European Value Added Tax (VAT) group Intragroup transfer of tax losses Limitation on tax attributes carry forward in the case of change of control and extraordinary transactions Update on the notional interest deduction (NID) regime One-off opportunity for nonresident companies to step up Italian participations One-off asset step up Extension of the corporate tax incentive for the sale or assignment of real estate and registered movable property to shareholders Incentive regime for high net worth individuals transferring their tax residence to Italy

2 2 Global Tax Alert Detailed discussion Corporate tax rate provisions With effect from fiscal year (FY) 2017, the budget law for reduced the corporate tax rate by 3.5% (i.e., from 27.5% to 24%) and provided a 3.5% surcharge for banks and financial entities for which the overall corporate tax rate will, therefore, remain unchanged. The budget law for 2017 does not provide for any specific measure regarding the standard corporate tax rate. Therefore, the reduction of the Italian corporate income tax to 24% is confirmed. The Law introduces specific provisions for fund management companies. On the one hand, such companies are excluded from the application of the mentioned 3.5% corporate income tax surcharge, otherwise generally applied to financial entities. On the other hand, a 96% limit to the deduction of interest expenses is extended to such companies (as opposed to the previous 100% deduction rule). Extension of extra-amortization of certain tangible and intangible assets The Law extends the 40% extra-amortization (i.e., up to a total of 140% tax amortization), introduced by the budget law for in relation to the purchase of tangible assets for which the amortization rate for tax purposes exceeds 6.5%. In order to qualify for this measure, the assets have to be purchased or rented under a financial leasing contract by 30 June However, for assets acquired between 1 January 2018 and 30 June 2018, purchase orders need to be accepted by the seller by 31 December 2017 and at least 20% of their price needs to be paid by the same date. The Law also introduces a 150% extra-amortization (i.e., up to a total of 250% tax amortization) for some listed smart equipment which is allowed to benefit from specific digital and technological transformation processes under the model promoted by the Italian Government plan for industrial growth named Industry 4.0 Plan. 3 An additional 40% extraamortization is also introduced for certain intangible assets such as software, IT systems and platforms related to the Industry 4.0 Plan. A self-declaration or (for assets with a value higher than 500,000) a third party sworn appraisal is required. Such new tax measure does not affect the calculation of the advanced tax payments due for FYs 2017 and Extension and enhancement of the R&D tax credit The tax credit for R&D expenses is extended up to the fiscal year ending on 31 December 2020 and for an amount equal to the 50% of the qualifying R&D expenses exceeding the average of the same expenses incurred in FYs 2012, 2013 and The R&D expenses are credited up to a yearly maximum amount of 20 million instead of the previous 5 million threshold. The Law extended the R&D credit also to the R&D expenses incurred in connection with agreements entered into with non-italian European Union (EU), European Economic Area (EEA) and white listed 4 resident companies. Therefore, also the R&D expenses outsourced by foreign entities to Italian companies are now eligible for the tax credit. VAT Group The Law introduces, starting from 1 January 2018, the option for the European VAT Group (as provided by Art. 11 of the EU Directive 2006/112/CE) in the Italian VAT law. Companies included in the European VAT Group will be treated as a single VAT taxable person, meaning that: Transactions carried out between the entities of the group are not subject to VAT Transactions carried out between an entity of the group and a third party are treated as performed by the Group as an entity Entities incorporated in Italy should be entitled to elect the Group if, while legally independent, they are closely bound one to another by financial, economic and organizational links: Financial link: a minimum corporate participation link must exist between the entities electing for the Group (more than 50% of the voting rights). Economic link: the entities must perform alternatively the same kind of activity or complementary, ancillary and auxiliary ones. Organizational link: a link between the decision-making bodies of the entities has to exist. If the election is made, all entities fulfilling the requirements must adhere to the group.

3 Global Tax Alert 3 Intragroup transfer of tax losses Under the new provisions introduced by the Law, between Italian resident companies, not being part of a tax group, and having voting rights and a profit share not lower than 20%, it is now possible to transfer tax losses accrued in the first three fiscal years provided that the shares of the acquiring company (or the one of its direct or indirect shareholder) are listed in a regulated market. The transfer must be related to the whole amount of the tax losses for the first three fiscal years of activity. The acquiring company has to remunerate the seller for the losses transferred by using the same corporate tax rate of the fiscal year when the tax losses accrued. The remuneration is not subject to tax for the seller. Limitation on tax attributes carry forward in the case of change of ownership and extraordinary transactions The Law extends certain limitations already provided for the carrying forward of tax losses to spare non-deductible interest expenses and to the excess of NID. 5 In particular, such tax attributes may no longer be carried forward if the majority of the shares giving the voting rights in the ordinary shareholders meeting are transferred (i.e., change of control) and a change of the main business activity carried out by the Italian resident company takes place, unless certain vitality test are met. The Law also extends to the excess of NID, the limitation already provided for the carrying forward of tax losses and spare non-deductible interest expenses in the case of domestic and cross border merger and demerger transactions. 6 Update on the NID regime The Law sets the NID rates for FY2017 and for the following years. In particular, the deductions have been set at 2.3% for FY2017 and at 2.7% as of FY 2018 onwards. A new negative adjustment for determining the NID qualifying new equity has been also introduced by the Law. In particular, the increase of securities and financial instruments, other than participations, compared to the amount held as of 31 December 2010, will reduce the NID qualifying new equity. One-off opportunity for nonresident companies to step up Italian participations The Law revamps the special one-off opportunity for resident individual and nonresident entities to elect for a tax step up of participations in unlisted Italian companies held at least from 1 January 2017 through the payment of an 8% substitute tax. The provision may be of specific interest to foreign entities which could realize a capital gain subject to tax in Italy and not be eligible for exemption under an applicable treaty. The basis of the substitute tax is represented by the value of the participation as of 1 January 2017 and needs to be certified by a sworn appraisal prepared no later than 30 June The 8% substitute tax may be either paid in full by 30 June 2017 or through three annual installments beginning 30 June One-off asset step up The Law revamps another one-off opportunity for Italian companies to step up business assets for accounting and tax purposes for the period in course on 31 December The election may apply to tangible and intangible assets (except for immovable properties held by real estate trading companies) as well as to qualifying shareholdings, provided that the mentioned assets are included in the balance sheet related to the period in course on 31 December Under the proposed regime, companies can pick and choose the category of assets to be stepped-up through the payment of a substitute tax amounting to 16% for amortizable/ depreciable assets and 12% for non-amortizable/nondepreciable assets. The payment of the substitute tax results in a higher tax base allowing depreciation/amortization at a 27.9% rate or a lower taxable gain in case of disposal of the assets. Tax recognition of the new values for depreciation and amortization purposes occurs starting from the third fiscal year following the one in which the step up was made (e.g., from 1 January 2019 for calendar year companies). Tax recognition for capital gain purposes occurs starting from the fourth year following the one in which the step up was made (e.g., from 1 January 2020 for calendar year companies).

4 4 Global Tax Alert The equity reserve created as a consequence of the accounting step up can be freely distributed provided that a 10% substitute tax is paid. Italian companies reporting under International Financial Reporting Standards (IFRS) are not eligible to make the election for the above step up. Extension of the corporate tax incentive for the sale or assignment of real estate and registered movable property to shareholders The Law renews the possibility for certain companies and partnerships to benefit from more favorable tax rules, either in the case of attribution or disposal of real estate and registered movable property (e.g., cars) to the shareholders, or in the case of transformation into a simple partnership (Società Semplice). The eligible transactions indicated by the Law shall be executed no later than 30 September Incentive regime for high net worth individuals transferring their tax residence to Italy The Law introduces a territorial system of taxation to attract high net worth individuals. Under the new law provision, the respective individuals transferring their tax residency to Italy may shelter their foreign income and gains from Italian taxes for 15 years by paying a substitute tax amounting to 100,000 for each fiscal year in which the option is valid. The incentive regime may be also extended to the family members through the payment of a substitute tax amounting to 25,000 per member. The new system is available for all the individuals (regardless of their nationality or domicile) who have been non-tax resident in Italy for at least 9 years out of the 10 years preceding their transfer to Italy. In order to benefit from the regime, all applicants have to file a preliminary ruling with the Italian Tax Authorities by the deadline provided for the filing of the income tax return related to the fiscal year in which the tax residency is transferred. The Tax Authorities have 120 days to approve or deny the request and, if they don t provide the taxpayer with a written reply by the 120 days period, the request is deemed to have been approved.

5 Global Tax Alert 5 Endnotes 1. See EY Global Tax Alert, Italian Parliament issues budget law for 2016 including Country by Country Reporting and other important tax measures, dated 31 December Ibid. 3. Industry 4.0 Plan is a multi-annual industrial program recently launched by the Italian Government aimed at increasing investments and opportunities in the field of new technologies to boost economic growth and innovation in the Italian economy. The plan specifically aims at stimulating investments into intelligent machines that may interact between them while also connected through the Internet. Qualifying technologies include, among other things, Additive Manufacturing, Augmented Reality, Horizontal and Vertical Integration, Industrial Internet, Cloud, Cyber security, Big Data and Analytics. 4. See EY Global Tax Alert, Italy amends white list, dated 26 August Under the NID regime, Italian companies and Italian branches of foreign companies may deduct from their taxable income a notional interest expressed as a percentage of the increase of qualifying equity that occurred after 2010 year end (New Equity). From a practical perspective, the qualifying New Equity mainly corresponds to the algebraic sum of positive and negative adjustments triggered by the following events: Shareholder cash contributions and retained/undistributed profits represent elements qualifying as positive equity adjustments. Assignments in favor of the shareholder represent negative equity adjustments. 6. Under Italian Tax Law the carry forward of tax losses and spare non-deductible interest upon merger and demerger are subject to specific anti-abuse provisions aimed at limiting such carry forward. In particular, tax attributes generated by the companies participating to the mentioned transactions, are available under the following limitation and condition: In the limit of each company s net equity as resulting from the latest Financial Statements or, if lower, from the Financial Statements prepared for merger/ demerger purposes, without considering the contributions received during the previous 24 months (equity test) and If both revenues and personnel expenses booked by the merging/ demerging companies during the fiscal year preceding the merger/ demerger resolution exceed the 40% of their average of the two previous fiscal years (vitality test) 7. See EY Global Tax Alert, Italian Parliament issues budget law for 2016 including Country by Country Reporting and other important tax measures, dated 31 December 2015.

6 6 Global Tax Alert For additional information with respect to this Alert, please contact the following: Studio Legale Tributario in association with Ernst & Young, International Tax Services, Milan Domenico Borzumato Marco Magenta Studio Legale Tributario in association with Ernst & Young, International Tax Services, Rome Emiliano Zanotti Studio Legale Tributario in association with Ernst & Young, International Tax Services, Bologna Mario Ferrol Studio Legale Tributario in association with Ernst & Young, VAT, Rome Nicoletta Mazzitelli Ernst & Young LLP, Italian Tax Desk, New York Simone De Giovanni Giulio Melillo Emanuela Buono

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