Italy ITALY
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doing business in Italy
foreword This booklet has been prepared for the use of clients, partners and staff of HLB International member firms. It is designed to give some general information to those contemplating doing business in Italy and is not intended to be a comprehensive document. You should consult us, therefore, before taking further action. HLB Italy and HLB International cannot be held liable for any action or business decision taken on the basis of information in this booklet. HLB Italy July 2017. 1 Doing Business in Italy
about HLB International Formed in 1969, HLB International is a world-wide network of independent professional accounting firms and business advisers. The network comprises member firms in 140 countries who, collectively, have 22,300 staff in over 660 offices. Member firms provide clients with a comprehensive and personal service relating to auditing, taxation, accounting and general and financial management advice. Up-to-date information and general assistance on international matters can be obtained from any of the member firm partners of HLB Italy listed in this booklet or from the Executive Office in London. HLB International Executive Office 21 Ebury Street London SW1W 0LD UK Telephone +44 (0)20 7881 1100 Fax +44 (0)20 7881 1109 E-mail: mailbox@hlbi.com Web site: www.hlbi.com HLB International is a world-wide network of independent professional accounting firms and business advisers, each of which is a separate and independent legal entity and as such has no liability for the acts and omissions of any other member. HLB International Limited is an English company limited by guarantee which co-ordinates the international activities of the HLB International network but does not provide, supervise or manage professional services to clients. Accordingly, HLB International Limited has no liability for the acts and omissions of any member of the HLB International network, and vice versa. Doing Business in Italy 2
contents FOREWORD 1 ABOUT HLB INTERNATIONAL 2 GENERAL INFORMATION 4 Types of business entities 5 Corporations 6 Governance 7 The incorporation process 8 of a corporation Partnerships 9 Accounting and reporting 10 Bookkeeping 11 Financial statements 12 Other requirements 13 Tax returns and 14 tax payments Vat 15 Property tax 17 Taxation of business income 18 7.1.1. Tax residence 18 7.1.2. Rates 18 7.1.3. Determination of taxable base 18 7.1.4. Dummy companies 18 7.1.5. Incentives 21 7.1.5.1. Patent box 21 7.1.5.2. R&D tax credit 22 7.1.5.3. Allowance for Corporate 23 Equity, ACE 7.1.6. Taxation of outbound 23 dividends, interest and royalties 7.1.7.1. Domestic tax 25 consolidation regime 7.1.7.2. Worldwide tax 26 consolidation regime 7.1.8. Anti-avoidance rules 26 7.1.8.1. General 26 7.1.8.2. Specific 26 7.1.8.2.1. CFC regime 26 7.1.8.2.2. Tax residence of 27 foreign entities 7.1.8.2.3. Transfer pricing 28 7.1.8.2.4. Taxation of inbound 28 black-list dividends 7.1.8.2.5. Taxation of capital 28 gains arising from transfer of shares in black-list companies 7.1.8.2.6. Anti-hybrid measures 28 7.1.9. Foreign tax credits 28 7.1.10. Losses 29 7.1.11. Tax rulings 29 7.1.11.1 Domestic tax rulings 29 7.1.11.2 International tax rulings 30 7.1.11.3 Advance Pricing 31 Agreement, APA 7.2. Partnerships 31 7.2.1 Determination of taxable income 31 7.3. Representative Office 32 7.4. Permanent establishment 32 7.4.1 Determination of taxable income 33 7.5. EU directives on direct taxation 33 7.6. Transfer pricing 33 7.6.1 TP documentation 34 7.6.2 Country-by-country reporting 34 7.7. Tax treaties 35 7.8. Statute of limitations 36 8. Summary 37 9. Contacts 39 3 Doing Business in Italy
general information Population Capital Currency Area Government Legislature Official Language 61 million Rome Euro 301,338 Km2 Unitary parliamentary republic Parliament (Senate of the Republic /Chamber of Deputies) Italian Religion 83.3 percent Christianity, 12.4 percent no religion, 3.7 percent Islam, 0.2 percent Buddhism, 0.1 percent Hinduism, 0.3 percent Other religions Italy, with a population of more than 60 million people, consists of 20 regions that are subdivided into 110 provinces. The provinces are divided into more than 8,000 municipalities. Rome is Italy s capital, and location of the country s political leadership, state bureaucracy and the Vatican. Milan is the center of Italian business management and strategy. As a leading metropolitan area, most major firms have their Italian headquarters in Milan. The key business regions are located in the north of the country - Lombardy, Piedmont and Veneto - where approximately 75 percent of the nation s wealth is produced. Italy is the world s ninth biggest economy; an economy which is mainly based on services and manufacturing. The services sector accounts for almost three quarters of the total gross domestic product (GDP), and employs 65 percent of the country s total workforce. Within the service sector, the major sub-sectors are wholesale, retail sales and transportation. The industrial sector accounts for a quarter of Italy s total production, and employs around 30 percent of the total workforce. Manufacturing is the most important contributor within the industrial sector. The country s manufacturing is specialized in high-quality goods, and is mainly run by small-and medium-sized enterprises (SMEs). Most of these SMEs are family-owned enterprises. Agriculture employs around 5 percent of Italy s total workforce. Italy s time zone is +01.00 Greenwich Mean Time (GMT). Daylight saving is in effect from the end of March to the end of October, thereby rendering the time in Italy as +02.00 GMT. The Ministry of Finance is Italy s highest financial authority. The Italian Revenue Agency ( Agenzia delle Entrate ) is responsible for ensuring compliance with tax law and is supervised by the Ministry of Finance. Doing Business in Italy 4
types of business entities Italian business law provides for a wide range of legal entities that may be used to conduct business activities in There are two main types of legal entities: Corporations ( società di capitali ); and Partnerships ( società di persone ). 5 Doing Business in Italy
corporations The società di capitali, are limited liability companies in which the assets of the corporation are not commingled with the ones of its shareholders/shareholders. The shareholders are liable for the debts of the corporation only up to their contribution to the share capital, aside from the exceptions defined by law. There are three different types of corporations that may be incorporated under the Italian business law: joint-stock company ( società per azioni, abbreviated S.p.A. ): a limited liability company whose capital is divided into shares and whose shareholders are only liable for its debts and obligations within the limits of their equity contribution. The minimum required starting share capital for a S.p.A. is EUR 50,000 of which at least 25 percent must be paid in at incorporation. The minimum number of shareholder is one, and there is no maximum number of shareholders. If the S.p.A. is established by a sole shareholder, the entire amount of minimum capital must be immediately paid in. Shareholders of a S.p.A. can be either individuals or legal entities, and there are no restrictions on their residence or nationality. limited liability company ( società a responsabilità limitata, abbreviated S.r.l. ): is a company whose capital is divided into stakes and whose members are only liable for its debts or obligations within the limits of their equity contribution. The minimum required starting capital for a S.r.l. is EUR 10,000 of which at least 25 percent must be paid in at incorporation. As with S.p.A.s, the minimum number of shareholders is one, and there is no maximum number of shareholders. If the S.r.l. is established by a sole shareholder, the entire amount of minimum capital must be immediately paid in. Shareholders of a S.r.l. can be either individuals or legal entities, and there are no restrictions on their residence or nationality. The S.r.l. is the more common kind of corporation as it can be easier run compared to the S.p.A., and is characterized by its flexibility in terms of corporate governance and internal organization. In 2013, a simplified limited liability company ( società a responsabilità limitata semplificata, abbreviated S.r.l.s. ) was introduced to encourage entrepreneurship. The minimum required starting share capital for an S.r.l.s. is EUR 1.00 up to EUR 9,999.99, which must be immediately and fully paid in at the time of the company s incorporation. The shareholders may only be individuals, and the articles of association must be prepared according to a standard, nonmodifiable, model prescribed by law. partnership limited by shares ( società in accomandita per azioni, abbreviated S.a.p.a. : is a hybrid form of a company which combines features of both limited partnerships and joint stock companies. The company has two classes of shares corresponding to two different categories of shareholders; some with, and some without limited liability. In particular, standard shareholders ( accomandanti ) have limited liability, while managing shareholders ( accomandatari ) have full liability. Notwithstanding this, S.a.p.a.s are very similar to S.p.A.s. Foreign investors may be interested in evaluating the main differences between S.p.A.s and S.r.l.s in terms of corporate governance, as well as the requirements for their incorporation, prior to deciding the terms, conditions and timeframe of their investment project. Doing Business in Italy 6
governance A S.p.A. may be governed by one of the following alternative governance models: traditional system: whereby the management is assigned to a sole director or board of directors, which has broad power to govern the business. A board of statutory auditors ensures that the activities and the business are conducted in compliance with the articles of association, governing law, and the proper rules of business going forward. An external independent auditor either an individual or an auditing firm must audit the company s financial statements, except when this duty is delegated by the company s article of association to the board of statutory auditors. one-tier system: whereby the management is assigned to a board of directors. Control relates to an internal audit committee, and there is no board of statutory auditors. An external independent auditor either an individual or an auditing firm must audit the company s financial statements. two-tier system: whereby the management is assigned to a managing board. Control relates to a supervisory board, and there is no board of statutory auditors. The supervisory board carries out internal control functions. In addition, certain powers that are traditionally in the one-ties systems relating to the general shareholders meeting are reserved to the supervisory board, such as the power to appoint the directors, take legal actions against the latter, and approve the financial statements. An external independent auditor either an individual or an auditing firm - must audit the company s financial statements. If no system is adopted by the deed of incorporation, the traditional system applies. In addition, a director s office cannot be held for longer than 3 fiscal years, but he or she may be re-elected if the by-laws do not provide otherwise. For S.r.l.s only the traditional system is available, but the board of statutory auditors is mandatory only when at least two of the following criteria are met in two consecutive years: total assets exceeds EUR 4.400,000; total revenues exceeds EUR 8.800,000; or the average number of employees during the fiscal year exceeds 50 people. The term of a director serving on a S.r.l. can be open ended. Governance Joint-stock company / S.p.A. Management Management Control Statutory Audit Traditional system Solo Director or Board of Directors Board of Statutory Auditors Individual Auditor or Auditing Firm or Board of Statutory auditors One-tier system Board of Directors Internal Audit Committee Individual Auditor or Auditing Firm Two-tier system Managing Board Supervisory Board Individual Auditor or Auditing Firm 7 Doing Business in Italy
the incorporation process of a corporation Both S.p.A.s and S.r.l.s must be incorporated by means of shareholders deed signed in front of a public notary. The process for the incorporation of an Italian company by a foreign investor can take from 1 to 3 weeks. Prior to incorporation, each shareholder, as well as director, must obtain an Italian tax identification number ( codice fiscale ). Where the shareholder is a legal entity, the tax identification number is also required for its legal representative. Following the incorporation, a tax identification number together with a VAT number ( partita IVA ) will be attributed to the company. The directors, who are appointed by shareholders in the deed of incorporation, must accept their appointment and file a declaration of acceptance with the Business Register within 30 days following their appointment. The company does not legally exist until it has been registered with the Business Register. In addition to the deed of incorporation, articles of association must be drafted, which contain rules for the operations and governance of the company. Please note that a power-of-attorney executed by the initial shareholders/ shareholders would entitle an advisor to execute all the actions required for the incorporation process. This power-ofattorney must be signed in front of a public notary, and in the case of a document issued abroad, it must be legalized or apostilled as appropriate, with translation in the case of a language other than Italian. Doing Business in Italy 8
partnerships The società di persone are partnerships in which the partnership itself and its members jointly own the partnership assets. Thus, the partners are, jointly and severally liable - without limitation - for the obligations of the partnership, aside from exceptions defined by law or by the partners. A partnership may be set up in the following three different forms: simple partnership ( società semplice, abbreviated S.s. ): a partnership owned and run by individuals, in which there is no legal distinction between the owners and the assets. This partnership cannot be used to carry out business activities. general partnership ( società in nome collettivo, abbreviated S.n.c. ): a partnership owned by two or more partners who have full, joint and unlimited liability for its debts and obligations. limited partnership ( società in accomandita semplice abbreviated S.a.s. ): a partnership in which the managing partners ( accomandatari ) are liable jointly and without limits for the debts and obligations of the partnership, whereas the standard partners ( accomandanti ) are liable within the limits of their equity contribution. Partnerships have no legal personality and are thus considered imperfect legal entities; meaning they have some, but not all, of the features of legal entities. 9 Doing Business in Italy
accounting and reporting According to Italian corporate law, companies are generally required to keep a general ledger, an inventory ledger, a register of depreciable assets, VAT registers and to comply with Italian GAAP. However, companies listed in stock markets, as well as banks and insurance companies, are required to adopt IAS/IFRS. Other companies may also elect to use IAS/IFRS instead of Italian GAAP. Doing Business in Italy 10
bookkeeping All entities are required to maintain adequate double-entry books of accounts, including documentation supporting the underling transactions (which included business correspondence, i.e. letters, invoices, telegrams, emails), for a minimum of 10 years. The general ledger must report all transactions on a daily basis. Generally, each entry in the general ledger is also recorded in the VAT registers. The inventory ledger must contain a description and valuation of the company s assets and liabilities as indicated in the balance sheet. In addition, companies are required to keep a register of depreciable assets. The accounting books can computerized, and special rules would apply to certify the date of entry. Italian law does not expressly impose the use of Italian language for the accounting records. However, Italian law requires the Italian language to be used in court proceedings, so it is advisable to keep the records in Italian. 11 Doing Business in Italy
financial statements The same requirements apply to both S.p.A.s and S.r.l.s: generally, the shareholders meeting must be called at least once a year, within the date set by the by-laws, if any, or within 120 days from the end of the fiscal year. The annual shareholders meeting must resolve on the following matters: approval of the financial statements; allocation of profit and loss. Companies usually finish their financial year on December 31. Partnerships do not require the formal approval of their financial statements. Information concerning the financial year-end will be included in the income tax return. The by-laws can provide for a longer time limit, which must not exceed 180 days from the end of the fiscal year, where: (i) the company is required to file the consolidated financial statements; or (ii) there a special needs related to the structure and to the business purpose of the company. The Financial statements consists of three major documents: (i) Balance Sheet; (ii) Profit & Loss account; and (iii) Notes to accounts, which are a detailed description of the financial activities of the company. Companies generally must also have prepared a Directors Annual Report giving a true and fair view of the company s business. Smaller companies may prepare simplified financial statements. Statutory Auditors and External Auditor (whenever present) shall also issue a report on their activities with their own opinion on the company s financial statements. Companies must file the Financial statements, together with the Directors Annual report and the Statutory Auditor s Report / External Auditor Report (if required), with the Business Register within 30 days after the shareholders annual general meeting. Doing Business in Italy 12
other requirements S.p.A.s shall have an additional set of books, e.g. a Register of Shareholders and a Books of minutes for purposes of (i) Shareholders meetings, (ii) Directors meetings, and (iii) Board of Statutory Auditors meetings, etc. S.r.l.s shall have their own additional set of books, e.g. Books of minutes for (i) Members meetings, (ii) Directors Meetings and, whenever present, (iii) Statutory Auditors meetings. Partnerships generally only have accounting books, e.g., a general ledger, inventory ledger, register of depreciable assets, VAT registers, etc. 13 Doing Business in Italy
tax returns and tax payments Income Tax Returns (i.e. Modello Redditi SC and Modello IRAP ) must be filed electronically within nine months of the end of the taxable year, i.e. September 30 in case of a calendar-year end. For FY 2016, the Income Tax Returns must be filed by October 31, 2017. There are penalties for late filing. Advance payments for tax purposes must be paid and are equal to the net tax payables for the previous tax period. Such a payments are made in two installments, in the last day of the 6th (40 percent of the overall advance payment due) and 11th (60 percent of the overall advance payment due) months of the current taxable year. Reduced amounts can be paid if the company expects to realize a lower table income. Balance payments and first instalments of advance tax can be made in monthly instalments not exceeding 6 months and interest would apply. Companies acting as a withholding Tax Agent must electronically file by July 31 of the following year the Withholding Tax Agent Return (i.e. Modello 770 ). For FY 2016, the Withholding Tax Agent Return must be filed by October 31, 2017. In addition, withholding agents have to attest employees income, self-employees income and other income through the Certification of Income (i.e. Certificazione Unica ) to be filed electronically by March 7. Payment of residual tax for both Corporate Tax (IRES) and Regional Tax on Productive Activities (IRAP) must be made no later than the 30th day of the 6th month following the end of the company s taxable year. For a December 31 year-end the deadlines are as follow: June 30, first instalment of advance tax for the current year; June 30, balance payment for the previous year (the taxes payable are net of the advance payments made in the previous year); September 30, return filing for the previous year; and November 30, second instalment of advance tax for the current year. Doing Business in Italy 14
vat Value Added Tax (VAT) is a tax on consumers expenditure. It is collected on business transactions, imports and acquisitions. Most business transactions involve supplies of goods or services. VAT is payable if they are: supplies made in Italy; by a taxable person; in the course or furtherance of business; not specifically exempted. Supplies may be taxable, exempt, or outside the scope of taxation. Unless exempted (e.g. finance and insurance services, postal services) or specifically charged at a zero-rate or reduced rate, all supplies are chargeable to VAT at the standard rate of 22 percent. The 10 percent reduced rate applies to supplies such as certain foods, public transport, and hotel accommodation. The lower reduced rate of 4 percent applies to supplies such as certain basic foodstuffs and beverages, books and newspapers, certain pharmaceutical products, and medical equipment. The zero-rate applies inter alia to EU supplies, exports to third countries, international transport services, and services directly connected with exports and imports. All entities, either individuals or companies, carrying on a business must be registered for IVA. There are no minimum income turnover thresholds for registration. Generally, the input VAT paid on goods and services to be used for business purpose may be offset against the output VAT due on sales. It is not possible to recover VAT on exempt supplies. All taxable entities must pay the VAT balance of output VAT over input VAT resulting from the Periodical VAT Returns ( Liquidazioni Periodiche ) on a monthly basis by the 16th of the month following the month end. Quarterly payments may be made by minor taxpayers with a turnover of less than EUR 700,000 (or EUR 400,000 in the case of services) by the 16th of the second month following the quarter end, except for the fourth quarter for which the due date is March 16, i.e. May 16, August 16, November 16, March 16. A 1 percent interest rate is generally due. As a rule, an advance payment must be made by December 27. When applicable, and based on the historical method, the advance payment due amounts to the 88 percent of the last monthly/quarterly VAT payment made in the last calendar year. A provisional calculation is also possible. For FY 2017 the Annual VAT Return (i.e. Modello IVA ) has to be filed by the end of February of the following year. For FY 2018 onwards the Annual VAT Return has to be filed by April 30. Payments of any remaining VAT not paid during the previous calendar year by the monthly/quarterly dates is payable on March 16. A return listing the transactions made for VAT purposes (i.e. Spesometro ) has to be filed electronically on a quarterly basis: i.e. 1st quarter by May 31, 2nd quarter by September 16, 3th quarter by November 30, 4th quarter by February 28. For FY 2016 only, the Spesometro has to be filed by April 10, 2017 (for monthly VAT payers) or April 20, 2017 (for quarterly 15 Doing Business in Italy
VAT payers). For FY 2017 only, the Spesometro has to be filed electronically on a semester basis: 1st semester by September 16, 2017 and 2nd semester by February 28, 2018. Starting from FY 2017, the Periodical VAT Returns (monthly/quarterly) have to be filed electronically by the end of the second month following the quarter end, except for the one referring to the second quarter that is due by September 16, i.e. 1st quarter by May 31, 2nd quarter by September 16, 3th quarter by November 30, 4th quarter by February 28. Doing Business in Italy 16
property tax Municipal Tax on Real Estate ( Imposta Municipale Unica or IMU ) is levied on the cadastral value of immovable properties located in Italy. The cadastral value is basically a multiple of the cadastral income assigned to the property. In more detail, the cadastral value is determined by multiplying cadastral income by a coefficient of revaluation and a multiplier that varies depending on the different use of the property. The law provides for a 0.76 percent standard rate, but municipalities can increase or reduce such standard rate by 0.3 percent. If the property is passed as uninhabitable or being restored, the tax is reduced by 50 percent. IMU is paid in two equal instalments: a first advance payment due by June 16, and a balance payment due by December 16. The taxpayer may choose to make a sole payment by June 16. If the tax is not paid on time, penalties and interest apply. Cadastral value Categories of property Residential properties, garages, warehouses Coefficient of revaluation 5 percent Multiplier 160 Offices, factories, hotels, bank offices Shops 5 percent 5 percent 80 55 Agricultural land 25 percent 135 Note that non-agricultural lands are excluded from the cadastral valuation so that taxable value is determined based on fair market value. Agricultural lands in mountainous areas are exempt from IMU, whereas land in flat areas are only exempt from IMU if the owner is registered with the authorities as a professional farmer or agricultural smallholder. Everyone who owns a land or a property in Italy, whether they are resident or nonresident, must pay IMU. 17 Doing Business in Italy
taxation of business income 7.1. Corporations 7.1.1. Tax residence In Italy, resident companies are those which for the greater part of the tax year (i.e. more than 183 days) have had their legal seat, place of effective management or main business purpose in Italy. Therefore, the place of incorporation is not, in itself, determinative for income tax purposes. 7.1.2. Rates The finance Act for 2016 introduced significant changes relating to Italian corporate income tax, including the reduction of the Corporate Tax (IRES) from 27.5 percent to 24 percent for FY 2017 onwards; for FY 2016, the IRES rate is unchanged, i.e. 27.5 percent. A Regional Tax on Productive Activities (IRAP) of 3.9 percent (i.e. standard rate) is levied on the net production value in each region by resident companies and permanent establishments (PEs) of foreign companies. Regions may increase the standard rate by up to 0.92 percent. The standard rate is 4.65 percent for banks and financial institutions and 5.9 percent for insurance companies. The IRAP base is generally different to the IRES base. 7.1.3. Determination of taxable base IRES taxable base IRES taxable base is the result of the company s business profits, which consists of the net income determined during a financial period (i.e. January 1 to December 31, in case of a calendaryear end), adjusted as required by the Italian Tax Code. IRES is calculated as follows: Income before tax; Adding/deducting tax adjustments to income and expenses based on deductibility or non-recognition; Deducting losses brought forward (restrictions applicable, see paragraph 7.1.10); and Determining net IRES taxable income. The IRES taxable base is determined according to the worldwide taxation principle. Depreciation and Amortization Depreciation on tangible assets is deductible on the basis of straight-line method at rates set in the Ministerial Decree of December 31, 1988. The rates are halved when applied to a tangible asset in the first year of use. It is to note that land is not depreciable. A full deduction in the year of acquisition is permitted where the cost of the asset is no greater than EUR 516.46. Trademarks and goodwill may be amortized up to one eighteenth for each fiscal year (rate not exceeding 5.55 per cent). Patents, know-how and other intellectual properties may be amortized up to one half for each fiscal year (rate not exceeding 50 per cent). Concession rights are amortized using the straight-line method over the term of the concession set by law or contract. Entertainment expenses Entertainment expenses are deductible on an accrual basis within the following limits: Doing Business in Italy 18
1.5 percent of the turnover up to EUR 10 million; 0.6 percent of the turnover exceeding EUR 10 million, up to EUR 50 million; 0.4 percent of the turnover exceeding EUR 50 million. Entertainment expenses related to gifts are fully deductible if represented by goods whose value does not exceed EUR 50 each gross of VAT. Repair and maintenance expenses Ordinary repair and maintenance expenses are deductible to the extent of 5 percent of the gross book value of the depreciable tangible assets at the beginning of the tax year. Any remaining costs may be deducted over the following 5-year period. Bad debts provision An annual bad debts provision is allowed to the extent of 0.5 percent of the unguaranteed receivables face value. If the total provision amount exceed 5 percent of the aggregate trade receivables face value shown in the financial statements, deductions for bad debts provision are no longer allowed. The provision is deductible for IRES purposes only. Other provisions Other liabilities and risks provisions are never deductible. Research and Development Expenses, R&D R&D expenses are deductible in the tax year in which they were incurred or, up to the taxpayer, in equal instalments in the same year and over the next four years. Car expenses Car expenses (e.g. depreciation, maintenance, fuel) can be fully deducted if they are related to cars that are essential for the company's business activities. For other cars there are limits on how much expenses companies can deduct. These limits can be summarized as follow: 20 percent of the total expenses incurred for cars not assigned to employees; 70 percent of the total expenses incurred for cars assigned to employees for both business and personal use (the value of the personal use of the car must be treated as a taxable fringe benefit to the employee). Telephone and internet expenses The expenses related to telephone and internet charges are 80 per cent deductible. Fines and penalties These expenses are not deductible for tax purposes. IRAP IRAP is not deductible from the IRES taxable base except for a small portion relating to employment expenses, generally 10 percent of the IRAP paid during the fiscal year Local taxes Municipal tax on Real Estate ( Imposta Municipale Unica or IMU ) is generally not deductible for IRES and IRAP purposes. Starting from FY 2014 a deduction of 20 percent of IMU paid in the same fiscal year on real estate assets is allowed. 19 Doing Business in Italy
Directors fees Directors fees are fully deductible on a cash basis. Interest expenses Interest expenses, net of interest income accounted for in the same tax period, is not deductible if it exceeds 30 percent of the company s EBITDA. However, interest expenses exceeding the aforementioned limit may be carried forward, with no time limit, and used to offset taxable income within the 30 percent limit as above in following tax years. In addition, if in a certain year the 30 percent of the EBITDA is higher that the net interest expense, the surplus may be carried forward, with no time limit, and used to increase the EBITDA available in the following tax years. Dividends There is a participation exemption for dividends paid to companies resident in Italy, whereby 95 percent of the income is excluded from IRES tax base under the same conditions as apply to capital gains (see below). Dividends are not included in the IRAP base. Note that dividends distributed by black-list companies are fully taxable; no exemption is allowed unless the subject to tax test is met (see paragraph 7.1.8.2.4). Capital gains and losses Capital gains realized by companies are generally taxable as general business income subject to both IRES and IRAP, and capital losses are generally deductible for income tax purposes. Note that capital gains on shares are not included in the IRAP base. Tax on capital gains on assets may be deferred over five years for assets owned for more than three years. Capital gains on assets owned for less than three years are fully taxed in the year in which they are realized. Capital gains arising from the transfer of shares are 95 percent exempt if specific conditions are met (i.e. Participation Exemption); generally, where the capital gain relates to non-black-list financial assets owned for an uninterrupted period of at least 12 months. Tax on capital gains on financial assets cannot be deferred. Royalties For corporate tax purposes, royalties are considered as general business income subject to both IRES and IRAP. IRAP taxable base Resident companies and permanent establishments (PEs) of foreign companies are subject to IRAP on their income. IRAP is levied on a regional basis, and the different regions are free to raise or lower the standard IRAP rate (see paragraph 7.1.2). There are different methods to determine the IRAP taxable base depending on the nature of the business carried out by the taxpayer. Note that special rules apply to banks and insurance companies. For commercial and manufacturing companies, IRAP taxable base is represented by the gross margin resulting from the Annual Financial Statements. Accruals, interest income and expenses, provisions for liabilities and risks, as well as extraordinary items, will not be considered in determining IRAP tax base. Prior to FY 2015, labor costs were not Doing Business in Italy 20
deductible for IRAP purposes. However, starting from FY 2015, such costs are allowed as a full deduction when related to employees hired on a permanent basis. Considering that other labor related costs (such as mandatory insurance expenses against workrelated accident and social security and welfare contributions related to employees hired on a permanent basis) were already deductible, most labor costs are now deductible for IRAP purposes. 7.1.4. Dummy companies Based on the Italian non-operating companies rules an entity deemed to be a dummy company is required to report a minimum taxable income for both IRES and IRAP purposes. The presumptive taxable income is to be determined depending on the company s assets and predetermined coefficients. The main assets to be taken into consideration are shares, financial receivables, owned or leased real estate, and owned or leased fixed or intangible assets. Furthermore, if the same entity takes the legal form of a società di capitali (i.e. joint-stock company, limited liability, partnership limited by shares), an additional burden is included equal to 10.50 percent increase in standard corporate tax rate (IRES). In addition, for the purpose of the Regional Tax on Productive Activities (IRAP) the net production value of a dummy company is also to be determined presumptively. The standard rate would apply. Specifically, to check the status of a company, it is necessary to carry out a specific test (i.e. test dioperatività ) which aims to verify whether, in the last three years (including the year for which the test is carried out), the average value of revenues and increasers inventories and incomes (excluding extraordinary incomes), resulting from the profit and loss account is at least equal to the value determined by the application, to the three-year average value attributable on the company s assets, of certain coefficients set forth by law. Companies which have losses for five consecutive tax periods, as well as companies which, in the same period, have both losses for four tax periods and incomes lower than the amount determined based on the test di operatività, are also considered to be dummy companies. Non-operating companies are not allowed to: (i) recover the input VAT resulting from the Annual VAT Return; (ii) to transfer the input VAT; and (iii) offset the input VAT against other taxes and social contributions. Furthermore, non-operative companies cannot carry forward the input VAT resulting from the Annual VAT Return, if (i) the company is deemed to be a dummy company for three sequential years, and (ii) during each of the mentioned three sequential years, the company has not performed supplies of goods and services relevant for VAT purposes which exceed the amount of incomes determined for each year based on the coefficients set forth by law. The non-operating companies rules are not applicable to a company s first year of operation. Additional specific exemptions are provided by law. 7.1.5. Incentives 7.1.5.1. Patent box The Patent box regime is a tax incentive introduced in order to improve the development of intellectual property by companies, individual entrepreneurs, and non-resident taxpayers with a 21 Doing Business in Italy
permanent establishment in Italy (if they are resident in a country allowing adequate and effective exchange of information for tax purposes with Italy); as well as granting tax benefits to resident and non-resident taxpayers carrying out research and development activities. Eligible intangible assets are the following: software protected by copyright; patents, trademarks including collective brands; business and technical industrial know how; and other legally protected IP, such as designs and models. The benefit consists on a partial tax exemption from corporate tax for income arising from direct use or licensing of qualified intangible assets. Under this regime, taxpayers can partially exclude from their tax income, for purposes of the Corporate Tax (IRES) and the Regional Tax on Productive Activities (IRAP), qualifying income deriving from the direct exploitation of intangibles or from licensing of IP, such as royalties earned by the taxpayer, net of all IP-relating costs. Patent Box businesses shall be entitled to exclude up to 50 percent of their income derived from such assets. In order to determine the benefit, there must be a direct nexus between R&D activities and qualifying IP, as well as a direct nexus between qualified IP and qualifying income. The election shall be exercised annually by holders of the right to use the qualifying IP and it is deemed as irrevocable for 5 years. The Patent Box regime requires taxpayers to obtain a specific advance tax ruling from the Italian Tax Authorities, whose submission is mandatory for determining the amount of benefited income arising from the direct exploitation of the qualifying intangible assets. The ruling procedure is instead optional in order to determine the benefit where the qualifying IP is licensed to related parties against the payment of royalties or if it is transferred between related parties. 7.1.5.2. R&D tax credit The Finance Act for 2005 introduced in Italy R&D tax credit regime. The possibility of taking advantage of this opportunity depends on the taxpayer's fulfillment of certain conditions and on the actual availability of resources from the state. Qualifying R&D expenditure for the purposes of the R&D tax credit includes: (i) costs for highly qualified personnel; (ii) depreciation on instruments and laboratory tools costing EUR 2,000 or more per item; (iii) costs for R&D activities outsourced to universities and public research centers or to other companies which reside in a EU member state or in a state party to the European Economic Area (i.e. EEA), or in a state allowing adequate exchange of information for tax purposes with Italy; and (iv) costs incurred for technical expertise related to industrial or biotech intellectual property. It is to be noted that the R&D does not include any routine or regularly scheduled changes made to products, productions lines, manufacturing processes or existing services. The tax credit will be available to any enterprise investing at least EUR 30,000 per year in R&D, irrespective of its legal form, industry, size and location; and that bears one of more of the R&D costs mentioned above as from FY 2016 to FY 2020, and computed as a percentage of the total yearly R&D spending exceeding the average spending of the three tax years preceding FY 2015, i.e. FY 2012, 2013 and 2014. Doing Business in Italy 22
The credit percentage is 25 percent (50 percent from FY 2017 onwards) of the enterprise s extra spending on the R&D expenditure incurred under (ii) and (iv) above, and 50 percent of the enterprise s extra spending on the R&D expenditure incurred under (i) and (iii) above. The tax credit cannot exceed EUR 5M per year per each beneficiary (EUR 20M for FY 2017 onwards). To be able to benefit from the relief, certain accounting documentation and other evidence (e.g. timesheets, contracts) must be certified by an audit firm, the company s board of statutory auditors or by an independent individual registered auditor. The R&D tax credit can be used to offset Corporate Tax (IRES), Regional Tax on Productive Activities (IRAP), VAT and social security contributions starting from the year following that during which expenses were incurred. 7.1.5.3. Allowance for Corporate Equity, ACE The Allowance for Corporate Equity (ACE) is a tax incentive introduced to promote the recapitalization of undertakings and to mitigate the different tax treatment applied to companies supported by debt, as well as others supported by equity injections by shareholders. The qualifying equity increases may be inclusive of equity contributions, retained earnings (with the exception of profits allocated to a non-disposable reserve), and shareholders credits waiver. The ACE benefit entails a notional deduction from the corporate taxable base; the deduction corresponds to the net increase in the new equity employed in the entity (meaning the equity generated after 2010), multiplied by a rate determined yearly (which is 4.75 percent for FY 2016, 1.60 percent for FY 2017 and 1.50 percent for FY 2018). 23 Doing Business in Italy Under Italian legislation, unused ACE basis may be: (i) carried forward to future fiscal years; (ii) transferred to the fiscal unit, if the company is part of a tax group; and (iii) transformed into a tax credit to be offset against the Regional Tax on Productive Activities (IRAP) in five equal installments. 7.1.6. Taxation of outbound dividends, interest and royalties Dividends paid to non-resident companies Dividends paid to non-resident companies are generally subject to a 26 percent withholding tax (WHT). A partial refund of up to 11/26 of the WHT can be claimed by recipients who are able to prove - by presenting to the Italian Tax Authorities a certificate issued by their foreign Tax Authority that a final tax has been paid on the same dividends. The above WHT may be reduced under tax treaties: the WHT is generally reduced to 15 percent for portfolio dividends, and 5 percent for inter-company dividends. Dividends paid by an Italian subsidiary to a EU parent company that qualifies for the benefits of the Parent-Subsidiary Directive (see paragraph 7.5) are free from WHT. For the directive WHT exemption to apply, the recipient company must be a company resident in a EU member state subject to corporate income tax in its own state of residence and must directly own at least 10 percent of the shares of the distributing company for 12 consecutive months at the time of the payment of the dividend. Should the Parent-Subsidiary Directive be non-applicable, dividends paid to companies that are resident and pay corporate tax in a white-list EU or EEA country may be subject to WHT at the reduced rate of 1.375 percent. Therefore, in order to qualify for the reduced rate there are two requirements need to be satisfied: (i) the residency requirement and (ii) the subject to tax requirement.
Note that for the reduced WHT to apply, the payee must provide to the payer a certificate issued by the Tax Authorities of the recipient's EU Member State of residence, certifying that the recipient is resident of that state and is liable for a corporate income tax under the laws of its state of residence. - a third company, fulfilling the requirements under Annexes A and B of the domestic law, directly holds a participation equal to at least 25 percent of the voting rights in both the first and the second companies. Dividends paid to non-resident companies Withholding tax rate on dividends paid to non-residents (pre-treaty relief) 26 percent / 1.375 percent / 0 percent Interest paid to non-resident companies In general, there is a 26 percent WHT on interest payments to non-resident companies, but tax treaties may provide for a lower WHT rate to apply. There are also certain reduced domestic rates or exemptions. For instance, interest from Italian treasury bonds and similar instruments is taxed at a lower rate of 12.5 percent. Moreover, an exemption applies if the requirements of the Interest and Royalties Directive (see paragraph 7.5) are met. In particular, under the domestic law provisions implementing the Interest and Royalties Directive, exemption from WHT on interest paid by Italian resident companies or permanent establishments located in Italy to EU companies or permanent establishments apply if the following requirements are met: a direct and uninterrupted holding of at least 25 percent of the voting rights exists between companies for a period of at least one year. More specifically - the first company directly holds a participation equal to at least 25 percent of the voting rights in the second company; or - the second company directly holds a participation equal to at least 25 percent of the voting rights in the first company; or the receiving company is the beneficial owner of the interest payments; the parties concerned have a legal form as specified in the Annex A to the law; the parties concerned are liable, without being exempt, to one of the taxes indicated in the Annex B (i.e. corporate tax) to the law or to a tax that is identical or substantially similar; the interest payments are actually taxed in the country of the beneficial owner. If the debtor or the beneficial owner of interest payments is a permanent establishment, the conditions relating to the legal form, to the existence of companies group relations, and to the liability to tax are referred to the company/entity to which the permanent establishment belongs. Moreover, when the permanent establishment is the beneficial owner, interest payments have to represent income in respect of which the permanent establishment is liable to one of the taxes included in the Annex B to the law. The request for the application of the exemption regime must be substantiated by a certificate issued by the beneficial owner's Tax Authorities and a statement by the beneficial owner regarding the fulfilment of the legal form and subject-to-tax requirements. Doing Business in Italy 24
Interest paid to non-resident companies Withholding tax rate on interest paid to non-residents (pre-treaty relief) Royalties paid to non-resident companies Generally, royalties paid by Italian companies to non-resident beneficiaries on IP is subject to a 22.5 percent WHT (i.e. 30 percent of 75 percent of gross royalties). Tax treaties may provide for a lower WHT rate, but it would apply on the full gross amount. A 30 percent WHT applies on the full amount of the royalty payments for the use of, or the right to use, industrial, commercial or scientific equipment. When applicable, the Interest and Royalties Directive reduces the WHT to zero. As in the case of interest payments, certain conditions have to be met to apply the Interest and Royalties Directive, including a direct and uninterrupted holding of at least 25 percent of voting rights between companies for a period of at least one year (see above Interest paid to non-resident companies ). 7.1.7. Tax consolidation regime 26 percent / 12.5 percent / 0 percent be owned, directly or indirectly, by the common Italian parent company; the above control must be in place since the beginning of the tax period on which the regime is applied for; all companies participating in the scheme must have the same financial year-end date. Starting from FY 2015, foreign parent companies, resident in EU or in countries with an adequate and effective exchange of information for tax purposes with Italy, can consolidate the taxable income and losses of their Italian subsidiary companies without the need for any holding or subholding entity in Italy (the parent company must hold more than 50 percent of the share capital of the consolidated entities). For the application of the domestic tax consolidation, the foreign parent company has to designate one of the Italian subsidiary companies as a consolidating entity for all Italian companies. This allows for the consolidation of Italian taxable income and losses of the group companies Royalties paid to non-resident companies Withholding tax rate on royalties paid to non-residents (pre-treaty relief) 30 percent / 22.5 percent / 0 percent Companies belonging to the same group may opt for domestic or worldwide tax consolidation if certain conditions are met. 7.1.7.1. Domestic tax consolidation regime Italian companies belonging to the same group may opt for the domestic tax consolidation regime if the following conditions are met: more than 50 percent of the share capital of each Italian subsidiary must 25 Doing Business in Italy without the need for any holding/subholding entity in Italy. The election is irrevocable for a three-year period and the election has to be exercised in the tax return referring to the tax period for which the tax consolidation regime is applied for. Companies participating in the tax consolidation regime are jointly liable for taxes, penalties and any interest assessed on the aggregated income. The consolidated income is taxed at the parent company level (or consolidating entity level).