Doing Business in Italy – Taxation

At a Glance
1. Corporate Income Tax Rate 27,50%
2. Local Income Tax 3,90%
3. Capital Gains Tax Rate 27,00%
4. Branch Tax Rate 27,50%
5. Withholding Tax - Dividends 0,00/12,50/27,00 % - Interest 0,00/12,50/27,00 % - Royalties from Patents, Know-how, etc. (applicable to non residents; the rate may be reduced under tax treaties) 22.50% - Branch Remittance Tax
6. Net Operating Losses (Years) - Carryback 0 - Carry forward 5

Taxes on Corporate Income and Gains
Corporate Income Tax. Resident companies are subject to corporate income tax (“imposta sul reddito delle società”, or “IRES”; better known as “imposta sui reddito delle persone giuridiche”, or “IRPEG”) on their worldwide income. A resident company is a company that has any of the following located in Italy for the majority of the tax year:
7. Its registered office;
8. Its administrative office; or
9. Its principal corporate activity.
Unless they are able to prove the contrary, foreign entities controlling an Italian company are deemed to be resident for tax purposes in Italy if either of the following conditions is satisfied:
1. The foreign entity is directly or indirectly controlled by Italian resident entities or individuals; or
2. The majority of members of the board of directors managing the foreign entity are resident in Italy.

Non resident companies are subject to IRES on their Italian-source income only.
Rate of Corporate Tax. The IRES rate is 27.50%.

Local Income Tax. Resident and non resident companies are subject to a regional tax on productive activities (“imposta regionale sulle attività produttive”, or “IRAP”) on their Italian-source income.

For manufacturing companies, IRAP is imposed at a rate of 3,90% on the net value of production, which is calculated by subtracting the cost of production from the value of production. An 8.5% rate applies to public entities performing commercial activities.
Special rules for the calculation of the tax base for IRAP purposes also apply to banking institutions, insurance companies, public entities and non commercial entities.
Each region may increase or decrease the rate of IRAP by a maximum of one percentage point. Companies producing income in more than one region will be required to allocate their tax base for IRAP purposes among the various regions and pay the applicable tax to the local tax authorities.
Certain deductions are not allowed for IRAP purposes, such as certain extraordinary costs, credit losses, labour costs (excluding certain compulsory social contributions), and interest expenses (except for banks and holding companies registered under Article 113 of Legislative Decree No. 385/1993).

Capital Gains
Resident Companies and Non resident Companies with a Permanent Establishment in Italy. In general, capital gains derived by resident companies or non resident companies with a permanent establishment in Italy are subject to IRES and IRAP. Gains derived from disposals of participations and extraordinary capital gains are excluded from the tax base for IRAP purposes. Extraordinary gains are gains not related to the core business of the company, such as those derived from transfers of going concerns.
Capital gains on assets that have been held for at least three years may be taxed, at title taxpayer’s option, entirely in the year of sale or spread over a maximum period of five years.
Italian corporate taxpayers (that is, companies and branches) may benefit from a participation exemption regime for capital gains derived from disposals of Italian or foreign shareholdings that satisfy all of the following conditions:
1. The shareholding is classified in the first financial statements closed during the holding period as a long-term financial investment;
2. The Italian parent company holds the shareholding for an uninterrupted period of at least 12 months before the disposal;
3. The subsidiary actually carries out a business activity; and
4. The subsidiary is not resident in a tax haven identified in a “black list” that is contained in a ministerial decree.
Beginning with the third financial year (three full book years) before the year of the disposal, the last two conditions described above must be satisfied uninterruptedly.
Investments in real estate companies are eligible for the participation exemption only under certain limited circumstances.
A corporate tax exemption of 84 % applies to gains derived from the disposal of nonportfolio shares during the period after I January 2007.
If the conditions described above are not satisfied, capital gains on disposals of shareholdings are fully included in the calculation of the tax base for IRES purposes. Capital gains on investments that have been recorded in the last three financial statements as fixed assets may be taxed over a maximum period of five years. In addition, any capital losses derived from disposals of such shareholdings may be deducted.
Capital losses are fully deductible if they are incurred before a 12-month holding period lapses. They are fully non-deductible after the 12-month holding period lapses.
Effective from I January 2006, losses derived from disposals of participations not qualifying for the participation exemption are deductible for tax purposes only up to an amount equal to the taxable portion of the dividends received on participations. The new rule applies to disposals of participations acquired during the preceding 36 months.
Under a tax-free restructuring regime, capital contributions of going concerns between resident companies may be carried out as tax-neutral transactions. The recipient company records the assets and liabilities at the same value used by the transferor company for tax purposes, and the transferor company receives the newly issued shares of the receiving company at the same value as that of the transferred going concern.
Non-resident Companies without a Permanent Establishment in Italy. If no treaty protection is available, capital gains derived from sales of shares in Italian companies and partnerships by non-resident companies are subject to tax in Italy. Only 40% of capital gains on shares qualifying as a “substantial participation” is included in taxable income for corporate income tax purposes and taxed at the standard rate of 27,50%. A “substantial participation” in a company listed on a stock exchange requires more than 2% of the voting rights at ordinary shareholders’ meetings or 5% of the company’s capital. For an unlisted company, these percentages are increased to 20% and 25%, respectively.
Capital gains on “non substantial participations” are subject to a substitute tax of 12.5%. However, certain exemptions may apply.
Administration. Income tax returns must be filed by the end of the 7th month following the end of the company’s fiscal year (generally before 31 July). Companies must make advance payments of their corporate and local tax liability equal to a specified percentage of the tax paid for the preceding year. This percentage is normally 99%.
Tax Rulings. Several tax ruling procedures are available in Italy. Taxpayers may request ordinary tax rulings to clarify the application of tax measures to transactions if objective uncertainty exists regarding the tax law. The request for an ordinary tax ruling must include the identification data for the taxpayer, a description of the transaction and a list of applicable measures, circulars and court decisions.
Specific tax rulings are available with respect to a limited range of operations that could result in tax avoidance, including the following:
1. Corporate reorganizations;
2. Transactions subject to fictitious interposition legislation (legislation under which the tax authorities may attribute income to the beneficial owner);
3. Deduction of advertisement and entertainment expenses;
4. Exchanges of tax credits and excess taxes;
5. Tax-haven transactions;
6. International group companies; and
7. Tax restrictions on nonoperating companies.

The specific tax ruling request must be submitted to a special committee. In the event of litigation, the burden of proof is on the party that did not comply with the opinion. In practice, specific rulings are not binding on the tax authorities but they shift the burden of proof to them.
An international ruling scheme specifically deals with transfer pricing and cross-border interest, dividends, and royalties. An international ruling is binding for the fiscal year in which the ruling is entered into and for the following two fiscal years, unless material changes in legal or economic circumstances arise.
Dividends. A participation exemption regime applies to dividends. Under this regime, dividends distributed by companies to Italian entities subject to IRES (companies and branches) are 95% exempt from corporate taxation regardless of the source (domestic or forreign) of such dividends.
Dividends received from subsidiaries located in tax havens qualify for the 95% exemption only if this has been confirmed through an advance tax ruling.
Italian parent companies are taxed on 100% of the dividends received from a direct subsidiary resident in a blacklisted tax haven jurisdiction, unless it obtains a ruling to the contrary from the Italian tax authorities. To addition, Italian parent companies receiving dividends from an intermediate holding company resident in a non-blacklisted jurisdiction are fully taxable on the dividends to the extent that these dividends derive from blacklisted indirect subsidiaries.
The exemption percentage increases to 100% for taxpayers that elect for tax consolidation or the consortium relief.
A 27% withholding tax is imposed on dividends paid from Italian companies to non-resident companies without a permanent establishment in Italy (double tax treaties may provide for lower rates). Non-residents may obtain a refund of dividend withholding tax equal to the amount of foreign tax paid on the dividends, but the maximum refund is 4/9 of the withholding tax paid. Companies from European Union (EU) member states that receive dividends from Italian companies may be exempted from the dividend withholding tax or obtain a refund of the tax paid if they hold at least 25% of the shares of the payer for at least one year. The one-year holding period requirement must be satisfied as of the date of the distribution. Under proposed amendments, the 25% threshold is expected to be reduced to 15%, effective from 1 January 2007 and to 10%, effective frond January 2009.
For non-resident companies with branches in Italy that are considered permanent establishments (PEs) the treatment of dividends is based on the principle of “PE’s attraction.” Under this principle, dividends are deemed to flow through the Italian branch for tax purposes, and no withholding tax is applicable.
Withholding Taxes on Interest and Royalties. From 1 January 2004, no withholding tax is imposed on interest and royalties paid between associated companies of different EU member states if certain conditions are met. Under Italian domestic law, a 12.5% withholding tax is imposed on interest paid to non-residents. The rate is increased to 27% for payments to residents of blacklisted tax-haven jurisdictions. A 22.5% withholding tax is imposed on royalties and certain fees paid to non-residents. A company is an “associated company” of a second company if any of the following conditions are satisfied:
1. The first company has a direct holding of at least 25% in the capital of the second company;
2. The second company has a direct holding of at least 25% in the capital of the first company; or
3. A third company has a direct holding of at least 25% in the capital of both the first company and second company.

Under the ED directive, the shareholding must be held for an uninterrupted period of at least one year. If the one-year requirement is not satisfied as of the date of payment of the interest or royalties, the withholding agent must withhold taxes on interest or royalties. However, if the requirement is subsequently satisfied, the recipient of the payment may request a refund from the tax authorities.
To qualify for the withholding tax exemption, the following additional conditions must be satisfied:
1. The recipient must be a company from another EU member state that is established as one of the legal forms listed in Annex B of the law;
2. The income must be subject to tax in the recipient’s jurisdiction, without any exemption;
3. The recipient must be the beneficial owner of the payments.
Domestic withholding taxes on interest and royalties may be reduced or eliminated by tax treaties.
Foreign Tax Relief. A foreign tax credit may be claimed for foreign source income. The amount of the foreign tax credit cannot exceed that part of the corporate income tax, computed at the standard rate that is attributable to the foreign-source income. Accordingly, the foreign tax credit may be claimed up to the amount that results from prorating the total tax due by the proportion of foreign source income over total income.
If income is received from more than one foreign country, the above limitation on the foreign tax credit is applied for each country (per-country limitation). Excess foreign tax credits may be carried forward or back for eight years.
For corporate groups that elect the worldwide tax consolidation, an Italian parent company may consolidate profits and losses of its foreign subsidiaries joining the tax group and compute a single group tax liability. Such group tax liability may be offset by a direct foreign tax credit granted to the resident parent company with respect to taxes paid abroad by foreign subsidiaries that are members of the tax group.

Determination of Business Income
General. To determine taxable income, profits disclosed in the financial statements are adjusted for exempt profits, non-deductible expenses, special deductions and losses brought forward. Exempt profits include interest on government bonds issued on or before 30 September 1986 and income subject to Italian withholding tax at source as a final tax. Interest on government bonds issued after 30 September 1986, however, is not exempt from tax.
The following general principles govern the deduction of expenses:
1. Expenses are deductible if and to the extent to which they relate to activities or assets that produce revenue or other receipts that are included in income.
2. Expenses are deductible in the fiscal year to which they relate (accrual basis rule).
3. Exceptions are provided for specific items, such as compensation due to directors, which is deductible in the fiscal year in which it is paid.
Only one-third of entertainment expenses is deductible. The deductible amount is deductible in equal instalments over five years.
Write-offs of the value of Italian and foreign shareholdings may not be deducted.
Companies may not deduct expenses incurred in transactions with enterprises resident in non-EU tax-haven countries. However, this limitation does not apply if it is established that either of the following conditions is satisfied:
1. The foreign enterprise is effectively involved in an actual business activity in the country or territory in which it is located; or
2. The relevant transactions had a real business purpose and actually took place.
The interests to capitalize according to the ex art.110 DPR 917/1986 are deductibles. The other typologies of passive interests are deductibles until the total of actives interests and assimilated profits. The surplus is deductible until to 30% of Gross Operate Income– ROL: - ROL is the parameter to determine the deductible part of passive interests.
Amortization, rent, commercial and implicit interests are excluded from calculus of ROL.
The part of interests not deduced during a year is deductible in following years, on condition that the exceeding of the total of passive interests compared to the total of actives interests and assimilated profits is lower than 30% of the ROL of the relating year.
Foreign-Exchange Losses. Gains and losses resulting from the revaluation at the year-end exchange rate of assets and liabilities denominated in foreign currencies that are not classified for financial statement purposes as long-term investments (excluding those hedged against exchange risk) are included in taxable income after they are realized.
For assets and liabilities denominated in foreign currencies that are classified for financial statement purposes as long-term investments (excluding those hedged against exchange risk), companies may deduct foreign-exchange losses resulting from the revaluation at the year-end exchange rate. However, a foreign-exchange loss that is deducted from income is recaptured if the average exchange rate for each of the two following financial years is more favourable than the exchange rate used for computation of the deducted loss. The recaptured amount of loss is computed taking into account the lower average rate recorded in the relevant two years.
Non operating Companies. Italian resident companies and permanent establishments of non-resident companies are deemed to be “non operating companies” if the total of their average non extraordinary proceeds (proceeds from the ordinary activities of a company as shown on its financial statements) and increases in inventory are less than the sum of the average of the following during the preceding three years:
1. 2% of the book value of the company’s financial assets;
2. 6% of the book value of the company’s real estate assets;
3. 15% of the book value of the company’s long-term assets.

If the company qualifies as a non operating company, its taxable income cannot be lower than the sum of the following items:
1. 1.5% of the book value of the company’s financial assets for the year;
2. 4.75% of the book value of the company’s real estate assets for the year; and
3. 12% of the book value of the company’s long-term assets for the year.

Nonoperating companies that are in a value-added tax (VAT) credit position may no longer take the following actions:
1. Claim such VAT for a refund;
2. Use the VAT to offset other tax payments due;
3. Surrender the VAT to other group companies; or
4. Carry forward the VAT.

Tax losses incurred by nonoperating companies may not be carried forward.
Companies can be exempted from the above mentioned regime, for both income tax and VAT purposes, if they prove to the tax authorities that they were not able to reach the minimum income requirements because of extraordinary circumstances. Certain companies are specifically excluded from the nonoperating companies’ regime.
Inventories. Inventory is normally valued at the lower of cost or market value for both fiscal and accounting purposes. However, companies may select other methods of inventory valuation specifically provided in the law, such as first-in, first-out (FIFO), lasting, first-out (LIFO) or average cost.
Provisions. Italian tax law provides a limited number of provisions. Bad and Doubtful Debts. A general provision of 0.5% of total trade receivables at the year-end may be made each year until the total doubtful debt provision reaches 5%. Bad debts actually incurred are deductible to the extent they are not covered by the accumulated reserve and only if they have become irrecoverable or if there are bankruptcy proceedings.
Banks may deduct on a straight-line basis over seven years the write-down of receivables that exceeds the 0.5% limitation described in the preceding paragraph.
Redundancy and Retirement Payments. Provisions for redundancy and retirement payments are deductible in amounts stated by civil law and relevant collective agreements.
Depreciation and Amortization Allowances. Depreciation at rates not exceeding those prescribed by the Ministry of Finance is calculated on the purchase price or cost of manufacture. Incidental costs, such as customs duties and transport and installation expenses, are included in the depreciable base. Depreciation is computed on the straight-line method. Rates for plant and machinery vary between 3% and 15%. The established rates may be increased if assets are more intensely used than they are normally. For the first three years of an asset’s life, accelerated depreciation of up to two times the ordinary rate per year may be claimed.
Land is not depreciable. The cost of land on which business buildings are constructed is no longer depreciable.
Goodwill that is purchased may be amortized over a period of 18 years. Know-how, copyrights, and patents can be amortized over two fiscal years. The amortization period for trademarks is 18 years.
Patents and know-how may be amortized at amounts not exceeding one-third of the cost each year. The amortization period for trademarks is 10 years.
Research expenses and advertising expenses may be either entirely deducted in the year incurred or written off in equal instalments in that year and in the four subsequent years, at the company’s option.
Amortization allowances of other rights may be claimed with reference to the utilization period provided by the agreement.
Relief for Losses. For IRES purposes only, losses may be carried forward and deducted from income of the five subsequent tax periods. Stricter rules apply to loss carry forwards if ownership of the company is transferred and if the company changes its activities. Effective from 2006, certain limitations on tax loss carry forwards that applied to transfers of companies to third parties are extended to intragroup transfers.
Losses incurred in the first three years of an activity may be carried forward for an unlimited number of tax periods. Effective from 2006, the three-year time limit is no longer computed from the date of the beginning of the company’s activities, but from the company’s date of incorporation. In addition, to qualify for an unlimited loss carry forward, such losses must derive from a new activity; that is, companies within the same group may not have previously carried out the activity.
The company resulting from or surviving after a merger may carry forward unrelieved losses of the merged companies against its own profits for the unexpired portion of the loss carry forward periods. In general, tax losses carried forward may not exceed the lower of the net equity at the close of the last fiscal year or the net equity shown on the statement of net worth prepared for the merger of each company involved in the merger. This limitation is applied on a company-by-company basis. Contributions to capital made in the 24 months preceding the date of the net worth statement are disregarded. Special rules further limit the amount of the losses that can be carried forward. Additional measures combat abuses resulting from the use of losses with respect to mergers, demergers and the transparency regime.
Groups of Companies. Groups of companies may benefit from tax consolidation and consortium relief. These regimes allow the offsetting of profit and losses of members of a group of companies.
Tax Consolidation. Italian tax consolidation rules provide two separate consolidation systems, depending on the residence of the companies involved. A domestic consolidation regime is available for Italian resident companies only. A worldwide consolidation regime, with slightly different conditions, is available for multinationals.
To qualify for consolidation, more than 50% of the voting rights of each subsidiary must be owned, directly or indirectly, by the common Italian parent company.
For a domestic consolidation, the election is binding for three fiscal years. However, if the holding company loses control over a subsidiary, such subsidiary must be immediately excluded from the consolidation. The tax consolidation includes 100% of the subsidiaries’ profits and losses, even if the subsidiary has other shareholders. The domestic consolidation may be limited to certain entities, leaving one or more otherwise eligible entities outside the group filing election. Tax losses realized before the election for tax consolidation can be used only by the company that incurred such losses.
Under a domestic consolidation, transfers of assets (other than goods produced or traded by the company, shares, bonds, and other similar securities) between group members may be carried out as tax-neutral transactions if both the seller and the buyer elect the domestic consolidation regime.
Consortium Relief. Italian parent corporations can elect consortium relief if they hold more than 10% but less than 50% of the voting rights in their Italian subsidiaries. Under this election, the subsidiaries are treated as look-through entities for Italian tax purposes and their profits and losses flow through to the parent company in proportion to the stake owned. These profits or losses can offset the shareholders’ losses or profits in the fiscal year in which the transparent company’s fiscal year ends. Tax losses realized by the shareholders before the exercise of the election for the consortium relief cannot be used to offset profits of transparent companies.
Dividends distributed by an eligible transparent company are not taken into account for tax purposes in the hands of the recipient shareholders. As a result, Italian corporate shareholders are not subject to corporate income tax on 5% of the dividends received. The election does not change the tax treatment of dividends distributed out of reserves containing profits accrued before the exercise of the election. Another benefit from consortium relief is that an eligible transparent company does not pay corporate income tax.
The consortium relief election is binding for three fiscal years and requires the consent of all the shareholders.
The consortium relief election may be beneficial for joint ventures that are not eligible for tax consolidation because the control test is not met. In addition, the election is also available for non-resident companies that are not subject to Italian withholding tax on dividend payments (that is, EU corporate shareholders qualifying under the EU Parent-Subsidiary Directive). If both EU corporate shareholders qualifying under the ED Parent-Subsidiary Directive and Italian corporate shareholders hold an Italian subsidiary, the EU corporate shareholders would want to elect consortium relief to allow the Italian corporate shareholders to benefit from tax transparency. .

Group Value-Added Tax. For groups of companies linked by more than a 50% direct shareholding, net value-added tax (VAT) refundable to one group company with respect to its own transactions may be offset against VAT payable by another, and only the balance is required to be paid by, or refunded to, the group.

Other Significant Taxes
The table below summarizes other significant taxes.
Nature of Tax
1. Value-added tax, on goods, services and imports - Standard rate 20% - Other rates 4%; 10%
2. Municipal real property tax (ICI), imposed on property’s cadastral value: 0,4% to 0,7%
3. Transfer tax on disposals of shares: 0,14%
4. Social security contributions (2006 rates); includes employee’s liability, pension contributions (IVS) and other minor contributions Industry; payable on gross remuneration by employers with more than 50 employees - Workers: 41,27% - Office staff : 39,05% - Executives: 36,15% - Basic contribution: 36,15%
Nature of Tax
Additional contribution payable to the Social Security Institute for Industrial Executives (PREVINDAI); based on gross remuneration capped at € 150,000: 7% to 8%
Additional contribution payable to other social insurance fund (FASI): € 3.144
Trade; payable on gross remuneration by employers with more than 200 employees Workers: 39,07%
Office staff : 39,07%
Executives: 35,73%
(For workers with remuneration greater than €39,297, the above rates are increased by 1%. For workers not making social security contributions before 1 January 1996, the pension contributions (IVS) payable by employers and employees are calculated on gross salary capped at €85,478.)
Contribution for industrial injuries; or professional diseases; payable by employers; rate depends on the professional risk covered; income caps apply to executives; general range of rates 0.5% to 4%

Miscellaneous Matters
Foreign-Exchange Controls. The underlying principle of the foreign exchange control system is that transactions with non-residents are permitted unless expressly prohibited. However, payments by residents to foreign intermediaries must be channelled through authorized banks or professional intermediaries. In addition, transfers of money and securities exceeding € 12,500 must be declared to the Italian Exchange Office. Inbound and outbound investments are virtually unrestricted.
Transfer Pricing. Italy impose transfer-pricing rules on transactions between related resident and non-resident companies. Under these rules, intragroup transactions must be carried out at arm’s length. The Italian transfer-pricing rules do not apply to domestic transactions. As a result, adjustments of the prices in these transactions are based on other antiabuse provisions.
Controlled Foreign Companies. Law No. 342 of 21 November 2000, Legislative Decree No. 344 of 12 December 2003 and Legislative Decree No. 268 of7 August 2006 introduced a controlled foreign company (CFC) regime. The CFC rules apply if a resident of Italy controls or has a participation exceeding 20% of the share capital in a non-resident company that is subject to a privileged tax regime. Article 2359 of the Italian Civil Code provides the rules for determining whether an Italian company controls a non-resident company. A decree of the Ministry of Finance dated 21 November 2001 provides a “black list” of countries that are regarded as having privileged tax regimes as well as a list of entities and activities considered to be subject to such regimes. If the CFC rules apply, the Italian resident is taxed on the resident’s share of the profits of the CFC, regardless of the actual distribution of such profits. The tax rate equals the average rate for the taxpayer, with a minimum tax rate of27%.
Antiavoidance Legislation. Under Italian anti avoidance rules (Article 37-bis of Presidential Decree No. 6001l973), in principle, the tax authorities may consider a transaction that involves single or connected acts to be a tax-avoidance transaction if it meets all of the following requirements at the same time:
1. The transaction involves one or more of the following operations: - Contributions to companies or transfers or use of going concerns; - Assignments of credits; - Assignments of excess tax credits; - Payments of interest and royalties that are exempt from withholding tax to ED companies that are directly or indirectly controlled by non-ED residents; - Transactions provided for in ED Directive No. 90/434/CEE; - Transactions, including appraisals, regarding participations, securities, certificates, currencies, precious metals, swaps, options, hedging instruments and other specified items; and - Transfers of assets carried out as tax-neutral transactions between companies electing the domestic group taxation regime.
2. The transaction was entered into without a sound economic reason.
3. The transaction was entered into in order to get around the law.
4. The transaction was entered into in order to achieve an undue income tax savings or tax refunds.

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