Law no. 662 of December 23,1996 (hereinafter the "Law") contains the guidelines for the reform of, among the others, the taxation of business profits.
Such guidelines will be implemented by more detailed Legislative Decrees to be enacted in 1997.
This means that for the time being nobody is able to forecast in detail what the contents of the new rules will be. However, the general aspects and effects of the new rules can be described on the basis of the above mentioned guidelines.
2. IREP (REGIONAL TAX ON PRODUCTION ACTIVITIES)
2.1. General Aspects
This tax will affect production activities, both of the business and self-employed professional nature.
IREP will replace ILOR, Social Security contributions and other minor taxes (such as ICIAP, Tax on Net Worth, and the Tax of State Concession on VAT number). However, the scope of the tax will not be exactly the same as ILOR. In particular:
- some revenues presently excluded from ILOR's taxable basis will be subject to IREP (e.g. self-employed revenues);
- as far as the business profits are concerned, only the ordinary business costs and revenues entered in the income statement will be taken into account in order to determine the taxable basis.
The tax rate will be determined by each Region and will vary from 3.5 to 4.5% of the taxable basis, however Regions will be entitled to increase it by one further percentage point.
If a company has several production units in different regions, the entire taxable profit will be allocated to each region in proportion to the amount of costs for personnel or, as alternative, to the value of the fixed assets existing therein.
The tax double imposition treaty applicable to ILOR will apply to IREP too.
2.2. Taxable Basis For Business Companies.
With respect to business profits, the taxable basis of IREP will be determined by making reference to some items in the income statement scheme provided by section 2425 of the Civil Code.
Indeed, the taxable basis will correspond to the difference between the "Value of production" (letter A) of section 2425) and the "Costs of production" (letter B) of the same section), with the exclusion of the following costs:
- costs of personnel;
- devaluation of fixed assets other than depreciation;
- devaluation of receivables included in the circulating assets; and
- costs for collaboration relationships (the so-called "collaborazione coordinata e continuativa").
Other extraordinary expenses (such as interest payable, capital losses, and so on) cannot be deduced. Banks, financial and insurance companies will be subject to particular provisions.
2.3. Main Aspects Affecting The Final Tax Burden
If compared to ILOR, IREP might entail a higher or lower tax burden on business profits, depending on the financial statements structure of the taxpayer.
Here below are some of the aspects which may affect the final tax burden:
- Any increase in the costs for personnel and self-employed collaborators, being such costs undeductible from the taxable basis, will disadvantage the companies which do not make use of services supplied by external enterprises.
- A similar disadvantage would ensue from indebtedness, because of the impossibility to deduce interest payable.
- IREP will not be deductable from the taxable basis of personal income tax (IRPEG, IRPEF).
The foreign-source will not be included in the IREP taxable basis, even if produced abroad in the absence of any permanent establishment in Italy.
2.4. Effectiveness
IREP will be effective from 1998 with respect to the tax year 1997. All advance payments of other taxes which will be replaced by IREP (ILOR, Tax on Net Worth and so on) will be credited against the IREP due in 1998.
3. DIT (DUAL INCOME TAX)
3.1. General Aspects
Pursuant to article 3, para 162, of the Law, some Legislative Decrees wll define the rules aimed at taxing at a favourable raate the Company's profits corresponding to the "ordinary remuneration" of the "invested capital".
i) By "ordinary remuneration" it is meant any nominal return on debentures traded in the securities market; and ii)by "invested capital" it is meant the increase of capital during the tax year with reference to: - reserves consisting of profits; and - stock capital and funds created with cash capital paid by quota/shareholders.
The more advantageous tax rate will be betwwen 12.5% and 27% in lieu of the 37% ordinary tax rate.
The effectiveness of this purpose can be strengthened by the recently enacted reform of the tax treatment applicable to debentures issued by joint stock companies (SpA) which are not listed in the Stock Exchange.
3.2. Tax Treatment Of Interest On Debentures
Article 5 of Law no. 725 of December 23, 1994, as amended by of article 3, paras 114 and 115, of Law no. 549 of December 28, 1995, provides (i) restrictions on the deductibility of the companies' interest payable and (ii) a less favourable tax treatment for investors, if some requirements are not fulfilled.
Therefore, if the interest accrued on debentures issued by joint stock companies exceeds the Bank Rate (TUS) plus 7 (for debentures quoted in security markets) or 3 (for debentures not quoted in security markets) percentage points, the following restrictions will apply:
3.3. Further Effects For Quota/Shareholders
- the interest accrued in excess cannot be deducted by the company;
- the interest payable to the investor will be subject to a 30% final withholding tax, in lieu of a 12.5% final withholding tax.
With respect to quota/shareholders, in particular those who are not resident in Italy, further positive effects in terms of tax convenience will be produced by the reform of the tax credit on dividends and the abolition of the "Equalisation tax increase" (Maggiorazione di conguaglio"), both provided by article 3, para163, of the Law.
Upon implementation of the above reform, the following consequences will occur:
- resident quota/ shareholders will be entitled to a tax credit on dividends no longer corresponding to the fixed amount of 9/16 of dividends but to the tax actually paid by the company;
- the abolition of the "equalisation tax increase" (provided by section 105 of the Italian tax Code (TUIR) and affecting the company's dividends exceeding the amount of business profits taxed at 37%) will create a benefit for non-resident quota/shareholders, as they will no longer have to claim tax credits from the Italian Administration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information contact Luca Granelli of Gianni, Origoni & Partners, Milan on tel: +392 7600 9756, e-mail: dibella@galactica.it or enter a text search 'Gianni, Origoni & Partners' and 'Business Monitor'.
