Limited liability companies and branches of foreign companies exercising commercial activities in Italy are subject to the same taxes and fiscal commitments.
Both companies and branches of non-resident companies are subject to the following corporate taxes:
- Italian Corporate Income Tax (IRES - Imposta sul Reddito delle Società ) set at a 27.5% rate;
- Italian Regional Tax on Production (IRAP - Imposta Regionale sulle Attività Produttive) set at a 3.9% rate.
Companies and branches are also subject to the same tax compliance requirements (e.g.: both must keep accounting books and VAT registers, lodge their income tax return, VAT return, withholding tax return etc.).
Although prima facie the tax implications of having a branch or a corporation are very similar, there are some differences.
For example, a fiscal advantage for a branch as opposed to a corporation is that profits may be transferred to the foreign company free of withholding tax, given that the branch is not an independent entity with respect to the parent company and transferred profits are not considered dividends.
On the contrary, the payment of dividends from the Italian subsidiary to the parent company may be subject to withholding tax, when the Parent-Subsidiary Directive is not applicable.
On the other hand, a branch structure may entail sometimes higher complexities in the allocation of certain elements of revenues or of costs (e.g.: allocation of interest costs).
Moreover, the use of a branch could impact on the content of the transfer pricing documentation to be submitted by the branch.
In fact, for the purpose of the transfer pricing documentation, the documentation shall be filed as if the head quarter of the company is located in Italy
Therefore, a careful examination is required, on a case by case basis, to understand if, in a given situation, a branch structure may be preferable to a corporate structure, or viceversa.
Is it possible to move from a branch structure to a corporate structure?
In order to convert a branch structure in a corporate structure and vice versa, a specific transaction is required. The conversion is in general a taxable event. Different solutions may be put in place in order to move from a branch to a corporation and vice versa. Each change is to be evaluated on a case by case basis in order to maximize tax efficiency.
For example, if the conversion from a branch structure to a corporate structure and vice versa involves an Italian resident entity and an EU resident entity, the "Merger Directive" (Directive2009/133/CE) might come applicable and, thus, make the transaction tax neutral.
Which type of corporate entities can be set up in Italy?
The following corporate entities can be set up under Italian law:
- Limited Liability Companies (Società a Responsabilità Limitata, in brief "S.r.l."), whose corporate capital is represented by quotas and must be, at least, equal to the amount of € 1;
- Joint Stock Companies (Società per azioni, in brief "S.p.A."), whose corporate capital is represented by shares and must be, at least, equal to the amount of € 50,000;
- Partnership Limited by Shares (Società in Accomandita per Azioni, in brief "SAPA"), in respect of which the law provisions regarding S.p.A. shall generally apply. In order to perform specific types of business (e.g.: investment and banking companies, saving management companies, etc.), the law requires specific amounts of corporate capital.
The most relevant and common aspects of the corporate entities are the following:
- they act by means of different bodies and resolutions are taken through the majority system;
- a perfect assets separation is provided (i.e.: autonomia patrimoniale perfetta); in this respect, the shareholders shall not fulfil the corporate obligations by means of their personal assets, and the contributions are exclusively owned by the company. They shall perform the agreed contributions without undertaking any other liability towards the company or its creditors;
- only the company, by means of its corporate capital, is liable for the corporate obligations (save for what provided with reference to the SAPA companies, as indicated below);
- the shareholders may perform some control systems;
- the corporate participations are, unless otherwise agreed, freely transferable;
- the company has legal status;
- in the event of insolvency, the company is subject to the law provisions concerning bankruptcy.
In general, bankruptcy effects are not extended to the shareholders.
As far as concerns SAPA companies, there are two different kinds of stakeholders:
- those whose liability is joint and unlimited and who manage the company (i.e.: unlimited partners), and
- those whose liability is limited to the corporate capital they have subscribed (i.e. limited partners).
With reference to the different types of partnerships [Società Semplice (S.S.), Società in Nome Collettivo (S.n.c.) and Società in Accomandita Semplice (SAS)], the most relevant and common aspects to be considered are the following:
- a minimum set amount of corporate capital is not required;
- in case corporate assets are not sufficient to fulfil the company's obligations, creditors may be satisfied by means of the personal assets of the partners, as they are unlimitedly and jointly liable for corporate obligations, with exception to SAS companies in which there are limited partners;
- corporate participation may be transferred only if all other partners agree;
- partners per se (i.e.: intuitus personae), as well as the relationships between them, are particularly important;
- the bankruptcy of the company implies the automatic bankruptcy of all unlimited liable partners;
- the performance of commercial activities is forbidden by the Law for what concerns SS companies.
Foreign investors, according to their preferences and business necessities, are able to set up any of the companies described above.
Which are the obligations and procedures for the incorporation of a corporate entity?
A corporate entity may be incorporated by means of an agreement or a unilateral deed (in the event of a sole shareholder). The deed of incorporation shall be null and void if not executed by means of a public deed before a Notary Public.
The execution of the deed of incorporation may be implemented in two different ways:
- simultaneous or immediate execution in presence of the parties (or their proxy-holders);
- Subsequent execution or execution by means of public applications (only for S.p.A. and SAPA), which is concluded after a complex procedure in which the different applications are evaluated.
In both cases, there are specific requirements for the validity of the deed.
In particular, pursuant to Section 2328 of the Italian Civil Code, the deed should indicate the corporate purpose, the corporate name (including the type of company), the registered office, the amount of corporate capital and the appointment of the first directors.
S.p.A. and SAPA deeds of incorporation are represented by two different documents (i.e.: the deed of incorporation, including the parties' will to incorporate the company, and the by-laws, containing the provisions ruling the future operational functioning of the company).
As far as concerns a S.r.l., the deed of incorporation and the by-laws may be included in one sole document. The Notary Public, after receiving the deed of incorporation and verifying its compliance with the law provisions, shall file it within 20 days with the Companies' Register located in the same district of the company's registered office.
By means of such registration, the company obtains the legal status and therefore starts to operate.
Should any activity be performed in the name and on behalf of the company before its registration, those who have acted in the name and on behalf of the company (as well as those who authorized such activities) are unlimitedly liable vis-à-vis third parties for the activities performed before the registration.
May a company be set up by a sole shareholder/quotaholder?
S.p.A. and S.r.l. companies may be set up by means of a sole shareholder, which may be an individual, a company (even a foreign one) or a public entity.
The principle of the perfect separation of assets is applicable; therefore, in the event of insolvency, the sole shareholder shall not fulfil the company's obligations by means of their personal assets.
An exception to this rule is applicable in the event of activities performed before the registration of the incorporation deed with the Companies' Register, in which event the sole shareholder is unlimitedly liable.
Furthermore, it is provided that upon incorporation, and/or any capital increase, the sole shareholder shall pay all contributions in cash. The missed payment of such contributions entails, also, the unlimited liability of the sole shareholder.
The sole shareholder shall be indicated on the company documents and correspondence (but not in the corporate name), and registered in the Companies' Register. If this information is not provided the shareholder will be unlimitedly liable for the corporate obligations.
All the agreements between the company and the sole shareholder, as well as the transactions performed by the company in favour of the sole shareholder, may be enforceable vis-à-vis the creditors of the company if they have been listed in the Board of Directors' Meetings Minutes Book or if they have been drawn up by means of a written deed, having a fixed date prior to the possible transfer.
Are there any differences, under a tax standpoint, between the various types of companies in Italy?
There are no differences, from a tax viewpoint, between the two main forms of limited liabilities companies, S.p.A. and S.r.l.
Both types of companies are indeed subject to IRES and IRAP taxes and to the same tax obligations (keeping of registers, lodging of tax returns, etc...).
On the other hand, partnerships, including general partnerships (S.n.c.) and limited partnerships (S.A.S.), are treated as transparent entities and are not subject to IRES tax but only to IRAP tax.
The taxable income of the partnerships is automatically attributed to the partners in proportion to their entitlement to the partnership' profits and, consequently, is taxed in the hands of the same partners.
At certain conditions, also limited liability companies may elect to be treated as transparent entities
Which are the main taxes for the incorporation of a company in Italy?
In the event of the incorporation of a company, a registration tax applies with regards to contributions made by shareholders in order to form the share capital.
In the event of the contribution of real estate properties, also mortgage and cadastral taxes apply.
The amount of registration tax varies according to the nature of the items contributed. More in detail, registration tax is:
- € 200 in the event of contribution of cash, movable goods, credits and other rights (regardless of the contributor)
- € 200 in the event of contribution of immovable properties carried out by a VAT person,(except in specific cases);
- an amount ranging between 2% and 9% of the market value of the item in the event of contribution of immovable properties carried out by a person not registered for VAT (12% for farm land contribution);
- € 200 in the event of contribution of a going concern.
Among non-fiscal costs, it is important to consider the fees applied by the Public Notary to draw up the incorporation deeds. These may vary depending on the value of the deed.
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.