Italy: Italian Corporate Income Tax For Foreign Investors

Last Updated: 7 October 2015
Article by Giulia Cipollini

Corporate income tax

Italian corporate income tax (imposta sul reddito delle società, or IRES) is due by resident companies on their worldwide income. A company is deemed to be resident within the Italian territory when it has any of the following elements located in Italy for the major part of the tax year (as per above, more than 183 days):

  • Its registered office;
  • Its administrative office (equivalent to the 'place of effective management' notion);
  • Its principal activity and business.

Italian law also provides for a rebuttable presumption, introduced for anti-avoidance purposes. Precisely, unless proof of the contrary is given, foreign entities controlling an Italian company are deemed to be tax residents in Italy if either of the following conditions is satisfied:

  • The foreign entity is directly or indirectly controlled by Italian resident entities or individuals;
  • The majority of members of the board of directors managing the foreign entity are resident in Italy.

As for non-resident individuals, IRES is imposed on non-resident entities on their Italian-source income only. 

Corporate tax rates

The IRES rate is 27.5 percent. A 6.5 percent surcharge (so called 'Robin Tax') was applied to companies operating in the areas of oil, gas and energy companies that, in the previous fiscal year, had revenues exceeding EUR 3 million and taxable income exceeding EUR 300.000.

However, please note that the Italian Constitutional Court declared the Robin Tax as unconstitutional with effect starting from February 2015.

Determination of business income

Generally speaking, both positive and negative components of an entity's income statement are taxed or deducted under the accrual principle.

Further, income items must be certain from a legal point of view and objectively determined or determinable. No deduction will be granted for items not following the certain and objective determination principle. Deduction or taxation of income will be deferred to consequent fiscal years when such criterion is met.

Generally, expenses are deductible as follows:

  • Expenses are deductible if they relate to activities or assets producing revenue or other receipts that are included in income.
  • Expenses are deductible in the tax year to which they relate (accrual basis rule).

Companies shall not deduct expenses derived from entering into transactions with enterprises and consultants resident in non-EU blacklist countries. However, such limitation does not apply when it is established that either of the following conditions is met:

  • The foreign enterprise is effectively involved in an actual business activity in the country or territory in which it is located.
  • The relevant transactions have a real business purpose and actually take place.

The Ministry of Finance issued a decree dated 23 January 2002, which identifies the countries included on the Italian blacklist for the above purposes.

Specific rules applies to entities that adopted International Financial Reporting Standards (IFRS) for Italian statutory financial reporting purposes. These provisions' purpose is to align income determination rules with IFRS.

Local tax

Resident and nonresident companies are subject to a regional tax on productive activities (imposta regionale sulle attività produttive, or IRAP) on their Italian-source income. 

There are different methods of calculation of IRAP tax base, strictly linked to the nature of the business carried out by the taxpayer. Provisions for liabilities and risks, as well as extraordinary items, will not be considered in determining the IRAP tax base.

IRAP is levied on a regional basis. The Italian regions are allowed to increase or decrease the standard IRAP rate up to 0.92 percent. Italian companies with permanent establishments (PEs) abroad are not subject to IRAP on the income earned through the mentioned PEs.

Italian IRAP has been highly criticised and represents a controversial tax in the view of may scholars. Each year debates arise on the possibility to reduce it or eliminate it.

Value-added tax (VAT)

Italian VAT (Imposta sul Valore Aggiunto, IVA) is provided for the supply of goods and services carried out in Italy by entrepreneurs, professionals, or artists and on importations carried out by anyone. 

The Italian standard VAT rate is 22 percent. Reduced rates apply to specifically listed supplies of goods and services (for example, 4% for listed food, drinks, and agricultural products and 10% for electric power supplies for listed uses and listed drugs).

Further, certain supplies of goods and services expressly listed in the law are exempt from VAT (for example, hospital and medical care, education, insurance services, specific financial services, supply, leasing of particular immovable property). Other specifically listed transactions are also out of the VAT application scope (for example, transfer of money).

Recovery on input VAT on purchases of goods and services in relation to business activity is generally allowed. Certain limits exist in relation to specific items (e.g. cars, entertainment expenses) and to companies carrying out certain activities. 

Registration tax

Certain deeds and contracts require filing with the local registration tax office, and consequently, the relevant tax will be levied.

Registration tax is due as a fixed amount or as a percentage of the value of the goods and/or rights that are the object of the contract, depending on the nature, form and object of the contract itself. Generally, transactions subject to VAT will not be taxed as in registration tax.

2. Corporate reorganisations (mergers and demergers)

In principle, company restructurings, such as mergers and demergers, are deemed as tax neutral. However, please note that, for financial accounting purposes, the transaction will result in the recognition of higher values of the assets or of goodwill. Companies can opt for partial or full recognition for tax purposes of the step-up in the financial accounting values of assets or of the goodwill arising from the corporate reorganisations, upon the condition that they pay a substitutive tax.
Such substitutive tax will be calculated on the step-up in taxable basis and will rely on progressive rates of 12 percent up to 16 percent.

3. Group taxation

Domestic tax consolidation ('Consolidato Fiscale')

Entities part of the same group can opt for domestic tax consolidation. A single IRES tax base will exist, which includes the taxable income and losses of each participating company. The tax consolidation does not operate for IRAP purposes.

In the event of an overall tax loss position arises, it can be carried forward and used against future consolidated taxable income. On the other hand, tax losses arising in fiscal years previous to the domestic tax consolidation election can be carried forward and used only by the company which generated the losses.

The taxable base of each company part of the group is entirely considered. No apportionment based on the percentage of control is allowed.

To be valid, the domestic tax consolidation regime must satisfy the following conditions:

  • The consolidating entity must be an Italian tax resident company, and it must hold, directly or indirectly, more than 50% of the share capital of the consolidated entities (so called 'legal control').
  • The legal control must be in place from the beginning of the tax period for which the tax consolidation is applied for.
  • All of the companies participating in the group must have the same year-end.

Upon satisfaction of specific requirements, Italian PEs of foreign companies can also participate as controlling entities in a tax group.

The consolidation arrangement is elective. Certain companies may select whether to be part or not, and it is not necessary for all the Italian group/sub-group entities to jointly elect for the tax consolidation.

Once the election is made, it cannot be revoked for the following three fiscal years.

Please note that very recently, through the final improvement of the Decree regarding the internationalisation of enterprises , the group of addressees entitled to consolidate tax bases has been expanded, in order to be in line with EU legislation. It is now possible for Italian subsidiary companies to apply for consolidato when they are subsidiaries of a foreign parent company located in the EU or in a country allowing exchange of information with Italy. Similarly, consolidato is allowed for Italian permanent establishments of foreign parent companies, when they are business income holders.

A worldwide tax consolidation group is also allowed when talking about foreign subsidiaries.

Transfer Pricing

The taxable income derived from operations with non-resident corporations that directly or indirectly control or are controlled by an Italian entity (or by the same corporation controlling the Italian entity) corresponds in principle to the so called 'normal value' of the goods transferred, services rendered, and services and good received.

The normal value, according to Italian legislation and Court decisions (which follow the method provided for by the OECD), is to be intended as the average price paid under free market conditions for goods and services of the same kind, at the time and place in which the goods and services were purchased or performed.

On the base of the transfer pricing regulation provided by the OECD Guidelines, taxpayers will have to provide the Italian tax authorities with certain documentation to support the inter-company transaction drawn up in a specific format. Failure to submit documentation can result in an income assessment from the Italian tax authorities.

Ad-hoc international ruling procedures are available in order to agree transfer pricing methodology together with the tax authorities.

The agreement is binding in relation to the fiscal year of the agreement and for the following two fiscal years, unless significant changes in the circumstances occurred.

In relation to transfer pricing Italian legislation, the new Decree regarding the internationalisation of enterprises has introduced an historical clarification, according to which transfer pricing rules do not apply to domestic transactions between Italian resident subjects, but only relate to cross-border transactions. This interpretation goes against the firm position taken by the Italian Supreme Court supporting the application of domestic transfer pricing (last time as recently as 22 June 2015, in the decision n. 12844).

4. Latest news and going forward

Italy and its tax legislation offer many appealing measures for domestic and foreign taxpayers. Here are the main Italian provisions which effectively make the tax framework competitive on a worldwide level for both individuals and corporate entities:

a) Inheritance and gift tax: the Imposta di successione e donazione is chargeable on the taxpayer's worldwide assets for Italian tax residents. Foreign residents will be taxed on assets located in Italy. The rate of succession tax applied depends on the recipient of the asset according to the degree of kinship to the deceased. A variable rate of tax applies between 4% and 8% on the value of the asset dependant on the recipient. Immediate family may also benefit from a non-taxable threshold of €1 million per person. Italy, therefore, currently represents a tax haven given the low rates and high threshold for inheritance and gift tax purposes.

b) On 31st of July 2015, through the new 'Certainty Decree' ('Certezza del Diritto'), the former notion of tax avoidance has been eliminated and replaced with abuse of law. Under the new rules, abuse of law exists when a transaction 'lacks of economic substance, realises an undue tax advantage and the tax advantage is the main target of the operation put in place'. Freedom of establishment and intra-group transactions, with a particular focus on big multinationals, are therefore encouraged under the new rules.

c) Italy has entered into more than 90 Double Tax Conventions ('DTC') for direct tax purposes, based on the OECD Model, with Countries from every continent. Moreover, Italy has entered into 7 DTCs for indirect tax purposes. This makes it very efficient for foreign taxpayers willing to invest or enter Italy under certain circumstances.

d) A Participation Exemption regime ('PEX') is in place for certain investments. According to this regime, capital gains realised by Italian entities on sales of shareholdings are 95% exempt from IRES. The following conditions must be met in order to benefit from the measure: (i) the shareholding was held uninterruptedly for at least 12 months prior to the sale; (ii) the investment was classified as financial fixed asset in the financial statements relating to the first fiscal year of uninterrupted ownership; (iii) the subsidiary carries on a commercial activity (e.g. investments in companies mainly performing management of their own real estate are not entitled to PEX benefits); (iv) the majority of the subsidiary's income was not generated in a low tax jurisdiction.

Ad-hoc PEX regimes are also provided for capital gains realised by Italian tax resident individuals. 

e) In Italy, capital gains incurred on immovable property owned by individuals are not taxed if the individual has sold the property more than five years from the purchase. This benefit, however, does not apply on property owned by non-natural persons. 

f) On the 6th of August 2015, the Italian Cabinet finally approved the Decree regarding the internationalization of enterprises (so called 'Decreto Internazionalizzazione'). The measure aims at removing obstacles for the access to international markets and to establish a simple and transparent regulatory framework for foreign investors.

The new Decree introduces several provisions with strong impact on international taxation (e.g. transfer pricing, CFC rules).

g) The 2015 Finance Act, implementing the Italian Budget Law 2015, has introduced the Patent Box regime in Italy. This is a special tax incentive allowing reduced taxation for income derived from the exploitation or licensing of intangible assets by companies and commercial entities performing research and development activities (R&D). The Patent Box effectively aims to encourage the movement of intangible assets currently held abroad both by Italian and foreign companies to Italy and avoid the possible future relocation of such intangibles overseas to countries offering more favourable tax regimes.

Withers Studio Legale is uniquely qualified to assist you on Italian tax matters.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Jones Day
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Jones Day
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions