Answer ... In principle, the tax treatment of investment in capital assets follows the accounts:
- Yearly depreciation is deductible within the thresholds provided for by the Ministry of Finance; and
- Capital gains (losses) realised on the disposal of capital assets are subject to (and deductible for) IRES and IRAP (purposes), being the taxable base (loss) equal to the difference between the sale price and the tax value. Capital gains on investments regarded as fixed assets in the three financial statements preceding the sale may be electively taxed over a maximum period of five years.
Capital asset write-offs realised for accounting purposes are generally not relevant for tax purposes.
With specific reference to the disposal of participations, Italian tax law provides for a special ‘participation exemption regime’, based on which 95% of the capital gain is IRES exempt (it is also outside the scope of IRAP taxation), provided that the following requirements are met:
- The shareholding was classified as a long-term financial investment in the financial statement of the year of acquisition;
- The company held the shareholding for an uninterrupted period of at least 12 months before the disposal;
- The subsidiary v carries out a business activity (real estate companies are assumed not to carry out a business activity; therefore, they can satisfy this requirement only under certain limited circumstances); and
- The subsidiary is not resident in a tax haven.
The last two requirements above should be met uninterruptedly for the three financial years preceding the disposal. If these requirements are not met, the capital gain on the sale of the participation is fully included in the calculation of the tax base for IRES purposes.
Conversely, capital losses on participations eligible for the participation exemption regime are 100% non-deductible.
Answer ... According to Italian tax law, companies which carry out significant investments in certain research and development (R&D) activities are entitled to benefit from a tax credit of 50%/25% (depending on the kind of expenses) of eligible expenses exceeding the average R&D expenses sustained in the three-year period from 2012 to 2014, up to a maximum of €10 million.
In addition, Italian tax law provides a favourable tax regime (the ‘patent box’) for taxpayers carrying out substantial investment in R&D activities aimed at the generation of qualified intangible assets, such as industrial patents, models and designs capable of being legally protected, trademarks, know-how and other intellectual property.
Taxpayers involved in such activities are eligible, upon specific application, for a reduction of their IRES and IRAP taxable base equal to 50% of the income derived from exploitation of the qualifying asset. The exemption applies to income earned both indirectly from licensing the intellectual property and directly from exploitation of the intangibles.
Capital gains derived from the disposal of qualifying assets are tax exempt, provided that at least 90% of the disposal price is used to maintain or develop other qualifying intangible assets before the end of the second fiscal year following that in which the disposal took place.
The patent box regime lasts for five fiscal years after the year of election.
The discipline was recently amended to remove trademarks from eligible assets, in accordance with the recommendations set forth under the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting Action 5.
Answer ... Inventory is normally evaluated as the lower of the acquisition/manufacturing cost and market value for both fiscal and accounting purposes. To determine the acquisition/manufacturing cost, the taxpayer may select one of the various methods of inventory valuation specifically provided for by the law, such as first in, first out; last in, first out; or average cost.
Answer ... Under Italian tax law, financial gains and/or losses emerging from the year-end valuation at the fair market value of derivative financial instruments, according to the correct accounting principles (Organismo Italiano di Contabilità and International Accounting Standards/International Financial Reporting Standards) are generally recognised for IRES purpose.
Specific rules apply to derivatives subscribed for hedging purposes. With reference to such financial instruments, gains and/or losses deriving from the year-end valuation or realisation are recognised for IRES purposes pursuant to the same rules as apply to the covered assets and/or liabilities.