Answer ... Non-resident corporate taxpayers are subject to corporate income tax (‘Imposta sul Reddito delle Società’ (IRES)) Italy on Italian-source income only. In this respect, Italian-source income (ie, business profits, royalties, dividends, capital gains) should be considered separately (as for physical persons) and taxed accordingly (‘trattamento separato dei redditi’).
Business profits are subject to IRES taxation in Italy only if the non-resident recipient has a permanent establishment in the state. In such case, business profits are also subject to the regional tax on business activities (‘Imposta Regionale sulle Attività Produttive’ (IRAP)).
For taxation purposes, the permanent establishment must prepare proper statutory accounts. Its taxable income is calculated based on the net profit/loss of the year, adjusted taking into consideration the IRES/IRAP adjustments applicable to domestic corporations.
The profits of a local branch are determined pursuant to the so-called ‘separated entity’ approach, whereby the branch is considered a functionally segregated entity from the head office. Transactions with the head office are subject to transfer pricing rules.
Answer ... Pursuant to the Italian principle of ‘trattamento separato dei redditi’ (see question 4.1), applicable to non-resident recipients, outbound payments of dividends, interest and royalties by Italian corporates to non-resident recipients are generally subject to withholding tax.
In principle, the payment of dividends to a non-resident recipient is subject to a final 26% withholding tax (a lower rate may apply under an applicable double tax treaty). The foreign recipient may claim a partial refund (up to 11/26 of the withholding tax levied) by proving, through proper documentation issued by the foreign tax authorities, that the same dividends were taxed in its state of residence.
A reduced rate of 1.2% may apply if the recipient:
- is a company or an entity (with no permanent establishment in Italy) which is resident in a member state of the European Union or the European Economic Area that allows for adequate exchange of information with Italy; and
- is liable to corporate income tax in its country of residence.
According to the EU Parent-Subsidiary Directive (2011/96/EU), no withholding tax is levied on dividends paid by an Italian subsidiary to its foreign parent company, provided that the latter:
- is tax resident in an EU member state;
- meets the requirements set out in the Directive to be considered as ‘qualified’ for the purpose of the directive;
- is subject to corporate income tax in its state of residence; and
- has held at least 10% of the capital of the Italian subsidiary for an uninterrupted period of at least one year.
In principle, the payment of royalties to a non-resident recipient is subject to a final 30% withholding tax (a lower rate may apply under an applicable double tax treaty). However, according to the EU Interest and Royalties Directive (2003/49/EU), no withholding tax is levied on royalties paid to foreign companies, provided that the following requirements are met:
- The recipient is tax resident in another EU member state;
- The recipient meets the requirements set out in the directive to be considered as ‘qualified’ for the purposes of the directive;
- The recipient is liable to corporate income tax in its state of residence;
- The flow of royalties is subject to corporate income tax in the recipient’s state of residence; and
The recipient and the payer qualify as ‘associated companies’ - that is, either:
- one of them has continuously held directly at least 25% of the voting rights of the other for at least one year; or
- a third EU company has continuously held directly at least 25% of the voting rights of both companies for at least one year.
In principle, the payment of interest to a non-resident recipient is subject to a final 26% withholding tax (a lower rate may apply under an applicable double tax treaty).
However, according to the EU Interest and Royalties Directive (2003/49/EU), no withholding tax is levied on interest paid by an Italian company to an EU ‘associated’ company, provided that the same requirements as apply to royalty payments are met.
Answer ... Double tax treaties signed by the Italian government generally follow the Organisation for Economic Co-operation and Development Model Convention. Generally, treaty provisions override domestic provisions (regardless of whether they were enforced before or after the domestic provisions), unless the domestic provisions are more favourable for the taxpayer.
Answer ... Italian domestic tax law provides for autonomous foreign tax relief with reference to foreign source income earned by Italian taxpayers.
The Italian foreign tax credit is equal to the amount of tax paid abroad by the taxpayer on the specific foreign source income. However, this amount cannot exceed the IRES quota attributable to the same foreign source income, according to the following formula:
IRES x foreign source income / total income
If the income comes from more than one foreign country, a ‘per country’ limitation mechanism applies. Any excess foreign tax credit may be carried forward or back for eight years.
Answer ... Under Italian tax law, foreign companies which transfer their tax residence to Italy from a whitelisted jurisdiction are entailed to step up for tax purposes assets and liabilities at fair market value.
Conversely, the tax value of assets (liabilities) belonging to companies which transfer their tax residence to Italy from a blacklisted jurisdiction is deemed to be equal to the lower (higher) value of the acquisition cost, the book value and the fair market value. However, such companies may apply for a tax ruling from the Italian tax authorities on the relevant tax values to be attributed to their assets and liabilities.
Answer ... An Italian company which transfers its tax residence outside Italy triggers a taxable event in Italy.
In such case any unrealised capital gains, calculated on the basis of the fair market value of its assets, is subject to IRES, unless the relevant assets are attributed to an Italian permanent establishment of the company.
However, according to recent amendments to the law, Italian companies that transfer their tax residence to other white-listed countries which are members of the European Union or the European Economic Area are entitled to request the deferral of the exit tax to the moment of actual realisation of the relevant assets or, alternatively, for payment of the exit tax in six annual instalments.
If taxation is deferred to the moment of actual realisation, the taxpayer should file periodic information with the Italian tax authorities, to allow them to monitor the migrated assets. In any case, the capital gains relating to the assets are deemed to be realised for exit tax purposes10 years after the transfer of residence.
Mergers and acquisitions and other corporate restructurings do not interrupt the deferral of exit tax payment, as long as both the company and the assets remain in the white-listed country following the transaction.