Italy: Tax (Joint Ventures)

1. Are partnerships that are established under the laws of your jurisdiction tax transparent in your jurisdiction? Is there any other type of entity that is capable of being established under the laws of your jurisdiction that is tax transparent in your jurisdiction (such as US LLCs are in the United States)?

Yes, partnerships are tax transparent in Italy. Profits and losses accrue directly to the partners for income tax purposes. The Italian Civil Code and the Italian Tax Code (TUIR) recognises three types of partnership, subject to the same fiscal regime.

Under Law No. 80 of 7 April 2003, Italian corporations and limited liability entities (società per azioni and società a responsabilità limitata), which would normally be taxed as an opaque entity, can opt for the transparency regime. If they do opt for the transparency regime, their income and losses accrue directly to the shareholders.

2. Can any losses made by a partnership (or other transparent entity) that is established under the laws of another jurisdiction be offset, on an arising basis (or on some other basis), against the profits of a corporate partner or member that is tax resident in your jurisdiction (for example, against the profits of any business which that corporate partner/member carries on outside the partnership/transparent entity)? If so, is such relief limited to the corporate partner/member's pro rata share of the losses made by the partnership?

No. As a general rule, losses of a foreign partnership or of a transparent entity cannot be offset against profits of an Italian partner or member.

However, a foreign corporate entity can offset losses under the Italian worldwide tax consolidation regime, where applicable.

3. Do partnerships (or other transparent entities) that are established under the laws of your jurisdiction generally receive similar benefits to companies (or other opaque entities) that are tax resident in your jurisdiction under the double tax treaties that your jurisdiction is a party to?

No. Italian partnerships do not generally benefit from double tax treaties. However, the terms of each particular treaty would need to be examined on case-by-case basis.

4. Does your jurisdiction have rules that either restrict the proportion of a company's capital that is comprised of loans by affiliates or that limit tax relief for interest or other funding costs in respect of such loans (for example, thin capitalisation rules)? If so, please explain in what circumstances these rules apply and what (if any) steps can be taken to prevent their application to funding provided by affiliates.

Since 2008, Italy no longer has thin capitalisation rules. Other tax measures were introduced to limit the tax deductibility of interest expenses for corporate income tax purposes (see Question 9).

An incentive to capitalise Italian companies by means of a tax reduction of a "deemed interest" has been introduced (ACE regime). The rate is determined annually by a Ministerial Decree calculated on the company's equity increases. As from 2020 the rate reduction is fixed at 1.3%.

5.If a company (or other opaque entity) that is tax resident in your jurisdiction transfers assets (including shares) to a company (or other opaque entity) that is tax resident in another jurisdiction, what taxes might arise? Are reliefs potentially available, such as where the assets transferred comprise a business? (Please distinguish, if relevant, between assets that are located in your jurisdiction and assets located in another jurisdiction.)

Tax on capital gains

An Italian company is liable to corporation tax (IRES) on any gains made on the sale of assets located anywhere in the world. If the assets have been owned for at least three years, the company can include the realised capital gain as taxable income in the financial year of the sale, or elect to spread it in equal instalments over this fiscal year and in the following four years.

A participation exemption regime applies with regard to capital gains arising from the disposal of a participation, provided that the following conditions are met:

• The participation has been held by the seller for at least 12 months.
• The participation has been accounted for in the balance sheet as a financial asset (immobilizzazioni finanziarie).
• The participation relates to a company resident in a country in which the effective rate of taxation is not more than 50% lower than the tax rate that would have been applied in Italy, or a ruling has been requested on a voluntary basis in which the Italian tax authority confirms that the holding of the participation in the company resident in the relevant country does not represent an artificial localisation of income in this country.
• The participation relates to a company which effectively carries out an entrepreneurial activity (the relevant evidence is not necessary if the company's shares are listed in a regulated market).

Under the participation exemption regime, 95% of the amount of the capital gain arising from the disposal of a participation is exempt.

Capital losses realised in relation to participations which qualify for the participation exemption are not deductible for corporate income tax purposes.

Rollover relief is potentially available to an Italian company on the sale of qualifying shareholdings or in the case of a transfer of a business as a going concern in exchange for shares in an EU company (provided that the conditions of the EU Mergers Directive (Directive 2009/113/CE) are fulfilled).

Registration tax

Generally, a proportional registration tax is payable on the transfer of assets (located in Italy) if a transfer agreement is executed in Italy and the transfer is not subject to value added tax (VAT) (Article 2, a), DPR 131/1986).

Registration tax is also levied on the transfer of real estate located in Italy if the transfer is not subject to VAT, regardless of whether the transfer agreement is executed in Italy or abroad (Article 2, b), DPR 131/1986).

Finally, the transfer of a business located in Italy as a going concern always triggers registration tax at a rate of 3% on the goodwill and on the value of the assets transferred (9% on the value of real estate and buildings, 12% on land and 0.5% on receivables).

As for the transfer of shares and participations, registration tax is payable only in certain circumstances at a flat rate of EUR200.

Both the seller and the buyer are responsible for the payment of registration tax.

Financial transaction tax

A financial transaction tax (FTT) was introduced on 1 March 2013. FTT is charged at 0.2% on the transfer of ownership rights in:

• Shares and other participating securities issued by Italian resident companies.
• Financial instruments representing these shares and/or participating securities, whether or not issued by Italian resident companies.

The tax rate is reduced to 0.1% if the transaction involves listed shares and is executed on a regulated market or a multilateral trading system of an EU or EEA member state which exchanges information with the Italian tax authorities.

VAT

VAT potentially applies to the transfer of assets (excluding shares). The current standard rate is 22%. However, the transfer of a business as a going concern is outside the scope of VAT and registration tax will therefore apply at the proportional tax rate.

6. Is any tax or duty payable on the issue of shares by a company (or other opaque entity) that is incorporated or established in your jurisdiction, or on the transfer of such shares?

No. For transfer of shares, see Question 5.

7. What rate(s) of tax do companies (or other opaque entities) which are tax resident in your jurisdiction pay in your jurisdiction and how is it assessed?

The standard rate of corporation tax (IRES) is 24%. Italian resident companies are liable to corporation tax on their worldwide income profits and capital gains (subject to the provisions of relevant double tax treaties).

Italian source income is also subject to a 3.9% local tax (IRAP) (which can be increased or decreased by about 0.92% depending on the region where the company is located in Italy and on the activity carried out), on a tax basis calculated according to specific rules. IRAP is payable on certain items of the profit or loss as determined by the relevant accounting rules (ITA, GAAP or IFRS), with specific tax adjustments.

With regard to the participation exemption, see Question 5.

In the case of a foreign branch of an Italian resident company, there are two options:

• The ordinary regime which provides for the credit method, whereby foreign branch profit and losses are included in the Italian parent company's taxable basis.
• An optional branch exemption regime, whereby all the branches of the Italian parent company are treated as foreign independent fiscal entities.

Both IRES and IRAP taxable basis is calculated on the basis of the profit and loss account of the company applying certain tax adjustments.

8. Can losses of a company (or other opaque entity) that is tax resident in your jurisdiction be offset against (for example, by way of surrender for tax purposes or as a result of a tax consolidation or group) the profits of another company (or other opaque entity). If so, what conditions apply? Can losses be carried forward for tax purposes?

Where election for the "tax consolidation regime" is made, trading losses can be surrendered to the Italian parent company if accrued after joining the tax consolidation regime.

Tax losses incurred in or after the fiscal year 2011 can be carried forward indefinitely to the following tax years, and in the subsequent tax years any unused carry forward losses can be set off against an amount not higher than 80% of the taxable income for the year.

Tax losses realised in the first three years of activity and connected to a new productive activity can be deducted from an unlimited amount of taxable income in the following fiscal years.

9. Are interest payments tax deductible in your jurisdiction?

Yes. Interest expenses (net of interest income, if any) are deductible within the limits of 30% of the gross operating profit (GOP). The GOP amount is determined making reference to the tax values used to calculate the corporate income taxable basis. Any net passive interest deemed not tax-deductible can be carried forward in the following fiscal years and deducted up to 30% of the relevant GOP.

Active interest exceeding interest expenses in a given fiscal year can be carried forward in subsequent fiscal years without limitation of time.

The excess of 30% EBITDA not used in a given fiscal year to offset interest expenses can be carried forward for the subsequent five fiscal years.

GOP is determined according to specific rules and broadly corresponds to the EBITDA with some adjustments provided by tax rules. For this purpose, interest also includes expenses arising from loans, financial lease agreements, bonds and similar financial instruments and any other transaction having financial purpose, but excluding interest for deferred payment related to commercial debt if already included in the original amount of debt (so-called implicit interest).

The excess of interest expenses generated by a company whose group opted for the consolidated tax regime may be offset by the excess of EBITDA/active interest generated by the other group's companies.

With regard to the OECD BEPS Action 2, as an EU member, Italy is subject to the two EU anti-tax avoidance directives: ATAD (Council Directive (EU) 2016/1164 dated July 12, 2016) and ATAD 2 (Council Directive (EU) dated May 29, 2017, which amends ATAD). The directives have been implemented in Italy and include anti-hybrid rules that cover hybrid mismatches between EU member states, and between EU member states and non-EU countries.

Italy already had domestic legislation applicable to some hybrid mismatch transactions/products. For example, under Articles 89 and 44 of TUIR, profit distributed by a non-resident entity is excluded from the taxable base of the receiving Italian entity under the participation tax regime only to the extent that this income is not tax deductible by the distributing entity.

With regard to BEPS Action 4 on interest deduction, the ATAD provides for an interest limitation rule to avoid virtual arrangements aimed at minimising tax payments. Italian legislation already had a provision for computing the maximum amount of deductible interest (30% of EBITDA).

10. Are withholding taxes applied to dividends, interest and/or other payments made by a company (or other opaque entity) that is tax resident in your jurisdiction to a company (or other opaque entity) that is tax resident in another jurisdiction? If so, what rates apply? Can they be reduced or eliminated in any circumstances, and is any relief available from such sales taxes?

Dividends

A final withholding tax at the rate of 26% applies to dividends paid to foreign shareholders. Non-resident shareholders (other than holders of privileged shares) are entitled to apply for a tax refund if the profits are also subject to tax abroad.

The withholding tax is equal to 1.20% for dividends paid to European companies out of profits accrued in the fiscal year as of 1 January 2017.

However, there is no withholding obligation on dividends paid to European companies that hold at least 10% of the share capital of an Italian company for at least one year (under the EU Parent/Subsidiary Directive (2011/96/UE)) provided that the election under Article 27-bis of Presidential Decree 29 September 1973, No. 600 is applied.

Double tax treaties provide reduced rates of withholding, usually between 5% and 15%.

The same regime applies to the payment of dividends in kind.

Interest

A withholding obligation of 26% applies to interest payments made to foreign companies.

There is no withholding obligation on certain kinds of bond and on interest paid by banks in their ordinary course of business. The withholding tax also does not apply to qualified loans granted by EU banks, insurance companies, mutual funds (both licensed to carry out banking activity) and institutional investors on medium/long term loans granted to Italian operating companies.

Double tax treaties provide for reduced rates of withholding, usually between 10% and 15%.

Under the Interest and Royalty Directive (Council Directive 2003/49/EC of 3 June 2003), under certain conditions, interest paid to EU related entities is not subject to Italian withholding tax.

Royalties

A withholding obligation of 22.5% applies to royalties on intellectual property, licences and know-how.

Double tax treaties provide for reduced rates of withholding, usually between 5% and 15%.

Under the Interest and Royalty Directive (Council Directive 2003/49/EC of 3 June 2003), under certain conditions, royalties paid to EU related entities are not subject to Italian withholding taxes.

Interest arising from Italian government bonds and other public bonds is subject to a 12.5% withholding tax.

Patent box regime

The 2015 Financial Act (Law No. 190/2014) has introduced a new tax regime aimed at boosting the development of qualified intangibles and research and development (R&D) activities in Italy.

Taxpayers who carry on R&D activities related to qualified intangible assets can opt for the patent box regime. Foreign entities are eligible for this regime (in connection with their Italian permanent establishments) if they:

• Are resident in a country which has entered into a double tax treaty with Italy.
• Have arranged an exchange of information arrangement with Italy.

Once obtained, the option cannot be revoked for five fiscal periods.

Under the patent box regime, the taxable base of income arising from intangibles is progressively reduced up to 50% from the 2017 fiscal period onwards. The eligible income (to which the 50% exemption is then applied) is determined by multiplying the overall income derived from the above intangibles by the ratio of qualifying expenses (those incurred for R&D activities to develop and maintain the relevant assets) over the total amount of expenses incurred to develop the intangible asset.

11. What is the tax treatment of dividends and other distributions of profit by a company (or other opaque entity) that is tax resident in your jurisdiction to a corporate shareholder (domestic or overseas)?

Italian corporate shareholders may benefit from the participation exemption regime, under which 95% of the dividend amount is exempt from taxation.

Dividends paid to foreign non-European or SEE resident corporate shareholders are subject to a 26% withholding tax (see Question 10), otherwise under the participation exemption rules a final 1.2% final withholding tax is due. If the conditions provided by the EU Parent-Subsidiary Directive (2011/96/UE) are met, no withholding tax applies.

Double tax treaties provide for reduced rates of withholding (between 5% and 15%).

12. What is the tax treatment of dividends received by a company (or other opaque entity) that is tax resident in your jurisdiction from a company (or other opaque entity) that is tax resident in another jurisdiction? In particular, what mechanism (participation exemption or credit method) is used to prevent double taxation, what conditions must be satisfied in order to qualify for such exemption or credit, and is credit available for underlying tax (such as, corporate income tax paid, by the dividend paying company, in respect of the profits out of which the dividend is paid)?

Italy operates a credit system for taxes paid abroad. An Italian company is potentially liable to tax on dividends received from a foreign company but credit is given for tax that has been withheld abroad. In general terms, if these taxes are equal to or greater than 24% of the gross dividend no further tax is payable in Italy.

Foreign dividends may be exempt from tax in Italy if paid by European controlled entities, which satisfy the Parent-Subsidiary EU Directive. As a general rule, the participation exemption regime applies to dividends received from qualified non-Italian resident companies, whereby dividends are 95% exempt from Italian corporate tax. The company that pays dividends should be tax resident in a country that exchanges tax information with the Italian tax authorities (included in a "white list" regularly updated by Ministerial Decree).

However, dividends deriving from companies incorporated in a country not included in the "white list" (Tax cooperative countries) are 100% taxable unless a positive ruling has been obtained from the Italian tax authority (Article 167 (5) (b) of Presidential Decree 22 December 1986, No. 917).

13. Are there any circumstances in which (undistributed) profits of a company (or other opaque entity) that is tax resident in another jurisdiction can be imputed to a corporate shareholder that is tax resident in your jurisdiction by tax authorities (controlled foreign company rules)?

Decree No. 78 of 1 July 2009 has introduced stricter rules in relation to the controlled foreign companies (CFC) regime. Under the CFC regime, CFCs are treated as transparent entities and their profits are attributed to the Italian taxpayer (company or individual) who controls the CFC.

Before the new rules came into force, Italian CFC regulations only applied when the foreign entity was a resident of a tax haven included in a "black list". Decree No. 78/2009 has broadened the scope of the CFC rules to include entities located in any jurisdiction (not only in a tax haven), provided the following two conditions are met:

• The CFC is subject, in its own country, to an effective rate of taxation which is more than 50% lower than the tax rate that would have applied if resident in Italy. In this case, the Italian resident controlling person should first determine the taxable profits of the CFC and then verify if the tax burden of the CFC is lower than 50% of the tax rate that would have applied, had the company been resident in Italy.
• The CFC derives more than 50% of its revenues from the management, holding or investment in securities, shareholding, credits or other financial assets, from the disposal or licensing of intellectual property rights, or from the performance of intra-group services (including financial services). In this case, the Italian resident controlling person should verify whether the "passive income" and revenues from intra-group services exceed 50% of total revenues.

The Decree does provide for a special safeguard clause, under which the CFC rules will not apply, notwithstanding that the company meets the conditions outlined above. The Italian resident shareholder may apply for an advance tax ruling under the procedure set out by Article 167, paragraph 5, of Presidential Decree No. 917 of 1986, to demonstrate that "the setup of the CFC in the foreign country is not artificial and is not aimed at obtaining any undue tax advantage".

14. Does your jurisdiction have transfer pricing rules, such as rules that require taxable profits of a company (or other opaque entity) that is tax resident in your jurisdiction to be calculated on the basis that transactions between it and any affiliate of it are on arm's length terms? If so, please explain broadly how they apply?

Yes. Transactions between Italian companies and foreign affiliates must be on an arm's length basis. If not, they can be adjusted, and Italian corporate tax is due on the adjusted basis.

Standard income tax penalties apply, broadly from 90% to 180% of the amount of the assessed tax, plus interest. Criminal penalties could also apply in certain circumstances.

Law Decree No. 78 of 31 May 2010 concerning "Urgent measures for financial stabilisation and economic competitiveness" has introduced, for the first time, a specific transfer pricing documents provision into Italian tax law. Under the new provision, if the taxpayer provides the tax authorities with transfer pricing documentation during a tax audit, there will be no tax penalties on possible tax adjustments brought by the tax authorities if they determine that the intercompany transaction is not compliant with the arm's length principle. The Tax Revenue Director has specified details of the documents and supporting data required to gain relief from any tax penalties in a provision dated 29 September 2010.

15. What is the taxation treatment of below market rate loans made to the joint venture by its members or shareholders? Is any of the foregone interest imputed as income to the lender(s)? Will a zero rate loan be treated as a gift, and (if so) what are the tax consequences of this?

If members or shareholders of an Italian joint venture (JV) lend money to the JV at below market rate, and the members or shareholders are non-Italian tax resident, the foreign tax authorities may challenge the interest rate under the transfer pricing rules. Under a recent procedure introduced by Ministerial Decree of 14 May 2018, the higher taxable interest rate which would be assessed to the lender could then be recovered as an additional interest expense at the level of the Italian JV.

If the JV and its members or shareholders are both tax resident in Italy, no transfer pricing rules apply. However, the general tax principle whereby a cost must relate to the business to be tax deductible (principio di inerenza) should be taken into account, in particular if the cost of funding for the member or shareholder is higher that the interest rate charged to the JV, the balance between the interest cost of funding and the loan agreed rate (under market value) could be disregarded to the lender.

16. What taxes might arise on the initial transfer of businesses or assets from the joint venture partners to the joint venture entity, if the latter is established under the laws of your jurisdiction as a partnership (or other transparent entity)? Are reliefs potentially available? (Please distinguish, if relevant, between assets that are located in your jurisdiction and assets located in another jurisdiction.)

EUR200 stamp duty is payable on a transfer of business or assets from the JV partners to the JV entity if the transfer implies a participation increase in the JV entity. VAT will not apply to such a transfer.

The transferor may be subject to tax on any capital gain made on the sale of assets located anywhere in the world.

If consideration is paid for the transfer of a business or assets, the transaction is regarded as a sale for fiscal purposes. A 3% registration tax on goodwill value, as well as capital gain tax, may be due on the value of the assets (see Question 5). Generally, recapture or claw back of any tax relief does not apply in these circumstances.

17. Are withholding taxes, or sales taxes (such as value added tax), applied to payments (such as distributions of profit, management charges or a payment for the use of a brand/other intellectual property) made by a partnership (or other transparent entity) that is established under the laws of your jurisdiction to a foreign company (or other opaque entity) that is tax resident in another jurisdiction (for example, to the members of the partnership/opaque entity)? If so, what rates apply? Can they be reduced or eliminated in any circumstances, and is any relief available from such sales taxes (such as for transactions within a VAT group).

VAT does not apply to a distribution of profit to a foreign company made by an Italian partnership or transparent entity. For withholding tax, see Question 10.

With regard to management charges or payment for the use of a brand/other intellectual property, application of VAT and withholding tax depends on the transaction and the qualification of the service provided. If the payment is in specie, VAT may be payable depending on the nature of the asset transferred. However, a double tax treaty may provide for a withholding tax reduction.

18. Are companies (or other opaque entities) that are incorporated under the laws of your jurisdiction automatically tax resident in your jurisdiction?

As a general rule, companies incorporated in Italy are considered to be tax resident in Italy, unless the place of business of the company is located abroad. If this is the case, the company will not be resident in Italy for tax purposes or it may have a dual residency regime. Any situation can be cleared through the relevant tax treaty provision or through a tax ruling with the Italian tax authority.

19. Which of the approaches to preventing treaty abuse ("limitation on benefits" rule or "principal purpose" test) does your jurisdiction include in its tax treaties?

In relation to the Multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting (MLI), Italy has opted to apply the principal purpose test (PPT) alone, except for those tax treaties that already contain provisions that deny all of the benefits that would otherwise be provided under the tax treaties where the principal purpose or one of the principal purposes of any arrangements or transactions, or of any person concerned with the latter was to obtain those benefits.

Furthermore, Italy has not agreed to the application of the simplified limitation on benefits rule (LOB) thus entirely excluding its application with respect to its tax treaties. In addition, Italy has neither expressed an opinion regarding the symmetrical/asymmetrical application of the simplified LOB. Therefore, when the other contracting jurisdictions do not accept the application of the PPT alone, then the contracting jurisdictions shall try to reach a mutually satisfactory solution.

20. Does your jurisdiction have anti-hybrid rules, and to what extent are these compliant with the BEPS Action 2 proposals?

See Question 9.

21. Are any sales taxes (such as value added tax), applied to royalties, service fees/management charges or other payments made by a company (or other opaque entity) that is tax resident in your jurisdiction to its shareholders/members (or their affiliates)? If so, what rates apply? Can they be reduced or eliminated in any circumstances, and is any relief available from such sales taxes (such as for transactions within a VAT group)?

Royalties and service fees/management charges paid by an Italian company to a non-Italian resident entity are potentially subject to VAT provisions and withholding tax. However, the VAT treatment and the application of any withholding tax must be assessed on a case-by-case basis with reference to the legal nature of the services provided and the fiscal residence of the parties involved.

In general, management fees and royalties paid to non-Italian entities are subject to a 30% withholding tax, calculated on an adjusted taxable base that may be reduced under a relevant double tax treaty, if applicable. VAT is generally not levied on such payments because of the general VAT territoriality rules.

Reproduced from Practical Law with the permission of the publishers. For further information, visit www.practicallaw.com or call +44 (0)20 7542 6664.

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.