Vasapolli

At a Glance

- Corporate income tax (IRES): 27.5%.
- Regional tax on productive activities (IRAP): 3.9% (1).
- IRES taxable income: worldwide income.
- IRAP taxable income: added value produced in Italy.
- Losses: carry forward allowed for an unlimited number of fiscal periods; carry back not allowed.
- Domestic consolidation: allowed.
- Branch profit tax: not applicable.

(1) some costs are not deductible when determining the taxable income - the basic rate of tax can be increased or decreased at a regional level.

Corporations

Corporate profits are subject to two taxes: IRES, a state tax, and IRAP, a regional tax. As a rule, IRAP paid on labour expenses and IRAP paid on interest expenses (10% flat rate deduction) are deductible in determining the taxable base for IRES.

Partnerships

Partnerships other than Limited Partnerships by Shares are treated as transparent entities and are not subject to IRES. However, they are subject to IRAP.

In the case of partnerships, the taxable income is computed in the hands of the partnership (which must keep the books and accounts), but is taxed in the hands of the partners in proportion to their entitlement to the partnership's profits.

Non-resident Companies

Non-resident companies and entities of every kind (including partnerships) are subject to IRES on income derived from Italy. They are also subject to IRAP on income derived from a permanent establishment maintained in Italy for at least three months (see Taxation of Non-Resident Companies).

Residence

Resident companies are those that for the greater part of the tax year have had their legal headquarters, place of effective management or main business purpose in Italy. The place of incorporation is not relevant.

IRES Taxable Income

Resident companies are subject to IRES on their worldwide income. Foreign income is therefore included in the taxable base.

IRAP Taxable Income

IRAP is levied only on the added value produced in Italy; added value produced abroad is excluded from the taxable base. In particular, IRAP is levied on the net value of the production derived in each Italian region.

Taxpayers carrying out business activities in more than one region by employing personnel in each region for more than 3 months must apportion their taxable base between the regions on the basis of the remuneration paid to personnel employed in each region.

Taxable income and deductible items are determined according to the profit and loss account (they are not influenced by the rules applicable for IRES). However, in assessing the taxable base of IRAP, you must consider the following:
- part of the cost of employees (1), the directors’ fees, the provisions for liabilities and charges, the amounts written off receivables and tangible and intangible fixed assets, the financial charges, including interest payable, are not deductible;
- the financial profits, including dividends and interest received, are not taxed;
- depreciation and amortization are deductible according to the General Accepted Accounting Principles adopted for the drawing up of the balance sheet. However, trademarks and goodwill may be depreciated up to one eighteenth for each fiscal year.

(1) Cost of employees with an open-ended contract are fully deductible.

Depreciation and Amortization

Depreciation of tangible assets is permitted on a straight-line basis. In particular, depreciation is determined by applying the coefficients established by the Ministry of Finance to the cost price, reduced by half for the first fiscal year.

In general, land is not depreciable. For the purposes of depreciation of buildings, the land on which the building has been built and the land that is considered part of the building are not depreciable. The value of such land is determined as the higher of (a) the value written in the balance sheet in the year of purchase and (b) 20% of the aggregate value of the building (increased to 30% in the case of industrial buildings). However, if the land has been purchased separately before the construction of the building, the above value of the land is equal to the price that was paid for it.

If the cost of tangible assets is less than euro 516.46, it can be deducted entirely in the financial year of acquisition.

Trademarks may be depreciated up to one eighteenth for each fiscal year. Patents, know‑how and other intellectual property may be depreciated up to one half for each fiscal year.

Goodwill may be depreciated only up to one eighteenth of the value for each fiscal year.

Concession rights may be depreciated according to the period of use set by law or by contract.

Valuation of Inventory

The valuation of the inventory is left up to the taxpayer, provided the value is not lower than the value determined by tax law.

The minimum value for tax purposes is the lower of the cost or market value. Goods in stock are grouped in categories, depending on their value and characteristics.

In addition to the LIFO (last in, first out) method, the FIFO (first in, first out) and the average cost methods are also accepted when determining the cost value if the company uses such methods for company law purposes.

Research and Development

Research and development costs are deductible in the fiscal year in which they are incurred, or in equal portions in that year and the following years, but not after the fourth following year.

Advertising and Other Publicity Expenses

Advertising and other publicity expenses are deductible in the fiscal year when they are incurred or in equal portions in that year and the 4 years that follow.

Entertainment Expenses

Entertainment expenses are fully deductible in the year in which they are accrued provided that they are inherent to the business activity and their amount is appropriate pursuant to the criteria set with a Ministerial Decree.

As a rule, entertainment expenses are deductible within the following limits:
- 1.3% of the revenues up to euro 10,000,000;
- 0.5% of the revenues between euro 10,000,000 and euro 50,000,000;
- 0.1% of the revenues beyond euro 50,000,000.

Costs of Vehicles

The costs incurred for the acquisition, maintenance, repair and operation of trucks/lorries, autobuses, caterpillars and such are fully deductible.

The costs incurred for the acquisition, maintenance, repair and operation of motor vehicles (cars, motorcycles and mopeds) that are used directly in, and absolutely necessary for, the business purpose of the company (e.g., the cars of a rental company) are fully deductible.

The other expenses related to motor vehicles (cars, motorcycles and mopeds) are deductible with the following limitations:
a) vehicles put at the disposal of employees for the greater part of the fiscal year are deductible by up to 70%;
b) vehicles used by companies acting as sales agencies are deductible by up to 80%;
c) vehicles used for other business purposes and in other situations are deductible by up to 20%.

In the above cases b) and c), the costs incurred for the acquisition of cars are allowed up to a limit of euro 18,075.99 (euro 4,131.66 for motorcycles and euro 2,065.83 for mopeds). Long-term rental fees for cars are limited to euro 3,615.20 (euro 774.69 for motorcycles and euro 413.17 for mopeds) per fiscal year .

Costs of Telephones and Internet Connections

The costs incurred for the acquisition, maintenance, repair and operation of fixed and mobile telephones and Internet connections are deductible by up to 80%.

Directors' Fees

Directors' fees, both in fixed amount or as a proportion of profits, are fully deductible on a cash basis.

Finance Leasing Fees

Leasing fees are deductible by the lessee only if the contract lasts for more than half of the relevant depreciation period (or the whole relevant depreciation period in the case of leasing of cars, motorcycles and mopeds described in points b) and c) of the paragraph Costs of Vehicles). Leasing fees concerning immovable property are deductible with a minimum of 12 years. The relevant depreciation period is that determined by applying the coefficients established by the Ministry of Finance (see above Depreciation and Amortization).

In the case of leasing of immovable property, the portion of leasing fees that represents the repayment of the principal attributable to land, determined as described above with reference to depreciation, is not deductible.

Credits and Debits in Foreign Currencies

The evaluation of credits and debits in foreign currencies according to the exchange rates as of the last day of the financial year is not relevant for tax purposes, unless hedging contracts exist and are also evaluated according to the exchange rates as of the last day of the financial year.

Companies that have regular transactions in foreign currencies may keep accounts in various currencies. The balance of such accounts must be evaluated according to the exchange rates of the last day of the financial year.

Participation Exemption

Dividends

Dividends received by resident companies from other resident companies are tax exempt for 95% of their amount.

Foreign dividends are treated in the same manner as domestic dividends. However, the 95% exemption is subject to the condition that the distributing company is not a resident of a state or territory that has a privileged tax regime for Controlled Foreign Companies (CFC) purposes (see Controlled Foreign Companies (CFC) Rules). This holds true unless a ruling has been obtained that the holding of the shares in the controlled foreign company does not achieve the localization of income in a state having a privileged tax regime.

Capital Gains and Losses

Gains on the alienation of shares, financial instruments assimilated to shares and interests in resident companies or partnerships are tax exempt for 95% of their amount under the “Participation Exemption” regime. The exemption applies, provided that (i) the participation has been continuously held for at least 12 months (the LIFO method applies), (ii) the participation is classified as a financial asset in the first balance sheet closed after the acquisition and (iii) the participated company is engaged in a business activity (companies whose assets are mainly represented by real estate not used in the business activity are not deemed to perform a real business activity). Corresponding capital losses are not deductible however.

Capital gains on shares in non-resident companies are treated in the same manner as domestic gains. However, the exemption is subject to the condition that the participated company is not a resident of a state or territory that has a privileged tax regime for Controlled Foreign Companies (CFC) purposes (see Controlled Foreign Company (CFC) Rules). This holds true unless a ruling has been obtained that the holding of the shares in the controlled foreign company does not achieve the localization of income in a state having a privileged tax regime.

Interest expenses

The part of interest expenses that exceeds interest income (net interest expenses) is deductible up to an amount equal to 30% of the "gross operating income" (EBITDA). The EBIDTA is calculated as the difference between (i) revenues and (ii) costs of production, excluding depreciation, amortization and financial leasing instalments.

Non-deductible interest expenses of a fiscal period may be carried forward and deducted in the following fiscal periods, provided and in the limits that in the following fiscal periods the net interest expenses accrued are lower than 30% of EBITDA.

The excess EBITDA (i.e., the amount of the EBITDA that exceeds the net interest expenses) of a fiscal period can be brought forward and added to the EBITDA of the following fiscal periods.

If a company joins the domestic consolidation regime (see Domestic and Worldwide Consolidation), non-deductible interest expenses may be offset against the taxable income of another company included in the domestic consolidation, provided and in the limits that the latter company has an excess EBITDA.

Anti-Tax-Haven Legislation

Anti-tax-haven legislation is applied to prevent the use of tax haven jurisdictions. In particular, costs and expenses are not deductible if they arise from transactions with companies resident in a non-European Union (EU) Member State with a preferred tax regime. The Ministry of Finance has issued a list of states and territories with a preferred tax regime. The deduction is allowed, however, if the resident company can prove that the non-resident company actually and primarily carries out a business activity, or that the transactions have a business purpose and have in fact been concluded.

Taxpayers may ask for advance rulings on the applicability of this anti-avoidance provision.

Transfer Pricing

Business income of a resident enterprise that arises:

- (i) from transactions with non‑residents that have direct or indirect control over the resident enterprise,

- (ii) from transactions with non-resident companies controlled (directly or indirectly) by the resident enterprise, and

- (iii) from transactions between resident and non-resident companies that are under the common control of a third company,

is assessed on the basis of the "normal value" of the goods transferred, services rendered or services received if an increase in taxable income derives from it. In principle, the definition of "normal value" is the same as the definition of arm's length price.

The provision also applies if a decrease in taxable income derives from it, but only if the mutual agreement procedure provided in double tax treaties is used. A circular of the Minister of Finance indicates the different methods of valuation (arm's length principle) to be used for each type of transaction.

From 2010, if the taxpayer maintains proper documentation as to how the transfer prices were set, no penalty will be charged if the tax authorities contest the transfer prices that have been applied. The standards of this documentation have been set by a Ministerial Decree.

As an alternative, the taxpayer may recur to the International ruling system under which advance pricing agreements may be concluded with the tax authorities regarding:

- specific transfer pricing issues, including the attribution of income or losses to Italian permanent establishments of foreign taxpayers and to foreign permanent establishments of Italian taxpayers, and

- the application of tax treaties to dividend, interest and royalty flows.

The ruling is binding on both parties for 3 fiscal years.

Controlled Foreign Company (CFC) Rules

Under CFC legislation, profits of a non-resident entity are deemed to be profits of an Italian resident (individual or company) if (i) the resident controls, directly or indirectly, the non-resident entity and (ii) the non-resident entity is resident in a tax haven as defined in a blacklist issued by the Ministry of Finance. The profits of the foreign controlled entity are taxed at the resident's average tax rate (not lower than 27%).

The application of the CFC rules can be avoided if the resident company proves that the non-resident entity predominantly carries on an actual business in the market of the country in which it is resident, or that the participation in the non-resident entity does not achieve the localization of income in tax haven countries or territories.

The CFC rules are also extended to "related entities", i.e. those in which the Italian resident directly or indirectly holds a profit entitlement exceeding 20% (10% in the case of listed companies). Under the rule, the profits of the non-resident related company flow proportionally through to the Italian resident taxpayer, which will be liable to tax in Italy on the higher of the profits of the related foreign company as determined in its books, or a deemed income to be determined on the basis of coefficients of return.

Taxpayers may ask for advance rulings on the applicability of this anti-avoidance provision.

Losses

For IRES purposes only, losses may be carried forward and deducted from income of the subsequent fiscal periods up to 80% of the taxable income of each fiscal period.. Losses incurred in the first three fiscal periods may be carried forward and deducted from 100% of the taxable income of the subsequent fiscal periods, provided that the losses are generated in an new activity (i.e. an activity that was not previously carried out by another entity). Carrying-forward losses can be restricted, however, if ownership of the company is transferred and the company changes its activities.

Losses may not be carried back.

Allowance for corporate equity (ACE)

The “ACE” incentive allows a company to deduct from the taxable income an amount equal to the notional return of the new capital invested into resident corporations.

The deductible amount is computed as a percentage of the net equity increase (i.e. new shareholders’ contribution and allocation of the profits to reserves, net of distributions) against the opening equity fund as at 31/12/2010.

Under no circumstances, however, the net equity increase can exceed the company's equity at the end of the given fiscal year.

The rate to be applied to the net equity increase, as defined above to determine the deductible amount, is fixed by a Ministerial Decree and it takes into consideration the average yield of the public securities plus a premium risk. Currently, the applicable rate has been determined as 4% for the fiscal year 2014, 4,5% for 2015 and 4,75 for 2016.

IRES and IRAP Rates

IRES is applied at the rate of 27.5%.

IRAP is applied at the rate of 3.9%. However, regional authorities may decide to lower the taxation up to 2.98% or to increase it up to 4.82%.

Taxable Period

The fiscal year for corporate income tax purposes is the financial year of the company, as determined by the articles of incorporation.

The fiscal year for partnerships is the calendar year.

Tax Returns

Resident companies must file their corporate income tax return electronically by Internet within 9 months of the end of the financial year.

Payment of Tax

Corporate income tax is normally paid as two advance payments for the current tax year, based on the tax paid for the preceding tax year, the balance being payable:
- by the 16th day of the 6th month following the end of the financial year for companies approving the balance sheet within the statutory 120-day period;
- by the 16th day of the month following the approval of the balance sheet for companies approving the balance sheet later than the statutory 120-day period (thus benefiting from the 180-day term).

As a rule, advance payments are almost equal to the amount of taxes paid for the previous fiscal year. Reduced amounts can be paid if the company expects to realize a lower taxable income.

Advance payments must be paid in two instalments, the first due at the time a company pays the balance for the previous financial year and the second due by the end of the 11th month of the financial year.

All payments must be made electronically by Internet.

Rulings

If there is uncertainty regarding the correct interpretation of the tax provisions, a taxpayer may obtain a private ruling by filing a written request with the tax authorities.

In addition, special ruling procedures are provided with respect to:
- the application of the anti-avoidance provision;
- the application of the provision on fictitious interposition;
- the deductibility of advertisement and entertainment expenses;
- the application of the anti-tax haven legislation;
- the application of the Controlled Foreign Company Rules;
- the application of the arm's length principle of the transfer pricing rules.

Double Taxation Relief

Unilateral relief

In general, tax credit covers only direct foreign taxes, i.e. withholding taxes and taxes on business income.

In particular, unilateral relief from double taxation of income derived from abroad is granted in the form of:
- an ordinary tax credit for foreign income or withholding tax offset against Italian corporate income tax, and
- an exemption for the value of production derived abroad for the purposes of IRAP.

The foreign tax credit, calculated on a per-country basis, is limited to an amount equal to that part of the Italian tax that is attributable proportionally to that foreign-source income. In the case of partially exempt income, the foreign tax is reduced proportionally to the income taxable in Italy.

You must claim the tax credit in the tax return for the year in which the foreign tax is paid. If not, the right to the tax credit is lost.

Treaty relief

The double taxation treaties concluded by Italy normally provide for the avoidance of double taxation in accordance with the OECD Model Convention. The general method for avoiding double taxation is the credit method, which corresponds to the foreign tax credit provided under domestic law.

Domestic and Worldwide Consolidation

Both domestic and worldwide consolidation is available.

Both the controlling company and the controlled companies included in the consolidation must exercise the option for domestic consolidation. Once exercised, the option is irrevocable for a period of 3 fiscal years.

In order to exercise the option, the fiscal year of the consolidated controlled companies must be the same as that of the controlling company.

The effect of the domestic consolidation is that all taxable income of the controlled companies is aggregated and taxed at the level of the controlling company, with certain adjustments.

Worldwide consolidation is also available, but it is rarely applied because its rules are excessively strict.

General Anti-Avoidance Rule

The tax authorities may disallow the tax advantages achieved by any act or transaction that is carried out, without valid economic reasons, to avoid obligations or prohibitions contained in Italian law and obtain a tax saving. This applies only if the tax advantage results from (among others):
- mergers, divisions, transformations, voluntary winding-ups and distributions to shareholders of reserves not consisting in profits;
- contributions to the capital of companies and transactions concerning branches of activity;
- transfers of debt claims and excess tax credits;
- European Union (EU) mergers, divisions, transfers of assets and exchanges of shares;
- transfer abroad of the registered office of an Italian company;
- transactions concerning securities and financial instruments;
- payments of interest and royalties eligible for the exemption under the EU Interest and Royalties Directive (2003/49/EC), if made to a person directly or indirectly controlled by one or more persons established outside the European Union;
- transactions between resident entities and their affiliates resident in tax havens and concerning the payment of an amount under a penalty clause.

Mergers and Divisions

The merger of two or more companies is tax neutral and does not constitute either the realization or distribution of capital gains or capital losses by the merged companies.

The division of a company is tax neutral and does not constitute either the realization or distribution of capital gains or capital losses by the divided company.