Allowances for corporate equity
Deductions from taxable base for regional tax on production

On December 6 2011 the government passed Legislative Decree 201/2011, which included a number of tax measures affecting corporate and individual taxpayers. The decree was amended and converted into Law 214/2011 on December 22 2011. Further changes followed in Legislative Decree 16/2012, which was passed on March 2 2012.

Allowances for corporate equity

In order to encourage corporate self-financing, the decree has introduced an incentive - known as the 'allowance for corporate equity' - which enables companies to deduct an amount equal to the notional return on invested capital from their taxable income for the purposes of income tax and corporation tax. This provision, which is effective from the tax year underway on December 31 2011, applies to:

  • joint stock companies (ie, joint stock companies and limited partnerships with share capital, limited liability companies, cooperatives and European cooperatives) that are tax resident in Italy;
  • public or private bodies - excluding companies, but including trusts - which are tax resident in Italy and are exclusively or predominantly engaged in commercial activities;
  • non-resident companies and bodies in relation to their permanent establishments within the Italian territory; and
  • individual enterprises, non-limited partnerships and limited partnerships (subject to certain conditions).

This benefit is conditional on the entities being subject to particular tax regimes. Guidelines on how to qualify for and use the benefit will be established in a separate decree, to be issued by the Ministry of the Economy.

The notional return on invested capital is determined by applying a deemed rate to the net equity increase (ie, the difference between equity increases and reductions) as compared to the equity result as of December 31 2010. For these purposes, 'equity' as of the end of the 2010 financial year is the net equity shown on the balance sheet at year-end, without considering net income for the 2010 tax year. In order to determine the equity increase applicable for tax relief purposes, the factors for entities to consider include:

  • contributions in cash, starting from the payment date; and
  • net profits allocated to reserves, except for those allocated to reserves that are designated as unavailable.

In the case of newly established businesses and companies, the equity increase corresponds to the total initial equity contribution.

The following transactions qualify as equity reductions, with effect from the beginning of the tax year in which they occur:

  • equity reductions as a result of distributions to shareholders (ie, as dividends) or to partners;
  • acquisitions of shareholdings in controlled companies; and
  • acquisitions of businesses or going concerns.

The deemed rate to be applied is 3% for the first three-year period. With effect from the fourth tax year, a decree from the Ministry of the Economy will determine the applicable rate by January 31. The rate will be calculated on the basis of the average return on public bonds, but may be increased by 3% to compensation for greater risk.

If the notional return exceeds the taxable income calculated for a given tax year, the excess may be rolled over to subsequent tax years for corporate equity allowance purposes.

Deductions from taxable base for regional tax on production

With effect from the tax year following that underway on December 31 2011, higher deductions from taxable income will apply for the purposes of the regional tax on production. Such deductions will be available on the basis of the number of employees on permanent contracts (including those recruited before 2012) at work in the relevant tax year. The amounts of the deductions are as follows:

  • from €4,600 to €10,600 for each female worker and each worker under 35; and
  • from €9,200 to €15,200 for workers in the above categories who are employed in certain regions (ie, Abruzzi, Basilicata, Calabria, Campania, Molise, Apulia, Sardinia and Sicily).

As from the tax year underway on December 31 2012, the taxable income calculated for income tax and corporation tax purposes can be reduced by deducting an amount equal to the regional tax on production due in relation to labour costs (ie, relating only to employees and similar), net of any deductions available at present.

Such deduction may be granted to joint stock companies and other bodies that carry out business activities, including partnerships, individual enterprises, individual and associated professionals, banks and finance and insurance companies.

In line with Article 99 of the Corporate Tax Act, the deduction is available in the tax year in which the regional tax on production is paid (in compliance with the 'cash basis' principle).

For further information on this topic please contact Marco Abramo Lanza, Simona Zangrandi or Franco Pozzi at Studio Legale Tributario Biscozzi Nobili by telephone (+39 02 763 6931), fax (+39 02 780 146) or email ([email protected], [email protected] or [email protected]).