Legislative Decree no. 147 of 14.9.2015 ("Internationalization Decree") introduced significant innovations into the national legal system with the aim of making the tax system fairer, more transparent, competitive and attractive, with the main aim of encouraging the internationalization of the entrepreneurial context, in application of the recommendations made within the European Union.
Among the most important innovations, the Internationalization Decree:
- modified the regulation of international tax rulings; and
- introduced the procedure for the advance tax ruling on new investments.
2. New rules on international tax rulings for enterprises with international business operations.
The international tax ruling procedure (ruling internazionale) came into force in 2004, pursuant to the enactment of art. 8 of Law Decree no. 269 of 30.9.2003 (“Law Decree no. 269/2003”), in order to allow multinational enterprises to reach a binding agreement with the Italian tax authority, especially with regard to transfer pricing and cross-border payment of dividends, interest and royalties.
In this respect, art. 1 of the Internationalization Decree repealed art. 8 of Law Decree no. 269/2003 by introducing an innovative and general procedure under art. 31-ter of Presidential Decree no. 600 of 29.9.1973 ("Presidential Decree no. 600/1973").
As a consequence, the modified international tax ruling procedure was enacted with Regulation no. 2016/42295 of the Director of the Revenue Agency of 21.3.2016 (the “Regulations”), which broadens the scope of this ruling procedure (now called “accordi preventivi per le imprese con attività internazionale”) which, in addition to transfer pricing, may apply, mainly, to the following areas:
- the prior definition of the outgoing or incoming values in the event of transfer of residence from or towards Italy (articles 166 and 166-bis of the Income Tax Code, “TUIR”);
- the attribution of profits and losses to a foreign permanent establishment of a resident company/entity or to the Italian permanent establishment of a non-resident subject;
- the payment or receipt of dividends, interest and royalties and other item of income to or from non-residents;
- the prior assessment of the existence of a permanent establishment in Italy, in the light of the criteria provided for by Article 162 of the TUIR and pursuant to double tax treaties entered into by Italy.
The new regime may be elected by the so-called "companies with international activities" including companies which operate and/or intend to operate in the near future in Italy, regardless of their actual residence.
The ratio of the tax ruling is twofold:
- on the one hand, to strengthen the existing measures with further instruments that are attractive to foreign investors, aimed at creating a context of certainty and simplification;
- on the other hand, to bring the preventive agreements back into line with the so-called "forms of preventive, consensual and shared exercise of the powers falling within the competence of the offices of the Revenue Agency".
These agreements bind the parties that have entered into them, provided that there are no changes in the factual and legal framework in the tax period of the stipulation and in the following four. In other words, the agreement is stipulated with the implicit "rebus sic stantibus" clause and therefore its effectiveness depends on the permanence of the factual and legal circumstances on the basis of which it was concluded.
As for the temporal effectiveness of the agreement, the legislator has also provided for a sort of retroactive effectiveness (the so-called "roll-back") operating only in two mandatory cases:
- if the agreement results from agreements concluded with the competent authorities of other State as a result of mutual agreement procedures provided for in the double tax treaties;
- if the factual and legal circumstances underlying the (ordinary) agreement procedures have remained unchanged for one or more tax periods prior to the conclusion.
Although the Italian tax authorities are prohibited from exercising investigative powers in relation to the subject matter of the agreement, most frequently the international tax rulings are evaluated in order to prevent abuse of law. On this matter, the Italian Tax Authority clearly stated in the past, with reference to the previous procedure, that tax investigation must be exercised particularly cautiously. In fact, there is an overlap of administrative means which, although very different one another, require the execution of similar investigative activities which shall be justified by the presence of specific circumstances (https://bit.ly/2OrdR1c).
3. Advanced tax ruling on new investments.
Advanced tax ruling on new investments (introduced by art. 2 of the Internationalization Decree, subsequently amended by art. 1, par.1 of Law Decree no. 119/2018 implemented, with modifications, by Law no. 136/2018) allows companies that intend to make investments in Italy to obtain a preventive opinion from the Italian Revenue Agency on the relevant tax treatment of the investment plan itself and any related extraordinary operation. To the extent that the legal and factual circumstances remain the same, the reply is binding for the tax authority with reference to the business plan as described in the ruling application.
In order to qualify for this procedure, the investment must be worth at least 20 million euros (30 million for applications submitted until 31.12.2018) and must have a significant and long-lasting impact on employment levels.
The advanced tax ruling has met with considerable success so far. In particular, as reported by the Ministry of Economy and Finance (http://www.mef.gov.it/focus/article_0049.html), the cases examined concerned transactions for 15 billion euros (27 rulings). Such investments have brought at least 13 thousand more jobs compared to the figures of the previous year.
4. International tax rulings vs. Advanced tax ruling on new investments.
A matter of particular interest relates to the relationship between the advanced tax ruling on new investments and the new international tax ruling. Pursuant to Decree of April 29, 2016 of the Ministry of the Economy and Finance, the advanced tax ruling is inadmissible if it concerns matters which are subject of the new tax ruling, with the exception of point 4 above.
Given that, it would seem to be possible to conclude that the ruling on new investments could constitute the basis of a subsequent international tax ruling, also because the scope of the two instruments is only partly overlapping. In this perspective, the advance tax ruling on new investments could be seen as a way through which encouraging the subsequent conclusion of an international tax ruling.