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Direct taxation of businesses

i Tax on profitsDetermination of taxable profit

IRES applies to both resident and non-resident entities. Resident entities are taxed on their worldwide income, while non-resident entities are subject to tax on Italian-source income only. The taxable base for IRES purposes is the accounting result determined in the profit and loss account, as adjusted according to the provisions of the Italian Tax Code (ITC). The main adjustments relate to limits to tax deductibility of depreciation, amortisation, write-offs and interest expenses. Taxation applies on an accrual basis. Based on the allowance for corporate equity (ACE), enacted in 2011, a 'notional deduction' is allowed in the case of new equity injections in the form of cash contributions or the allocation of profits to reserves. The deductible amount under the ACE regime has varied over the past years, in particular: for 2018, the notional deduction amounts to 1.5 per cent, for 2017, to 1.6 per cent of the equity injection, and for 2016 such deduction amounted to 4.75 per cent. Any excess deductions may be carried forward without time limitations or converted into a tax credit used to decrease the regional income tax. Moreover, starting from 2017, the provision according to which companies admitted to be listed in the Stock Exchange after 25 June 2014 that meet specific requirements could benefit from an increase of 40 per cent of the ACE benefit for the tax period of admittance and for the subsequent two tax periods is no longer in force.

According to the draft Budget Law for 2019, the ACE will be repealed as of 2019, but any excess deduction available at 31 December 2018 may be carried forward without time limitations or converted into a tax credit to decrease the regional income tax.

In parallel to the repeal of the ACE, the draft Budget Law for 2019 provides for a new regime aimed at reducing the applicable CIT rate from 24 per cent to 15 per cent to profits that are reinvested to purchase new tangible fixed assets and hire new employees. The rule looks at the profits realised in the previous fiscal year and limits the benefit to a portion thereof equal to the fiscal cost of the new investments. For the provision to be applicable, it is also necessary that the profits have been allocated to disposable reserve and that both new tangible fixed assets and employees are located in Italy. Any profits falling under the scope of the tax benefit but exceeding net income may be carried forward.

If a company does not reach a certain threshold of activity (in terms of earnings) it can be qualified as 'dormant'; in these circumstances, a minimum deemed taxable income is calculated as a percentage of the book value of its fixed assets. Further, starting from 2012, an Italian company is deemed as dormant also when it has made tax losses for five consecutive years.

Capital and income

Capital gains are normally included in the overall taxable income. Subject to certain conditions, capital gains realised upon disposal of assets held for more than three years may be split into up to five annual instalments. Under the participation exemption regime, capital gains on qualifying shareholdings are subject to tax on only 5 per cent of their amount (95 per cent exemption).

Losses

Since 2011, tax losses can be carried forward indefinitely and offset up to 80 per cent of the taxable income of subsequent years; however, subject to certain conditions, losses incurred in the first three years from incorporation can be carried forward indefinitely and offset without limitations. Certain limits of losses carried forward apply in the case of a change of control, when a change in the main activity also occurs and certain 'vitality tests' are not met; losses carried forward are also limited in the case of a merger or demerger.

Pursuant to a regime of transfer of losses introduced by Budget Law for fiscal year 2017, a company is allowed to 'sell' – against a consideration equal to the nominal corporate tax rate – losses realised in the first three fiscal years from establishment, if certain conditions are met, in particular: (1) among the 'seller' and the 'buyer' of the losses there shall be a shareholding granting the right to 20 per cent of the profits and 20 per cent voting rights; (2) the 'buyer' (or the company that directly or indirectly controls the 'buyer') shall be listed; (3) the 'seller' shall not be a real estate company; and (4) the losses must refer to a new business activity.

Rates

Starting from 2017, the corporate income tax rate is set at 24 per cent, save for banks and other financial institutions, to which a special 3.5 per cent surcharge will apply for an overall 27.5 per cent rate. Note that until 2016, the corporate income tax was 27.5 per cent.

The tax rate is increased by 10.5 per cent if a company qualifies as dormant.

Administration

Corporate taxpayers must file a tax return within nine months from the end of the financial year. The tax year for corporate income tax purposes is the financial year of the company, as determined by the law or the by-laws, or, if it is not specified, the calendar year (so filing usually by 30 September, yet, for the return relating to fiscal year 2017 the deadline was postponed to 31 October).

Corporate income tax is due in advance, with a final balance payment. The advance payment, which is due in two instalments, is usually based on a percentage of the tax paid for the previous tax year. The balance payment is due by the 30th day of the sixth month after the end of the financial year (for taxpayers with a financial year corresponding to the calendar year, the balance is due by 30 June), and any excess tax paid may either be carried forward or refunded.

There is no regular audit cycle for corporate entities, except for certain large taxpayers with turnover, revenues or earnings exceeding €100 million, who are audited once every two years.

In the event of uncertainty regarding the correct interpretation of tax provisions, the taxpayer may ask for a ruling by filing a written request with the tax authorities, which must issue a written and motivated reply (see Section IX.iv).

The tax litigation trial encompasses two degrees of judgment before a provincial tax court and a regional tax court, and a third degree before the Cassation Court, which deals only with issues on points of law. Various pre-litigation and composition procedures are available, aimed at reaching settlements with the tax authorities by virtue of significant reductions in penalties.

Tax grouping

Both a domestic and a worldwide consolidation regime are available under the Italian tax system, as outlined below.

Domestic consolidation

Election for domestic tax consolidation may be made jointly by the resident controlling company and each resident controlled company (also indirectly controlled, if intermediate controlled companies are resident in foreign white-listed countries). A company is controlled by another company if the latter directly or indirectly has the majority of the voting rights (i.e., more than 50 per cent) in the general shareholders' meeting of the former. Under domestic tax consolidation, the taxable income of each consolidated company is aggregated and taxed at the level of the controlling company, regardless of the percentage of shareholding. Only losses incurred after the election can be offset against the profits of other group companies; losses incurred before such option may only be used at company level. Once the option is exercised, it is irrevocable for three tax years and can be renewed. Special rules apply in the case of a change of control during the tax grouping period.

Following one of the amendments mentioned at the outset, from 2015 the Italian tax system adopted a new form of domestic consolidation, namely the possibility of horizontal consolidation (i.e., in essence, consolidation of resident sister companies with a common parent resident in EU or EEA Member States): the amendment at hand followed the delivering of the European Court of Justice decision in SCA Group.

Worldwide consolidation

The option for worldwide consolidation may be exercised by a resident controlling company with respect to all controlled foreign companies provided that certain conditions are met. Under this regime, the income of the controlled companies (adjusted according to Italian tax provisions) is allocated to the controlling company in proportion to its profits entitlement. Losses incurred before the exercise of the option cannot be used in the consolidation; foreign tax credit relating to taxes paid abroad is normally available. Once the option is exercised, it is irrevocable for five tax years and is subject to renewal for periods of three years. Certain specific rules apply in the case of election for the worldwide consolidation regime, or for the interruption of the election and in the case of reduction of the participation of the holding in the controlled companies.

ii Other relevant taxesRegional income tax

Corporate entities are also subject to a regional income tax, IRAP, which is levied on the net value of the production derived in each Italian region. In particular, for commercial and manufacturing enterprises the tax base is equal to the difference between the operating income and the costs of production; in general, labour costs (other than employee-related, from 2015), bad debts and financial expenses are not deductible. For dormant companies, the tax base is equal to the minimum income determined for IRES purposes increased by employment costs and interest expenses. Special rules are provided for industrial holding companies, banks and financial entities, and insurance companies.

The standard rate is 3.9 per cent, but the Italian regions are entitled to increase or decrease this rate by up to 0.92 per cent. IRAP is partially deductible from the IRES tax base. The partial IRAP deduction reflects the interest expenses that are not deductible for IRAP purposes. As from tax year 2012, IRAP levied on the cost of personnel (for the amount that is not deductible from the IRAP tax base) has been fully deductible from the IRES tax base.

Value added tax

VAT is levied on the supply of goods and services made in the course of a business, artistic or professional activity. VAT is also levied on any individuals or legal entities that import goods from outside the European Union. According to the 'territoriality' principle, the sale of goods is deemed to have occurred in Italy if the goods are located in Italy at the time of transfer. Services are deemed to be supplied in Italy when the service is supplied to a taxable person for VAT purposes that has established its business in Italy; or the service is supplied to a non-taxable person for VAT purposes by a taxable person that has established its business in Italy. Special provisions apply to services relating to cultural, artistic, sport, scientific, educational, entertainment or similar activities: in general, these services are considered to have been rendered in Italy if the activities carried out in relation to them physically take place therein.

VAT is ordinarily due upon the transfer of ownership of goods or, in any event, when an invoice is issued or the payment received; however, taxpayers with turnover not exceeding €2 million can elect for the VAT cash-basis regime, under which the VAT payment obligation is deferred at the moment of collection of VAT from the client. Similarly, the deduction right on input VAT arises upon the payment of purchase invoices.

The deduction of input VAT is subject to the condition that goods and services purchased are used for taxable transactions (according to the pro rata deduction). VAT on certain goods and services is always non-deductible (e.g., food and drinks, hotels).

The ordinary VAT rate is 22 per cent. Reduced rates, namely 10, 5, 4 and zero per cent (i.e., exemptions) apply to specific categories of goods and services.

VAT group

Pursuant to Budget Law for fiscal year 2017, Italy has exercised the option for enacting VAT group legislation (Article 11 of Directive 2006/112/EC). Starting from fiscal year 2018, VAT taxable persons established in Italy, including fixed establishments of taxable persons established abroad, subject to certain requirements – a 'close connection' among the applicants through certain financial (i.e., corporate control is required; in the case of a foreign parent company of Italian sister companies, direct corporate control is required), economic and organisational links – may elect to be treated as a single taxable person for VAT purposes; accordingly, dealings among members of the VAT group are not taxable for VAT purposes (unless the VAT group has opted for the application of the segregation of activities according to which some internal dealings may be taxable for VAT purposes).

The election for the VAT group is binding for three years, unless eligibility requirements cease to apply, and is automatically renewed for each following year until it is revoked. Pure holding companies are excluded from the scope of application, but controlling active parent companies or holding companies carrying out 'mixed' activity are not. The option must have been exercised before 15 November 2018 for the effects to be applicable as of 2019. For the following years, the deadline is 30 September. In both cases, the financial link requirement must be met as of 1 July of the year of the request.

VAT financial consolidation

The VAT financial consolidation is an elective regime, according to which, subject to certain requirements, the VAT periodical payments due by the companies belonging to the same group (i.e., corporate control is required) may be made by the controlling entity on a consolidated basis. The election for VAT financial consolidation has effect until it is revoked, unless eligibility requirements cease to apply.

Registration tax

Registration tax is due on deeds and agreements executed in Italy subject to mandatory registration in public registers (e.g., transfer of real estate, transfer of a business as a going concern) or voluntarily filed in such registers.

As of January 2014, the indirect tax regime applicable to real estate transfers has changed. In particular, real estate transfers that do not fall within the scope of VAT will ordinarily be subject to proportional registration tax at a rate of 9 per cent, and mortgage and cadastral taxes apply at a fixed amount of €50 each. Further, registration tax rates may vary according to the nature of the deed or contract from 0.5 to 9 per cent (15 per cent on the sale of farm land).

As a general rule, if a transaction is subject to VAT, registration, mortgage and cadastral taxes are applicable at a fixed rate of €200 each (mortgage and cadastral taxes apply at 3 per cent and 1 per cent rates, respectively, to transactions involving buildings used as fixed assets).

Local property tax

The Budget Law for 2014 enacted a reform of local taxes whereby a new 'service tax', aimed at funding all local services and to be called IUC (the unified local tax), will be formed of an urban waste and disposal service tax (TARI), a tax related to community services provided by the municipalities (TASI) and a local property tax (IMU).

TARI applies to all properties. It is assessed on the occupant to fully cover the costs of urban waste and disposal. Although the tax is initially based on property size, municipalities may refine the tax to reflect property-specific waste production.

TASI is used to finance public services targeted to the entire community (e.g., street maintenance, street lights). Its purpose is to tax the ownership or possession of any kind of real estate, excluding rural lands and first dwelling other than premium properties, as defined for the purposes of local property tax. The TASI standard rate is 0.1 per cent, which can be increased or reduced by the municipalities.

IMU is the local property tax levied on the ownership of immovable properties (buildings, development land, rural land) located in Italy, and its tax base is determined according to certain cadastral values. IMU standard rates on dwelling places range from 0.46 to 1.06 per cent, depending on the nature of the properties and on the municipality in which the property is located. The municipality, in fact, may decide to reduce or increase the coefficient of 0.76 per cent for an amount of 0.3 per cent. As TASI, IMU is not due in connection with dwelling places that qualify as first dwelling places, except for premium properties.

Net wealth tax

There is no net wealth tax. As of 2014, an annual stamp duty of 0.2 per cent (previously, 0.1 per cent for 2012 and 0.15 per cent for 2013) is due on the value of financial instruments held at a resident bank. With respect to clients other than individuals, stamp duty on financial instruments ranges from €100 to €14,000.

IVIE and IVAFE

In 2011, a tax on the value of real estate property located abroad (IVIE) and a tax on financial assets held abroad (IVAFE) were introduced. Both taxes are applicable to individuals resident in Italy.

IVIE applies at a rate of 0.76 per cent on the cadastral value set by the foreign state (EU or EEA Member States) or the arm's-length value, save for first dwelling places that are either exempt, or taxed at 0.40 per cent in the case of premium properties. A foreign tax credit related to equivalent taxes paid in the country in which the property is located is normally allowed.

IVAFE shall be due on the value of financial instruments, current accounts and savings accounts held abroad. The tax rate is equal to 0.2 per cent on financial instruments (previously, 0.1 per cent for 2012 and 0.15 per cent for 2013) and to €34.20 on bank accounts, postal accounts and savings accounts held abroad. A foreign tax credit related to taxes paid in the country where the above-mentioned assets are held may be allowed.