Multinational companies doing business in Italy, Italian companies doing business abroad and non-resident companies which intend to invest in Italy may use the new international tax ruling procedure to reach an advanced agreement with the Italian Tax Authorities regarding the taxation of income derived from cross-border transactions.
Recently, Legislative Decree no. 147/2015 replaced the international tax ruling law and the Italian Tax Authority issued a Measure on 21 March 2016 with which the new law is entered into force. The new Measure replaces the former one dated 23 July 2004 in force until 20 March 2016.
The new law also applies to applications for an international tax ruling still in progress as at 21 March 2016.
Subjective scope of the procedure
Only companies ''engaged in international transactions'' can apply for an international tax ruling. Such companies include the following:
- an Italian resident company engaged in international transaction with a non-resident company that (i) is owned by the Italian resident company, (ii) owns the Italian resident company, or (iii) is owned by the same company that owns the Italian resident company;
- Italian resident companies of which all or part of their assets, equity, or fund are owned by a non-resident company or Italian resident companies that own all or part of the assets, equity or fund of a non-resident company;
- Italian resident companies that pay interest, dividends or royalties to non-resident companies or receive interest, dividends or royalties from non-resident companies;
- non-resident companies that operate in Italy through a permanent establishment, or Italian resident companies that operate in foreign countries through a permanent establishment and non-resident companies without a permanent establishment in Italy, which intend to invest in Italy.
Note that under the previous regime, non-resident companies without a permanent establishment in Italy, which intended to invest in Italy, could not apply for an international tax ruling.
Objective scope of the procedure
Companies can enter into an agreement with the Italian Tax Authority with regards to the following:
- determination of the arm's-length price of transactions between an Italian company and a non-resident company belonging to the same group;
- application of rules, including treaty rules, to a specific case in order to define the amount of income attributable to a permanent establishment in Italy of a non-resident company or to a permanent establishment in foreign countries of an Italian resident company;
- application of rules, including treaty rules, to the payment to (or receipt from) non-resident companies of dividends, interest, royalties or other income;
- clarification of whether a non-resident company has a permanent establishment in Italy under Italian tax law and double tax treaties;
- determination of the value of the assets of Italian resident companies that become resident for tax purposes in foreign countries and of non-resident companies that become resident for tax purposes in Italy.
The new provisions have extended the scope of the international tax ruling and so the new procedure can now be used where income/costs relative to international business activities are involved.
Effectiveness of the tax ruling
Once the agreement with the Italian Tax authorities has been reached, the international tax ruling is effective for the financial year in which the tax ruling is signed and for the following four financial years.
The international tax ruling can also apply retrospectively in two circumstances:
- if the ruling is based on an agreement reached with foreign tax authorities through a mutual agreement procedure under a double tax treaty, up to the financial year that the international tax ruling application was submitted.
- if the same factual and legal circumstances on which the international tax ruling is based were present in prior financial years, the applicant company may roll back the efficacy of the international tax ruling up to the financial year that the international tax ruling application was submitted, and amend its related tax returns without penalties ("active repentance" is applicable).
Consequence of the international tax ruling
The contents of the international tax ruling will be mandatory for both parties (the Tax Authority and the company). The Italian Tax Authorities cannot challenge the ruling.
If an international tax ruling has been signed, the company must file documentation and information so that the Tax Authority can monitor that the company is complying with the terms and conditions set out in the international tax ruling.
If the company violates the agreement, the Italian Tax Authorities should deliver a notice inviting the company to submit a defence brief within 30 days explaining the reasons why the company has not complied with the agreement. If the Italian tax Authorities do not accept the reasons of the company, the international tax ruling will no longer be effective.