The Italian Government has issued the final draft of its "Internationalization Decree", which gives practical application to the sections of the Tax Framework approved last year relating to the promotion of competition in the Italian market. Among the provisions included in the Decree there are some changes that could have a significant impact on foreign investors, including those in the real estate sector.

The first point to note is that foreign companies wishing to invest in Italy will be able to obtain a protective ruling from the Italian tax authorities in order to define many aspects of their investment. The main aspects on which the investors may obtain a ruling are—apart from the already existing ruling on transfer pricing—(i) whether the foreign investor’s presence in Italy gives rise to a permanent establishment or not; (ii) the tax implications of a transfer of residence to or from a foreign country; and (iii) whether a double tax treaty or other domestic rules may be applied, granting a reduction in the rates of withholding tax on dividends, interest, royalties or other taxable income/costs paid to or by non-resident entities.

Another protective ruling, aimed at giving certainty to foreign investors in Italy, concerns the tax implications of investments and the corporate transactions required to implement investments. The ruling may be related to a number of issues, such as potential abuses of the law, the possible application of the participation exemption regime to certain capital gains and the existence of a business concern.

These rulings are binding on the tax authorities themselves, so they will not be in a position to challenge investment structures as long as the conditions and circumstances described in the protective rulings remain true and correct.

In addition to the rulings, there are other important changes being introduced into the Italian tax regime.

One of these is related to the deductibility of passive interest in the case of loans granted for real estate purchased for leasing purposes, and secured by mortgages over the same real estate asset. Passive interest on such loans is currently not subject to the ordinary 30 per cent threshold and is therefore fully deductible.

The Internationalization Decree narrows down that exclusion. Should the Decree be approved in its current form, complete deductibility of passive interest would be allowable only if the loan is taken out by an entity whose main function is the carrying on of real estate activities. This would include entities where (i) the value of real estate assets, purchased with a view to renting out, constitutes the majority of their assets; and (ii) rental fees constitute at least two-thirds of their revenue. It is thought that this amendment is unlikely to have a negative impact on real estate investors in Italy.