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Acquisitions (from the buyer’s perspective)
Tax treatment of different acquisitions
What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?
The tax treatments of the purchase of shares is materially different from that of transfer of enterprise (assets and liabilities), with regard to both direct and indirect taxation.
With general reference to indirect taxation, the share purchase is subject to a fixed registration tax of €200,00, regardless of the form of the contract (see DPR No. 131/1986, and specifically, as to private agreement, see Tariff II, article 2; as to notarised and public deeds, see Tariff I, article 11).
On the contrary, the enterprise transfer is subjected to a proportional registration tax, to be applied with a proportional rate between 3 per cent and 9 per cent, depending on the kind of assets that the transferred enterprise consists of, unless the transfer is realised by a capital contribution (in which case a fixed registration tax of €200,00 is applied - see DPR No. 131/1986, Tariff I, article 4).
In both cases, no VAT is applied.
As to direct taxation, both the purchase of shares and the transfer of enterprise do not generate a taxable income for the purchaser. However, relevant consequences may derive from the concrete terms and conditions of the transfer, for both the seller, with reference to realised or hidden capital gain or capital loss on the company’s or enterprise’s assets, and the purchaser, with reference to its right to tax amortisation of the assets’ accounting or hidden value. These consequences may derive from several factors, among which: (i) legal status of the purchaser and seller (natural person or legal entities); (ii) terms and conditions pursuant to which the transfer is executed (sale, barter, capital contribution, merger, division).
Step-up in basis
In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?
In the event of enterprise transfer by way of sale, the purchaser is entitled to tax amortisation on the purchased items and to enter the same purchased items into the accounting assets, including intangibles and goodwill, at their purchase value, on the basis of which the capital gains and losses for the seller shall be calculated.
In the event of enterprise transfer by way of capital contribution between Italian residents, or when at least one of the parties is an Italian resident and the transferred enterprise is located in Italy, the purchaser is entitled to fiscally book the business assets at the tax value of the seller, and then, to re-evaluate them up to their fair value, paying a substitutive tax with the application of variable rates (12 per cent in case of revaluations up to €5 million; 14 per cent for revaluations between €5 and 10 million; 16 per cent for revaluation exceeding €10 million - see DPR No. 917/1986, article 176, ph 2-ter). In that case, the purchaser shall be also entitled to tax amortisation of the relevant revaluated values.
In the event of transfer of shares, the revaluation of the target company’s assets shall be allowed, following to the merger between the purchasing company and the target company, by imputation of the merger deficit (which is the difference between the shares purchase price and the correspondent proportional value of the target company’s net worth, annulled in consequence of the merger). This deficit can be also imputed to the target company’s goodwill or other intangible assets, with the payment of a substitutive tax to be applied with different rates, depending on the amount of revaluation (see DPR No. 917/1986, article 172, ph 10-bis, referring to the above-mentioned article 176, paragraph 2-ter).
Particular rules are also set for the transfer by way of exchange of shares, in the form of barter or capital contribution, with the transfer of the target company’s majority interest (see DPR No. 917/1986, article 175 and 177).
Domicile of acquisition company
Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?
In principles, Italian law does not provide for any restriction on foreign investment in Italian companies (except for the need of official authorisations in specific business sectors). However, the investment through an Italian-based company can be useful in the case of purchase of shares and subsequent merger of the target company, for the step-up on the assets and for the benefit of the national consolidation tax regime, which allows the algebraic sum of the group companies’ incomes and losses, including those of the purchaser and target company.
The Italian residence of the purchaser also has to be considered in order to plan tax efficiency strategies or further business development in Italy.
On the other hand, the foreign residence of the purchasing company has to be considered for the purposes of the transfer pricing tax rules concerning interests, dividends, royalties or service considerations, and the possible application of withholding taxes, also taking into consideration that more favourable rules are provided for foreign or EU-based shareholders.
Different rules are also provided for the possible purchase of an Italian enterprise by a foreign entity that has set up a permanent establishment in Italy.
Company mergers and share exchanges
Are company mergers or share exchanges common forms of acquisition?
The merger represents a widely used operation in Italy, since it allows the companies to improve their efficiency, mainly through the elimination of unnecessary corporate structures and the adoption of unitary taxation of merged companies’ incomes, with the possibility to benefit from the deduction of the costs supported for the merger process, of the step up on the incorporated company’s assets, and of a favourable substitutive tax (see DPR No. 917/1986, article 172, ph 10-bis).
Share exchange is less common in Italy, as it means that the two companies stay in existence and are taxed separately (unless they opt for the national or global consolidation regime, pursuant to DPR No. 917/1986, article 17 and following, and 130 and following), without being entitled to the step-up on the assets of the company whose majority interest is acquired. However, share exchange could represent a useful alternative to a merger when the minority shareholders of the acquired company have not become shareholders of the acquiring company, or when it is preferable to keep the two entities separate in order to proceed easily to a future sale of the target company.
Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
The purchase of a participation through the issue of own shares by the acquiring company is an operation called ‘contribution or exchange of shares’, which is differently regulated whether the purchaser acquires a majority shareholding in the target company or not. Furthermore, the regulation is different depending on whether the transaction is executed between companies that are resident for tax purposes in Italy, or in a member state, or in an extra-EU country. A fiscal neutrality regime is provided for the transfer of a majority shareholding between companies resident in Italy or in the EU, if the operation is executed without changing the fiscal values for both the transferor and the transferee (see DPR No. 917/1986, articles 175 and 177). Otherwise, the acquisition of shares, through payments in cash, is taxed if it generates capital gain, unless the seller is an Italian company and the participation exemption regime (Pex regime) is applicable (if all the following circumstances pursuant to article 87 of DPR No. 917/1986 are met: (i) the seller has been the owner of the sold shares for 12 months before the sale; (ii) the sold shares have been entered in the balance sheet into financial fixed assets; (iii) the sold shares have not been issued by a blacklisted company; and (iv) the sold shares have been issued by a commercial company).
Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?
In the case of transfer of shares or stocks, both the purchaser and the seller are and jointly and severally bound to payment of a fixed registration tax of €200,00 (see DPR No. 131/1986, and specifically, as to private agreement, see Tariff II, article 2; to notarised and public deeds, see Tariff I, article 11). The parties may to reach an agreement for a different allocation of expenses that is only valid for their internal relationship, and remains not relevant for the Italian tax authority.
The transfer of enterprise is liable to registration duty, at proportional rate, between 3 per cent and 9 per cent, depending on the assets, which make up the transferred enterprise. In addition, if business assets include real estate, the buyer shall also pay mortgage taxes and cadastral duties (currently at fixed aggregate amount of €100,00).
In the case of contribution of enterprise or shares, the parties shall pay a fixed registration tax of €200,00 (see DPR No. 131/1986, Tariff I, article 4).
None of the above-mentioned operations is subject to VAT and other taxes.
A stamp duty tax is due (see DPR No. 642/1972, Tariff I, article 1-bis) if the above-mentioned transactions are concluded by notarial deed or notarised private deed.
Net operating losses, other tax attributes and insolvency proceedings
Are net operating losses, tax credits or other types of deferred tax asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for preserving them? Are acquisitions or reorganisations of bankrupt or insolvent companies subject to any special rules or tax regimes?
The tax losses of Italian companies, generally deductible for ordinary companies (up to 80 per cent of the taxable incomes of the following tax periods and for the entire amount that can be balanced by such incomes - see DPR No. 917/1986, article 84, ph 1), can no longer be deducted when the majority shareholder and the corporate purpose of the acquired companies change, except in the case of the following vitality indexes: (i) the company has employed at least 10 employees during the past two years before the transfer; (ii) the company has recorded in the year before the transfer an amount of revenue and proceeds from its main business activity equal at least to 40 per cent of the average revenues and proceeds recorded during the previous two years; (iii) the company has paid during the past year before the transfer of an amount of salaries at least equal to 40 per cent of the average salaries paid during the previous two years (see DPR No. 917/1986, article 84, ph 3 (b).
Pursuant to article 172, ph 7, DPR No. 917/1986, the same revenue and proceeds vitality indexes listed above must be met for the deduction of the tax losses in the event of a merger.
The purchaser can benefit from the tax credits of the acquired company without any restriction, in the case of change of control or merger.
In the event of change of control, funds under a conditional tax suspension regime maintain such a regime, while, in the case of merger, the maintenance of such a regime is subject to the conditions that the funds are also constituted in the balance sheet of the incorporating company at first using all the merger deficit (if any).
Particular rules (provided for by articles 83 and 88 of DPR No. 917/1986) apply to insolvent companies, indiscriminately if in bankruptcy or in composition with creditors.
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility where the lender is foreign, a related party, or both? Can withholding taxes on interest payments be easily avoided? Is debt pushdown easily achieved? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?
The Italian resident purchasing company is entitled to deduct the interest paid for the acquisition of the (Italian or foreign) target company, provided that the limit of gross operating profit (earnings before interest, taxes, depreciation, and amortisation, EBITDA) ratio requirement is met (see DPR No. 917/1986, article 96). If the financier is foreign, the same rule applies, but it is important to consider the withholding taxes levied on the paid interest in the light of the rules set by the bilateral conventions against double taxation.
If the foreign financier is a related party, so belonging to the same group, it is also necessary to consider the possible application of the transfer pricing rules (see DPR No. 917/1986, article 110).
The withholding taxes on the paid interest may be avoided with good management of a funding operation. Moreover, if the buyer is resident in Italy, the deductibility of the paid interest from the income of the target company (the ‘push down’) may be obtained through the merger or through the adoption of the national consolidation tax regime (or, provided that stricter requirements are met, of the global consolidation tax regime).
In Italy there is no ‘capitalisation rule’, but there is a limit to deduction of passive interests paid in relation to the gross operating profit result (which is the EBITDA - see DPR No. 917/1986, article 96).
In the case of merger, the interest deduction of the passive interests of the companies taking part in the merging process is also governed by special rules (see DPR No. 917/1986, article 172, ph 7).
Protections for acquisitions
What forms of protection are generally sought for stock and business asset acquisitions? How are they documented? How are any payments made following a claim under a warranty or indemnity treated from a tax perspective? Are they subject to withholding taxes or taxable in the hands of the recipient?
In deals for stock and business asset acquisitions, warranties and indemnity provisions are recurrent. They can be variously structured and, in general, they provide either an indemnity for the buyer or a payment to the target company or entity, with collateral given by third parties (such as banks or insurance companies).
In general, the events and matters covered by the warranty provision, as well as the expiration term, should be specifically identified, especially for a stock acquisition, since, in this case, the acquired is the stock (shares, participation). According to Italian law, this means that, unless otherwise specifically provided, the seller guarantees the shares, as to the proprietorship, the face value and the rights attached to them (ie, voting rights), but not the assets of the company (and therefore the value) whose stock is sold.
Within business asset acquisitions, a common (and advisable) protection for the buyer is to ask for a certification by the Tax Agency as to pending proceedings or debts, since the buyer is held jointly liable with the seller for the taxes due by the latter for the fiscal year in which the acquisition occurred and the two previous ones.
Warranties and indemnities should be documented in writing, in the relevant agreement or side letters with a certified date, and so should the related claims and replies, even though the written form is not compulsory.
The indemnity or payment provided brings different effects from a fiscal point of view, depending on the structure chosen. As a rule, indemnity paid to the buyer is a price adjustment, so it is not taxed and not subject to withholding tax. Payment made to the target company instead is a contingent asset and taxable income of the target company, unless it can be qualified as a contribution by stockholders (see DPR No. 917/1986, article 88, ph 4).
What post-acquisition restructuring, if any, is typically carried out and why?
Post-acquisition restructuring is very common when the acquisition brings the control of the target company, usually fit for the purposes of the business plan assumed for the acquisition, in most cases replacing directors and auditors, except for special agreements with minority shareholders, if any.
Often, the finances and organisation of the target company are restructured and no strategic assets are sold. Usually, the acquiring entity enters into agreements and relationships with the target company, providing services of direction, cash pooling and cost sharing.
Such agreements and relationships must be carefully verified taking into account transfer price rules and regulations and double tax treaties involved, when the target company is Italian and the acquiring company is foreign.
Can tax neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?
As a general rule, in Italy, when the spin-off is achieved by selling business assets, the related gain or loss (given by the difference between the sale price and the book value) is included in the taxable income of the selling company.
This also triggers stamp duties equal to 3 per cent of the value of the business assets, 9 per cent to the extent it includes real estate (see DPR No. 131/1986, article 50 and rate schedule, Part I, thereto attached, article 1).
When the spin-off is made through contribution of the business assets into a company (existing or established for that purpose), it is fiscally neutral and does not trigger transfer taxes, provided that the book values recorded by both the contributing company and the receiving company are aligned in continuity. This means that the contributing company must replace the value of the business assets transferred with the value of the stock acquired and the receiving company must enter in its books the same value of the business assets transferred, without any fiscal adjustment.
Contribution of business assets into a company does not trigger proportional stamp duty (see rate schedule, Part I, attached to DPR No. 131/1986, article 4, No. 3).
Alternatively, split-up of company in two or more companies is fiscally neutral and does not trigger transfer taxes.
Loss of the company being divided can be preserved and deducted both by the latter and the recipient company, proportionally to the quota of the net worth respectively kept and transferred, as it results from the last financial reports, excluded the contribution made during the previous 24-month period.
The splitting-up of a company does not trigger proportional stamp duty (see rate schedule, Part I, attached to DPR No. 131/1986, article 4, No. 3 and No. 6b).
Migration of residence
Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?
As to Italian law, the migration of the residence of an Italian resident company, whether an acquisition company or target company, does not trigger exit tax, provided that the migrating company creates a permanent establishment in Italy, including all the assets of the migrating company that existed at the time of the migration and at the same fiscal value (see DPR No. 917/1986, article 166).
Otherwise, the migrating company is taxed on the difference between the sale value (as per DPR No. 917/1986, article 9) and book value of its assets.
When migrating to an EU member state or to a state that entered into a cooperation agreement for tax assessment and collection with Italy, it is possible not to trigger immediate exit tax payment without creating in Italy a permanent establishment, if the migrating company files an application for tax suspension. Tax suspension expires when, according to Italian income tax law,assets are considered sold, or, in any case, 10 years after the migration. Alternatively, the migrating company can apply for payment of the exit tax in six equal annual instalments (see Decree of the Finance Ministry, 2/7/20140).
The above rules set for companies migration apply also to the migration of a permanent establishment in Italy of foreign companies.
Interest and dividend payments
Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?
As a general rule, dividend payments to a foreign company by an Italian company are subject to withholding tax equal to 27 per cent. The foreigner receiver is entitled to refund up to 11/20 of the tax proven to be paid definitively abroad on the same dividends by certification of the tax authority of the foreign state (see DPR No. 600/1973, article 27, ph 3).
When paid to a company resident in EU member states, or in states of the European Economic Area, and who is there subject to corporate income tax, the applicable withholding tax is equal to 1,20 per cent (see DPR No. 600/1973, article 27, ph 3-ter).
The Italian distributing company can avoid application of the withholding (see DPR No. 600/1973, article 27-bis, ph. 3), if it meets the requirements set out in EU Parent Subsidiary Directive (ie, when the foreign receiving company directly holds no less than 20 per cent of the stock of the Italian distributing company) it takes one of the forms listed in the EU Parent Subsidiary Directive, it is a EU resident, it is subject to corporate income tax without exemption, and the holding period is no less than a year (see DPR No. 600/1973, article 27-bis, ph 1). Requirements must be proved in writing before dividends are paid to the distributing company, as to form, residence and tax appliance, by certification of the state of residence of the foreign company, and as to the holding period in writing by the foreign receiving company.
Under the same conditions, the foreign company can apply for a refund of the withholding tax, if applied (eg, because certifications were not available at the time of the payment of the dividends).
Interest paid to a foreign receiver by an Italian company (other than account or deposit interests, such as interest paid by banks) are subject to withholding tax equal to 26 per cent, unless double tax treaty rules provide otherwise (see DPR No. 600/1973, article 26, ph 5).
As per EU Directive 2003/49/CE, withholding tax does not apply if the receiver of foreign interest is an EU resident, it takes one of the forms listed in said Directive, it is subject to corporate income tax without exemption, and when the receiver and payer are linked through participation in the stock (the first in the second, vice versa or by a third company) of no less than 25 per cent for no less than a year (see DPR No. 600/1973, article 26-quater).
Tax-efficient extraction of profits
What other tax-efficient means are adopted for extracting profits from your jurisdiction?
After acquiring a target Italian company, the target company can be merged in the acquiring company, thus combining assets and incomes of the two companies and transforming the target company into a permanent establishment of the foreign acquiring company.
Often, the foreign acquiring company provides the target company with several centralised services, upon compensation not subject to withholding tax.
The target company can pay the foreign acquiring company royalties (eg, for a licence on a trademark or patent) that are subject to the same tax treatment as the interest (see previous paragraph 13) (ie, withholding tax equal to 26 per cent) unless double tax treaty rules provide otherwise (see DPR No. 600/1973, article 26, ph 5) and unless the EU Directive 2003/49/CE regime is applied.
A specific double tax treaty can reduce or erase withholding tax.
Disposals (from the seller’s perspective)
How are disposals most commonly carried out - a disposal of the business assets, the stock in the local company or stock in the foreign holding company?
When the selling company is an Italian resident, it is normally more convenient, from a fiscal point of view, selling the shares of the target company, being it Italian or foreign, since the Pex regime in Italy provides that only 5 per cent of the capital gain is taxable, if the shares were continuously held for the previous 12-month period, the shares were classified as financial fixed assets in the financial reports, provided that the target company is not resident in a blacklisted state or territory and that it carries on commercial or industrial activities (see DPR 917/1986, article 87).
Business assets disposals can be treated in the same way, if made by contributing the business assets in a company and then selling the company stock in the Pex regime, where the business assets are recorded in the receiving company books at the same fiscal value they had in the contributing company books, and the holding period is referred to the assets (see DPR 917/1986, article 176, ph 3). In this case, however, it must be taken into account that the Italian tax authority often requalifies the operation as a sale of business assets for the purposes of stamp duty application (3 per cent to 9 per cent of the assets value) with assessments in several cases confirmed in court.
The choice of structure of the operation, in any case, depends on the specific characteristics of the group, the purpose and on the evaluation of all effects.
Disposals of stock
Where the disposal is of stock in the local company by a non-resident company, will gains on disposal be exempt from tax? Are there special rules dealing with the disposal of stock in real property, energy and natural resource companies?
Disposal of an Italian company’s stock by a non-resident shareholding company is, as a general rule, is taxable in Italy (see DPR 917/1986, article 23(f). Such capital gain, when realised by an EU resident through disposal of a participation of no more than 20 per cent, is not taxable, unless otherwise provided by a relevant double tax treaty. It must be taken into account that often double tax treaties, according to the OECD model, provide that such incomes are taxable in the seller’s state of residence.
Disposal of stock in a real estate company does not benefit from the Pex regime, even if the seller is an Italian resident.
There are no special rules or regimes as to the disposal of stock in real estate, energy and natural resource companies.
Avoiding and deferring tax
If a gain is taxable on the disposal either of the shares in the local company or of the business assets by the local company, are there any methods for deferring or avoiding the tax?
Disposal of the stock in an Italian company can be fiscally neutral, when realised through the contribution of a controlling shareholding or through a participation exchange that leads to a control quota acquisition, without a cash adjustment, when the shares contributed or exchanged were continuously held for the previous 12-month period and were classified as financial fixed assets in the financial reports, provided that neither company is resident in a blacklisted state or territory and that it carries out commercial or industrial activities (see DPR 917/1986, article 177).
Business assets disposals can be fiscally neutral if made by contributing the business assets in a company and then the company stock is sold in the Pex regime, where the business assets are recorded in the receiving company’s books at the same fiscal value they had in the contributing company’s books and the holding period is related to the assets (see DPR 917/1986, article 176, ph 3).