Italian tax reforms cover a wide range and in some cases give taxpayers the opportunity to step up the base cost of certain assets for tax purposes, on payment of a substitutive tax.
On 28 December 2015, the Italian Parliament passed the 2016 Budget Law ("Legge di Stabilità") containing, among other provisions, various corporate tax measures which entered into force on 1 January 2016, even though some of such measures are already applicable in 2015 (i.e., boosted tax depreciation) or will be effective only beginning in 2017 or 2018). The most relevant corporate income tax measures cover the following topics:
- Reduction of corporate income tax ("IRES") rate and withholding tax rate on outbound dividends
- Surtax and enhanced passive interest deductibility for banks and other financial institutions
- Boosted tax depreciation for machinery and equipment;
- Accelerated tax amortization of goodwill and trademarks resulting from companies' reorganisations
- Investments in Southern Italy
- Deductibility of "black list" costs
- CFC legislation
- Country-by-country reporting
- Additional labour costs deduction from the Regional Tax ("IRAP")
- Offsetting between overdue tax debts and credits towards the Italian public administration
- Option to step-up the book and tax basis of corporate assets
- Revaluation of participations in non-listed Italian companies
- Extension of the statute of limitation for tax assessment purposes
Implementing regulations will be released in the next months.
1. Reduction of corporate income tax (IRES) and withholding tax rates on outbound dividends
A reduction of the corporate income tax ("IRES") rate from 27.5 per cent to 24 per cent will be effective from fiscal year ("FY") 2017. As a result (in light of the 95 per cent domestic participation exemption on dividend income), withholding tax on outbound dividends distributed by Italian companies to qualifying EEA companies will be reduced from 1.375 per cent to 1.20 per cent (i.e., 24% x 5%).
2. Surtax and enhanced passive interest deductibility for banks and other financial institutions
Starting from FY 2017, banks and other financial institutions will be subject to a 3.5 per cent surtax, for corporate income tax purposes. This increase in the corporate income tax burden will be partially compensated by the repeal of the restrictions on the deductibility of interest expenses for both IRES and IRAP purposes (the former 96 per cent cap that will remain in place only for insurance companies and insurance company groups).
3. Boosted tax amortization for machinery and equipment
Companies are entitled to increase, by 40 per cent and only for tax purposes, the depreciable cost of the tangible assets purchased in a specific timeframe. For IRES purposes, the tax benefits of this incentive ‒ i.e., corresponding increases in the yearly depreciation allowances ‒ will be spread over the length of the assets' life (which will not change as a result of the increase). The incentive will not give rise to deferred tax assets.
The incentive applies to tangible assets meeting the following requirements:
- The assets must qualify as “business assets” (i.e., “beni strumentali”), meaning that they must be used within the scope of the business activity.
- The assets must be “new”, meaning that they must be purchased by the manufacturer/distributor.
- The purchase must occur in the period between 15 October 2015 and 31 December 2016 (reference is generally made to the delivery date of the assets to the purchaser).
- The assets must have a depreciation rate not lower than 6.5 per cent. Buildings and other assets included in a list attached to the Budget Law are excluded.
4. Accelerated tax amortization of goodwill and trademarks resulting from companies' reorganizations
This measure consists of a reduction ‒ from one-tenth to one-fifth ‒ in the maximum per-year depreciation allowance for the stepped-up tax basis of the goodwill and trademarks resulting from company reorganizations taking place from FY 2016 onwards. Taxpayers are entitled to step-up the fiscal value of the goodwill and the trademark by paying a substitutive tax of 16 per cent.
5. Investments in Southern Italy
Qualifying enterprises whose manufacturing operations are carried out in certain regions in Southern Italy (i.e., Abruzzo, Basilicata, Calabria, Campania, Molise, Puglia, Sardinia and Sicily) are entitled to a tax credit in relation to new business assets purchased from 1 January 2016 to 31 December 2019 and located in such regions, within a limit for each single investment, equal to:
- 20 per cent for small enterprises, with a limit of EUR1.5 million;
- 15 per cent for medium enterprises, with a limit of EUR5 million; and
- 10 per cent for large enterprises, with a limit of EUR15 million.
6. Deductibility of "black list" costs
Starting from FY 2016, Italian enterprises can fully deduct costs and expenses incurred with other companies or professionals established in non-EU countries included in the so-called Italian “black list”, based on the general rules that apply with respect to all kinds of expenses.
In 2015 and before the enactment of this new regime, such expenses were deductible:
- up to the arm's length value, for the entire amount; and
- by demonstrating (either by seeking an advance ruling or during a tax audit ) that the transaction with the foreign entity was supported by a real business purpose, for the amount exceeding the arm's length value.
7. CFC legislation
Beginning in FY 2016, with regard to identifying the non-EU or non-EEA tax privileged jurisdictions for the purposes of applying the CFC legislation, no more reference has to be made to non-EU countries included in the so-called Italian “black list”.
Instead, a tax-privileged jurisdiction shall be identified by means of a comparison between the nominal level of taxation stated by the non-EU jurisdiction and Italy's nominal level of taxation. Only where the nominal tax rate of the foreign jurisdiction is below the 50 per cent of the Italian nominal corporate tax rate (i.e., 27.5 per cent and 24 per cent starting from FY 2017), the foreign jurisdiction will be considered a privileged jurisdiction, and, therefore, the income of the companies located in that privileged jurisdiction will be subject to taxation in Italy.
Controlled foreign companies established in EU or EEA jurisdictions might be still subject to the CFC regime if a) the effective level of taxation of such jurisdictions is lower than the 50 per cent of the Italian level of taxation; and b) over 50 per cent of controlled foreign company’s profits consists of passive income.
8. Country-by-country reporting
Beginning in FY 2016, Italian parent companies of multinational groups with a consolidated turnover exceeding EUR750 million are required to draft a country-by-country report aimed at providing the Italian Tax Authority with relevant information about the foreign subsidiaries' profits, income, taxes paid and accrued and other information demonstrating that a business activity is actually carried out by those companies.
The provision also applies to Italian subsidiaries, holdings of multinational groups, where the foreign parent company that is required to draft the consolidated financial statements resides in a foreign jurisdiction that either (a) did not implement a similar reporting obligation, or (ii) does not grant the exchange of information with respect to the information related to the Country by Country report, or (c) does not comply with the obligation to exchange the information related to the Country by Country report.
Failure to comply with the new reporting obligation may result in tax penalties ranging from EUR10 to EUR50,000.
9. Additional labour costs deduction from the Regional Tax
Starting from FY 2016, the deduction of labour costs from the Regional Tax (i.e., "IRAP") basis will be extended to seasonal workers (up to 70 per cent of the labour cost).
10. Offsetting between overdue tax debts and credits towards the Italian public administration
The possibility for taxpayers dealing with the Italian public administration to offset their receivables (meeting certain requirements), arising from the sale of goods or the provision of services, against their overdue tax liabilities has been extended to FY 2016.
11. Option to step-up the book and tax base cost of corporate assets
Except for companies who have adopted IFRS, Italian companies are entitled to elect for a step-up in the base cost of the book and tax value of the business assets, including participations, (and with the exception of real estate assets that are recorded in the inventory) recorded in their financial statements ending on 31 December 2015, subject to the payment of a substitutive tax with a rate of 16 per cent for depreciable assets and 12 per cent for other assets. The step-up is subject to the following conditions:
- the assets must be already owned as at 31 December 2014;
- the step-up must include all the assets belonging to the same category.
For tax purposes, the step-up will be effective starting from:
- FY 2018, for tax amortization purposes; and
- FY 2019, for capital gains taxation purposes.
12. Revaluation of participations in non-listed Italian companies
Individuals and foreign companies are entitled to reveal the fiscal value of their participations (both "qualified" and "non-qualified") in non-listed companies held at the date of 1 January 2016 subject to the payment of an 8 per cent substitutive tax by 30 June 2016. The higher value must be supported by the appraisal of an expert.
13. Extension of the statute of limitation for tax assessment purposes
The ordinary statute of limitation for tax assessment purposes has been extended from four to five fiscal years (following the FY in which the income tax return is filed) and from five years to seven years (in case of omitted tax return). Such extension balances the repeal of the provision according to which, under certain circumstances, the statute of limitation could be doubled in the case of a criminal violation.