Accounting and tax in Italy
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Every Italian company is required by law to maintain accounting records sufficient to identify all financial transactions carried out by the company. In addition, every Italian company must file company accounts at the Registrar of Companies (Registro delle Imprese) not later than 4 months after the company’s accounting year end.
While the full company accounts required by company law have to prepared by the director(s) of the company and approved by the members in a general meeting, a company which qualifies as a small or medium sized company (as defined by Article 2435-bis of the Italian Civil Code) may file a shorter set of ‘abbreviated’ at the Registrar od Company (Registro delle Imprese), thereby limiting the amount of information held at the public registry.
A company automatically qualify to file abbreviated accounts unless it exceeds for two accounting years consequently, at least two of the following thresholds:
- Net assets exceeding: € 4,400,000.00
- Turnover exceeding: € 8,800,000.00
- At least 50 employees
The accounts must be accompanies by a Director’s Report (nota integrativa), which is a statement by the director(s), explaining that figures indicated in the accounts and, if the company is audited, by a report prepared by the auditors.
Italian private limited companies (società a responsabilità limitata), which do not qualify to file the abbreviated account or are subject to file consolidated accounts or are part of a group that exceeds the limit shall appoint an internal auditor. Italian public limited companies (società per azioni) regardless of whether their stock are listed in a stock exchange shall appoint an internal board of auditors composed of al least 3 member one of which must be a registered in the Italian Register of Auditors.
In addition, companies that are required to file consolidated accounts shall also appoint an external auditor.
Auditing is required for:
- Joint Stock Limited companies (S.p.A.); and
- Private limited companies (S.r.l.) with exceeding two of the following limits in 2 consecutive years (a)) total assets of: EUR 4,400,000.00; (b) sales and services revenues of: EUR 8,800,000.00; or (c) average number of employees during the year: 50,or should the S.r.l. control a company subject to statutory audit;
- All companies drawing up consolidated financial statements;
- Listed companies;
- Banks, stock broking companies, fund management companies, regulated financial institutions.
The audit of the financial statements (“revisione legale dei conti”) shall be performed in accordance to the Italian Law (Art. 2409 bis of the Italian Civil Code) and the auditing standards issued by the Italian Institute of Chartered Accountant (CNDCEC, Consiglio Nazionale dei Dottori Commercialisti ed Esperti Contabili) which equate with the International Standards on Auditing (ISAs) issued by the International Federation of Accountants (IFAC).
In addition, before being applicable, the Italian auditing standards need to be approved by the Italian Stock Exchange Authority, CONSOB (Commissione Nazionale per le Società e la Borsa).
In Italy, an audit can be performed by the Board of Statutory Auditors (“Collegio Sindacale”) that may be in charge of both supervision of compliance with the law and the Articles of Association and with the statutory audit of the financial statements.
However, the two tasks can be also split and assigned to two different bodies: the supervision can be given to the Collegio Sindacale and the audit of the financial statements (including the quarterly checks on the accounts) can be given to an audit firm or an auditor.
The separation of these two tasks is compulsory for listed companies and companies required to prepare consolidated financial statements.
Deductibility of expenses
In determining taxable income, there is a wide range of expenses that can be deducted from the profit as indicated in the profit and loss accounts. Some of those expenses are 100% deductible, some of them are partially deductible and others are not deductible at all.
As a general principle, all the expenses incurred in order to carry on the company activity are eligible to be fully deducted from the profit.
However, if some of these costs are incurred both for company reasons and for private reasons, the percentage of deductibility is less than 100%.
Only the costs indicated in the P&L statement can be deducted for tax purposes.
The following list gives some examples of deductible costs and extent of their deductibility:
- depreciation: they are deductible pursuant to a decree (Min. Decree 31.12.1988) which establishes the different percentages of annual deductible depreciation for specific assets;
- cost of labor: all the costs related to wages, social and health contributions paid by the company are deductible;
- other taxes: apart from IRAP (deductible only up to 10% of the amount paid), other taxes are deductible in the fiscal year they have been paid;
- provisions: most provisions cannot be deducted for tax purposes since they are not relevant under a tax perspective;
- telephone costs: they are deductible for 80% of their amount;
- costs related to cars: if a car is used exclusively for business purposes, the costs are entirely deductible, other- wise, they can be deducted in different percentages (70% to 80% – at 27,5%) depending on the user and the conditions for use;
- gifts: they are entirely deductible if their value is less than EUR 50 each (gross VAT);
- entertainment expenses: deductible within the following limits: a. 1.3% of the annual sales (for annual sales below EUR 10 million); b. 0.5% of the annual sales (for annual sales within EUR 10 million and EUR 50 million); 0.1% of the annual sales (for annual sales of more than EUR 10 million);
- costs for goods and services purchased from companies residing in tax havens are deductible only if certain conditions are met. In any case, the relating amounts have to be indicated in the annual tax return.
Controlled Foreign Companies (CFC)
The income produced by businesses, companies or other entities, resident or established in a black list country, which is controlled directly or indirectly by a resident person (individual, company, etc.), is attributed directly to the resident person, in proportion to the participation held. These rules also apply if the subsidiary has a permanent establishment in one of the countries previously mentioned. The above rules also apply to associated foreign companies, i.e. to participations exceeding 20% (10% if the company is listed). Taxable income is therefore determined according to specific rules.
CFC rules do not apply where a positive advance ruling is given by the revenue authorities, which is intended to prove specific conditions are satisfied.
CFC rules also apply to controlled entities established in non-blacklist countries if:
- they are subject to tax rates less than 50% of the effective Italian tax rate; and
- more than 50% of the income earned is passive income (i.e. interests, dividends, royalties and services provided to related parties).
Advanced ruling for exemption is available.
In particular, transfer pricing rules in line with OECD Guideline apply to:
- foreign companies which control Italian enterprises they perform transactions with;
- Italian enterprises, which control foreign companies they perform transactions with;
- Italian or foreign companies which control both entities (Italian enterprises and foreign companies) involved in the transaction.
“Foreign companies” is defined in practice as any kind of business entity, legally recognized in the foreign country, even if it has only one partner.
“Italian companies” is defined as companies with share capital, partnerships, sole traders and permanent establishments foreign companies set up in Italy.
Inter-company transactions are to be performed at arm set up in, which is the principle recommended by the OECD Guidelines, according to which the price is negotiated by independent entities.
There are no legal obligations in terms of documenting the price policy used within the business group, however, it is advisable to ensure documentation can prove the transfer pricing method adopted within the group. Avoiding transfer pricing issues is also possible by using one of the means provided by the tax authorities, such as:
An annual tax return must include the following information:
- the kind of control (see the above point a) b) c)) applicable to the company;
- the amount of the transaction relating to the operation subject to the Transfer pricing rules;
- if the company has the documentation to prove the transfer pricing method adopted within the group.
In relation to the above documents, the Italian regulations make explicit reference to the OECD Guidelines (namely, to the recent edition approved by the OECD Council on July 22nd, 2010), and the documentation requirements broadly replicate the recommendations of the EU Code of Conduct on transfer pricing documentation for associated enterprises in the EU – the “European Union Transfer Pricing Documentation” or “EU TPD”. This includes the Master File and Country File concepts, although with some points of difference, towards a more comprehensive informative package (please see the table at the end for a detailed list of the required documentation).
Businesses with international activities may implement a suitable international standard ruling procedure, mainly with regard to the system of transfer prices, interest, dividends and royalties, in order to reach an agreement with the Inland Revenue, valid for three tax periods, without prejudice to any changes in the “de facto” and “de jure” circumstances resulting from the agreement signed.
Taxation on dividends and interests
Income of companies and associations subject to corporation tax (IRES) is only taxed when it is produced. The company therefore pays IRES permanently and shareholders are not entitled to any tax credit on the profits received.
Dividends received by Italian entities are subject to taxation as follows:
- dividend received from resident companies are taxed at 5% of their amount;
- dividend received from companies located in countries with a preferential tax system are fully taxable. Dividends paid to companies based in member states of the European Union (EU) and in members of the European Economic Area (EEA) that allow a suitable exchange of information with Italy, are generally taxed at source (WHT) at a rate of 1.375%.
Interest on bank deposits and current accounts is subject to a 26% substitutive final tax withheld at source. Other interest on loan, deposits and current accounts is also subject to a 26% advance withholding tax. Interest on bonds and other financial assets is subject to 26% advance or final withholding tax according to various conditions.
Interest paid to non-residents is subject to the same rates applied to resident individuals; the withholding tax is applied on a final basis. Interest paid to non-residents on deposit accounts with banks and post offices is exempt.
Payments to associated EU Companies are exempt under the EC Interest and Royalties Directive, provided that certain conditions are met.
Capital gains on the transfer of company holdings, under certain conditions, are 95% exempt from taxation. Capital losses are not deductible.
The legal conditions for exemption are the following:
- uninterrupted holding as from the first day of the 12th month preceding that of the transfer; holdings acquired more recently will be deemed to be transferred first (LIFO basis);
- classification of holdings as fixed asset investments as from the first balance sheet closed during the period of ownership;
- tax residence of the subsidiary in a country or territory other than those with a preferential tax system;
- exercise by the subsidiary of actual commercial activities in territory other than those with a prefer
The conditions set out in paragraphs c) and d) must be met without interruption at least as from the beginning of the third tax period prior to one of the transfers.
Tax transparency option
The tax transparency is a system by which the company transparency is not taxed in respect of the company itself, but is attributed to each shareholder, irrespective of its actual distribution, in proportion to their share in the profits.
The system is optional and the option has to be exercised by all the shareholders.
The requirements for exercising the option are as follows:
- the shareholders must all be limited liabilities companies with share capital, cooperative companies or mutual insurance companies resident in Italy;
- each shareholder must hold a percentage of voting rights at the general meeting and profit-sharing of minimum 10% and maximum 50%.
These conditions must be met from the very first day of the tax period of the subsidiary in which the option is exercised and remain in force until the end of the option period.
The option period is a 3-year period.
Under certain conditions, this system may also be applied if one or more shareholders are non-resident.
In the event of the distribution of dividends, consisting of profits acquired during the periods included in the period of validity of the option, dividends will not be taxed. This system is also applicable to S.r.l. or cooperatives, provided that:
- all the shareholders are natural persons only, up to 10 for an S.r.l. or 20 for cooperative societies;
- the subsidiary has an income not exceeding EUR 7,500,000;
- the company does not have participations within the participation exemption requirements.
Domestic tax consolidation
Domestic tax consolidation is an optional system arranged for a 3-year period , to which company groups may have access. To exercise the option, the law provides for the controlling company to participate directly or indirectly in an amount exceeding 50% of the share capital and profits of the subsidiary for the year. The system consists of the consolidation of the taxable income, calculated separately by each company, which is totally algebraic, irrespective of the percentages of participation of the different companies. For this purpose, the holding company must:
- submit the consolidated earnings return, calculating the overall global income based on the algebraic sum of the overall net income declared by each of the companies participating in the system, without making any consolidation adjustment;
- proceed with payment of the group taxation (IRES).
Any excess interest payable and non-deductible assimilated costs formed by a subject who takes part in the consolidated balance sheet can be deducted from the group’s overall income if and within the limits in which the other participants submit a declaration of large-scale gross earnings for the same taxation period that is not fully used for deduction. These rules can be applied to excesses carried forward, excluding any excess formed prior to entering the national consolidated balance sheet that must be used for the sole purposes of each company elected for this regime.
The option is exercised by forwarding suitable notification to the Inland Revenue.
Companies belonging to the group and using IRES rate reductions may not exercise the option.
The following conditions must also be met:
- residence in Italy of all companies participating in the “fiscal unit”;
- all of the companies participating in the group must have the same year-end;
- election of domicile by each subsidiary with the controlling company.
World tax consolidation
World tax consolidation is an optional system with a 5-year period, based on which a controlling company resident in Italy may consolidate the income made by all non-resident subsidiaries proportionately, for which the control requirement exists, based on the percentage of participation held in the subsidiaries. The following conditions must be met:
- residence of the controlling company in Italy;
- all of the companies participating in the group must have the same year-end, unless not permitted by foreign legislation;
- inspection of the balance sheets of the controlling and subsidiary companies;
- compulsory consolidation of all foreign subsidiary companies;
- certification by non-resident subsidiaries of their consent to the audit of the balance sheet and undertaking to provide any collaboration required to establish the tax assessment basis and to comply with the requests of the Inland Revenue.
A suitable appeal should be made to the Inland Revenue to check the requirements for the valid exercise of the option.
Withholding taxes are applied to various payments. The following are the most important. Tax treaties, where more favorable to the taxpayer, override statutory provisions.
Dividend income received by partnerships or by individuals in relation to business activities is subject to tax at 49.72%.Dividend income received by individuals not related to business activities is subject to:
- ordinary tax at 49.72%, if related to qualified participations(26% advance withholding tax also applies to foreign source dividends);
- 26% substitutive final tax withheld at source for the total amount, if related to non-qualified participations.
Qualified participations are participations entitling to:
- more than 2% of voting rights in an ordinary meeting or 5% of capital or corporate assets of quoted companies;
- more than 20% of voting rights in an ordinary meeting or 25% of capital or corporate assets of other companies.
Dividends of foreign source from black list countries are subject to ordinary tax on 100% of their amount. 26% advance withholding tax applies.
Dividend paid to non-residents (other than EU companies) are subject to a 26% final withholding tax. Reduced rates and reimbursement may apply (leading to a 15% effective tax rate), provided that certain conditions are met.
Dividends paid to EU companies are subject to a 1.375% final withholding tax.
Payments to a qualifying EU parent company are exempt from withholding tax under the Parent-Subsidiary Directive, according to specific conditions.
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