The corporate tax

Italian companies are subject to the corporate income tax (IRES – Imposta sul Reddito delle Società) on profits and to the regional tax (IRAP – Imposta Regionale sulle Attività Produttive).

National Corporate Tax (IRES)

The tax rate for the National Corporate Tax (IRES) is currently set at 24%. The rate for the Regional Corporate Tax (IRAP) can vary from region to region and typically ranges around 3.9%.

An Italian company must notify its existence to the Revenue Agency (Agenzia delle Entrate) immediately after its establishment and open a VAT position (Partita IVA). An Italian company must file its income tax return with the Revenue Agency within 12 months from the accounting reference date.

Italian tax resident companies must pay Italian corporate tax on their worldwide income and capital gains, subject to relief against double taxation.

If corporate tax is due in Italy, it must be paid 6 months after the accounting reference date. Failure to meet any of these deadlines will result in penalties and interest.

Regional Tax on Productive Activities (IRAP)

The Regional Tax on Productive Activities (IRAP) is a local tax collected by the Region where the productive activities subject to the tax are carried out.

If taxpayers conduct their activities in establishments and offices located in the territory of multiple regions, the distribution of taxable income, and therefore IRAP, is attributed proportionally to the cost of employees operating in the various regional establishments and offices.

Subject to IRAP

IRAP is due for those who regularly carry out activities of autonomous production of goods or services in the region.

In particular, the following are subject to IRAP:

Subjects subject to IRES:

– resident companies and commercial entities, as well as companies and entities of any kind that are non-resident, with or without legal personality;
– partnerships, limited partnerships, and those equated to simple partnerships engaging in arts and professions, and professional associations;
– agricultural producers receiving agricultural income (individuals or associations), except for those exempt from VAT;
– non-commercial public and private entities and public administrations;
– subjects receiving business income; and individuals receiving income from self-employment.

IRAP does not apply to investment funds, pension funds, European Economic Interest Groups (EEIGs), and door-to-door sellers.

Deductibility of Expenses

When determining taxable income, there is a wide range of expenses that can be deducted from profit as indicated in the profit and loss account. Some of these expenses are 100% deductible, some are partially deductible, and others are not deductible at all.

In principle, all expenses incurred for the conduct of business activities can be fully deducted from profit.

However, if some of these costs are incurred for both business and private reasons, the deductible percentage is less than 100%.

Only costs indicated in the income statement can be deducted for tax purposes.

The following list provides some examples of deductible costs and the extent of their deductibility:

– depreciation: Deductible according to a decree (DM 31.12.1988) which establishes the different percentages of annual depreciation deductible for specific assets;
– labor costs: All costs related to salaries, social security, and health contributions paid by the company are deductible;
– other taxes: In addition to IRAP (deductible only up to 10% of the amount paid), other taxes are deductible in the tax year in which they are paid;
– provisions: Some provisions are not fiscally deductible as they are not relevant for tax purposes;
– telephone expenses: Deductible for 80% of their amount;
– vehicle costs: If the vehicle is used exclusively for business purposes, the costs are fully deductible, otherwise they can be deducted at different percentages (70% or 80%) depending on the user and conditions of use;
– gifts: Fully deductible if their value is less than 50 euros each (gross VAT);
– entertainment expenses: Deductible within the following limits: a. 1.3% of annual turnover (for annual turnover below 10 million euros); b. 0.5% of annual turnover (for annual turnover between 10 million euros and 50 million euros); 0.1% of annual turnover (for annual turnover exceeding 10 million euros);
– costs for goods and services purchased from companies resident in tax havens are deductible only if certain conditions are met. In any case, the respective amounts must be indicated in the annual tax return.

Controlled Foreign Corporations (CFC)

An Italian company that directly or indirectly controls a foreign enterprise, company, or other entity is subject to the following conditions:

– the effective tax rate is less than 50% of the effective tax rate that such entities would be subject to if they were tax residents in Italy, and
– more than 1/3 of the revenues derive from passive income.

A company is required to consolidate the taxable income resulting in proportion to the percentage of ownership held, regardless of whether the profits have been distributed or not.

An advanced ruling for exemption is available.

Transfer pricing

Transfer pricing rules in line with OECD Guidelines apply to:

– foreign companies controlling Italian enterprises with which they transact;
– Italian enterprises controlling foreign companies with which they transact;
– Italian or foreign companies controlling both parties (Italian enterprises and foreign companies) involved in the transaction.

By “foreign companies,” practically any type of commercial entity legally recognized in a foreign country is meant, even if it has only one partner.

“Italian companies” are defined as joint-stock companies, partnerships, sole proprietorships, and foreign permanent establishments established in Italy.

Intercompany transactions must be conducted according to the principle of free competition, which is the principle recommended by the OECD Guidelines. Free competition transaction refers to a commercial transaction in which buyers and sellers act independently without one party influencing the other.

Transfer pricing regulations provide a penalty protection regime in case of transfer pricing audits by tax authorities, provided that the taxpayer has prepared adequate documentation detailing the compliance of intra-group transactions with the principle of free competition. Regarding this documentation, Italian regulations explicitly refer to the OECD Guidelines (i.e., to the recent edition approved by the OECD Council on July 22, 2010), and the documentation requirements largely replicate the recommendations of the EU Code of Conduct on Transfer Pricing Documentation for associated enterprises in the EU – the “EU Transfer Pricing Documentation” or “EU TP Documentation.”

This includes the concepts of Master File and Country File, albeit with some differences, towards a more comprehensive information package (see the table at the end for the detailed list of required documentation).

International Ruling

Companies with international operations can adopt a specific ruling procedure according to international standards, primarily concerning the transfer pricing system, interest, dividends, and royalties, in order to reach an agreement with the Revenue Agency, valid for three tax periods, subject to any changes in the “de facto” and “de jure” circumstances resulting from the signed agreement.

Taxation on Dividends

Dividends received from Italian entities are subject to taxation as follows:

– dividends received from resident companies are taxed at a rate of 5% of their amount;
– dividends received from companies based in countries with a preferential tax system are fully taxable.
– dividends paid to companies based in European Union (EU) member states and members of the European Economic Area (EEA) that allow adequate information exchange with Italy are subject to withholding tax (WHT) at a rate of 1.2%.

Dividend income received by individuals not engaged in business activities is subject to:

– final substitute tax of 26%;
– foreign source dividends from low-tax countries are subject to ordinary income tax on 100% of their amount;

Dividends paid to non-residents (other than EU companies) are subject to a final withholding tax of 26%.

Reduced rates and refunds may be applied if certain conditions are met.

Dividends paid to EU companies are subject to a final withholding tax of 1.2%.
Payments to a qualified EU parent company are exempt from withholding tax under the Parent-Subsidiary Directive, subject to specific conditions.

Taxation on Interest

Interest on bank deposits and current accounts is subject to a final substitute tax with a withholding rate of 26%. Other interests on loans, deposits, and current accounts are also subject to an advance withholding tax of 26%. Interests on bonds and other financial assets are subject to an advance or final withholding tax of 26% depending on various conditions.

Interests paid to non-residents are subject to the same rates applied to residents (26%); the withholding tax is applied definitively. Interests paid to non-residents on deposit accounts at banks and post offices are exempt.

Payments to associated European companies are exempt under the EC Directive on interest and royalties, provided certain conditions are met.

Exemption for Equity Holdings

Capital gains resulting from the sale of equity holdings, under certain conditions, are exempt from taxation at 95%. Capital losses are not deductible.

The legal conditions for the 95% exemption are as follows:

– continuous ownership from the first day of the 12th month preceding that of the transfer; more recently acquired holdings will be considered sold first (LIFO basis);
– classification of investments as fixed assets from the first closed balance sheet during the ownership period;
– tax residency of the subsidiary in a country or territory other than those with preferential tax regimes;
– operation of genuine commercial activity by the subsidiary.

Conditions c) and d) must be continuously met at least from the beginning of the third tax period preceding any of the sales.

Option for Tax Transparency

Tax transparency is a system in which corporate transparency is not taxed at the corporate level but is attributed to each shareholder, regardless of its actual distribution, in proportion to their share of profits.

This system is optional, and the option must be exercised by all shareholders.

The requirements to exercise the option are as follows:

– shareholders must all be capital companies, cooperative societies, or mutual insurance companies resident in Italy;
– each shareholder must hold a percentage of voting rights in the general meeting and a share of profits ranging from a minimum of 10% to a maximum of 50%.
– these conditions must be met from the first day of the controlled company’s tax period in which the option is exercised and remain in force until the end of the option period.

The option period is 3 years.

Under certain conditions, this system can also be applied if one or more shareholders are non-residents.

In the case of dividend distribution, consisting of profits acquired during the periods included in the validity period of the option, the dividends will not be taxed. This system is also applicable to Limited Liability Companies (Srl) or cooperatives, provided that:

All shareholders are only natural persons, up to 10 for Srl or 20 for cooperative societies;
The controlled company has income not exceeding 7,500,000 euros;
The company does not hold participations that meet the exemption criteria from participation.

National Tax Consolidation

National tax consolidation is an optional system available for a period of 3 years, which corporate groups can opt for. To exercise this option, the law requires that the parent company directly or indirectly holds more than 50% of the share capital and profits of the subsidiary. The system involves consolidating the taxable income, separately calculated by each company, which is algebraic, regardless of the percentage of ownership of the different companies. To do this, the holding company must:

– submit a consolidated tax return, calculating the overall global income based on the algebraic sum of the overall net incomes declared by each of the companies participating in the system, without making any consolidation adjustments;
– proceed with the payment of group taxation (IRES).

Any excess passive interest and assimilated undeductible costs incurred by a participant in the consolidated financial statements can be deducted from the group’s overall income if and to the extent that other participants declare relevant gross incomes for the same tax period not fully used for deduction. These rules can be applied to carried-forward excesses, excluding those possibly incurred before entry into the national consolidated financial statements, which must be used solely for the purposes of each company elected to this regime.

The option is exercised by sending appropriate communications to the Revenue Agency.

Companies benefiting from reduced IRES rates cannot exercise the option.

Furthermore, the following conditions must be met:

– all participating companies in the “tax nucleus” must be resident in Italy;
– all participating group companies must have the same closing year;
– each subsidiary must be domiciled at the parent company’s registered office.

Wordwide Tax Consolidation

Worldwide tax consolidation is an optional system lasting for 5 years, under which an Italian resident parent company can proportionally consolidate its incomes earned by all its non-resident subsidiary companies, for which the control requirement exists, based on the percentage of ownership held in the subsidiaries. The following conditions must be met:

– residence of the parent company in Italy;
– all participating group companies must have the same closing year, except where prohibited by foreign regulations;
– verification of the financial statements of both the parent and subsidiary companies;
– mandatory consolidation of all foreign subsidiary companies;
– certification by non-resident subsidiary companies of their consent to the audit of financial statements and commitment to provide all necessary cooperation for the determination of taxable income and to comply with requests from the Revenue Agency.

A specific application must be submitted to the Revenue Agency to verify the requirements for validly exercising the option.

Withholding taxes are applied to various payments. The following are the most significant. Tax treaties, where more favorable to the taxpayer, prevail over statutory provisions.