Italian companies are subject to corporation income tax (IRES – Imposta sul Reddito delle Società) on profits as well as regional tax (IRAP – Imposta Regionale sulle Attività Produttive).
National corporate tax (IRES)
The rate of national corporation tax (IRES) is currently 24%. The rate of regional corporation tax (IRAP) may vary from region to region and it is normally around 3,9%.
An Italian company must file a notice of its existence to the Inland Revenue (Agenzia delle Entrate) immediately after its incorporation and open a VAT position (Partita IVA). An Italian company must file with the Inland Revenue a Corporation Tax Return no later than 12 months after its accounting reference date.
Italian tax resident companies must pay Italian corporation tax on their worldwide income and gains, subject to double taxation relief.
Should any corporation tax be due in Italy, this must be paid 6 months after the accounting reference date. Should either of these dates be missed then penalties and interest become payable.
Regional tax on production activities (IRAP)
The regional tax on production activities (IRAP) is a local tax collected by the Region where the production activities liable for tax are conducted.
If taxpayers perform their activities in establishments and offices situated on the territory of several regions, the distribution of the taxable income, and, therefore, of IRAP is attributed in proportion to the cost of the employees working in the various regional establishments and offices.
Persons subject to IRAP
IRAP is due to those regularly engaged in an independently run activity in the production of goods or services in the Region.
In particular, the following persons are subject to IRAP:
- entities subject to IRES: resident commercial companies and institutions, and non-resident companies and institutions of any type with or without legal status;
- joint-name partnerships, limited partnerships and those equivalent to simple partnerships practicing arts and professions and professional associations;
- agricultural producers receiving agricultural income (individuals or groups), except for those exempt from VAT;
- public and private non-commercial institutions and public administrations;
- individuals receiving company income; and individuals receiving income from self-employed work.
IRAP does not apply to mutual investment funds, pension funds, European economic interest groups (EEIG) and door-to-door salesmen.
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 out the company business 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: some 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% or 80%) 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)
An Italian company that controls, either directly or indirectly, a foreign enterprise, company, or other entity that jointly falls into the following conditions:
- the effective tax rate is lower than 50% of the effective tax rate that such companies would be subject to if they were tax resident in Italy, and
- more than 1/3 of the revenues derive from passive income.
is required to consolidate the taxable income arising in proportion to the percentage of shareholding held, irrespective of whether the profits have been distributed or not.
Advanced ruling for exemption is available.
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 have to be performed according to the arm’s length principle, which is the principle recommended by the OECD Guidelines, according to which an arm’s length transaction refers to a business transaction in which buyers and sellers act independently without one party influencing the other..
Transfer pricing rules provide for a penalty protection regime in case of transfer pricing audit of the Tax Authorities, provided proper documentation detailing the compliance of inter-company transaction to the arm’s-length principle have been prepared by the taxpayer. In relation to the above documentation, 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
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 taxableDividends 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 taxed at source (WHT) at a rate of 1.2%.
Dividend income received by individuals not related to business activities is subject to:
- 26% substitutive final tax.
- Dividends of foreign source from low tax countries are subject to ordinary personal income tax on 100% of their amount.
Dividend paid to non-residents (other than EU companies) are subject to a 26% final withholding tax. Reduced rates and reimbursement may apply, provided that certain conditions are met.
- Dividends paid to EU companies are subject to a 1.2% final withholding tax.
- Payments to a qualifying EU parent company are exempt from withholding tax under the Parent-Subsidiary Directive, according to specific conditions.
Taxation on interest
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 (26%); 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 95% 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 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.
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.
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