22 September, 2019
Taxation of Italian Companies.
The taxation of the income of an Italian company is based on its aggregate income earned both in Italy and abroad. This articles provides an introduction to corporate tax in Italy, outlining the types (IRES and IRAP) and rates of income tax and explaining how such tax is calculated.
Corporate Tax
The taxation of the income of an Italian company is based on its aggregate income earned both in Italy and abroad. The corporation tax to be paid by a foreign company is levied upon its income earned in the Italian territory where it has a permanent establishment.
The income of a company is subject to national corporate income tax (IRES) and regional income tax (IRAP). IRES is a proportional tax levied at the rate of 24% on the amount of the taxable income. IRAP is calculated at a rate of 3.9%.
The taxable income of a company is represented by the results shown in its profit and loss account. Losses of a company may be carried forward and deducted from the corporate income tax (IRES) taxable income of the subsequent fiscal years up to 80% of the taxable income. Losses incurred in the first three fiscal years may be carried forward and deducted from 100% of the corporate income tax (IRES) taxable income of the subsequent fiscal years..
Italian corporate tax law provides for two types of withholding tax: (i) final withholding tax levied at source; and (ii) withholding tax in advance payment of income tax levied upon a single item of income and which may later be added to the aggregate income. Withholding tax rates refer to dividends, interest and royalties. This document explains the types and rates of withholding tax in Italy, including double taxation relief, and a table of Italian withholding taxes applicable to European countries is provided.
Withholding Tax
Types of withholding tax
Italian tax law provides, inter alia, for two types of withholding tax:
(1) final withholding tax levied at source; and
(2) withholding tax in advance payment of income tax levied upon a single item of income and which may later be added to the aggregate income. The amount of withholding tax levied in advance is deducted from the tax levied on the aggregate income. The withholding tax is levied intermediaries, i.e. by those who pay the income subject to withholding tax. These are commercial organisations, business concerns, commercial agencies and entities which are not subject to IRES. The withholding tax is levied by companies in the following instances:
(a) on income from employment;
(b) on fees for independent services;
(c) on commissions to agents and brokers;
(d) on royalties for the use of intellectual property rights, patents, trademarks and other rights on industrial property; and
(e) on capital income (interest on loans, from bonds, bank and post office deposits and current accounts, and dividends).
Rates of withholding tax
Italian Tax Law provides for the application of the withholding tax with referenceto dividends, interest and royalties.
Dividends distributed to entities other than individuals, which are not resident in Italy, are levied with a withholding tax rate of 26%; however if the entity is a company, which is subject to corporate income tax in a State belonging to the European Union and to the Economic European Area the applicable withholding tax rate is reduced to 1.2%. According to the parent/subsidiary Directive (90/434), if certain conditions are met, dividends distributed to the parent company by the subsidiary are exempted from any withholding tax.
In order to avoid cases of double taxation (both legal and economic) inbound dividends received by a company (non-resident in “low tax countries”) are exempt from taxation in the amount of 95%. For the interest due, a withholding tax rate of 26% is charged; for all other interest Italian Tax Law provides for the application of general full taxation.
Royalties paid to entities not resident in Italy are levied with a withholding tax rate of 30%; for other royalties Italian Tax Law provides for the application of general full taxation.
According to the interest/royalties Directive (2003/49), if certain conditions are met, interest and royalties paid to “group companies” (25% of participation) are exempted from any withholding tax.
Double taxation relief
Some international Doub, entered into by Italy to mitigate double taxation, set forth particular provisions for exemption from withholding tax for certain types of income or fix reduced rates in relation thereto. A table of the withholding taxes on payments from an Italian company to a resident of various countries included in this Publication is set out at para [508].
However, as mentioned above:
- according to the parent/subsidiary Directive (90/434), if certain conditions are met, dividends distributed to the parent company by the subsidiary are exempted from any withholding tax;
- according to the interest/royalties Directive (2003/49), if certain conditions are met, interest and royalties paid (and received) to (from) “group companies” (25% of participation) are exempted from any withholding tax;
- a specific Agreement provides a measure for the avoidance of double taxation on dividends, interest and royalties paid between EU and Swiss companies whose rationale strictly aligns to that of the EU Parent-Subsidiary Directive for dividend and to that of the Interest/royalties Directive for interest and royalties, payments between EU companies: it implies that, if certain conditions are met, dividend, interest and royalties paid to Swiss companies are exempted from any withholding tax.
In particular, Italy has signed 97 tax treaties to avoid double taxation.
For information for each countries, please visit:
https://www.finanze.gov.it/opencms/it/fiscalita-comunitaria-e-internazionale/ convenzioni-e-accordi/convenzioni-per-evitare-le-doppie-imposizioni/
Table of Italian Withholding Taxes Applicable to European Countries
Recipient | WHT (%) | ||
Dividends | Interest | Royalties | |
Resident corporations | 0 | 0/26 (1) | 0 |
Resident individuals | 26 (2) | 26 | 20 (3) |
EU resident corporations | 0/1.2 (4, 5) | 0 (4)/DTT rates | 0 (4)/DTT rates |
Swiss resident corporations | 0 (6)/DTT rates | 0 (6)/DTT rates | 0 (6)/DTT rates |
Non-resident corporations and individuals: | |||
Non-treaty countries | 26 (7) | 26 | 30 (3) |
Treaty countries (8): | |||
Austria | 15 | 0/10 | 0/10 |
Belgium | 15 | 0/15 | 5 |
Bulgaria | 10 | 0 | 5 |
Cyprus | 15 | 10 | 0 |
Czech Republic | 15 | 0 | 0/5 |
Denmark | 0/15 | 0/10 | 0/5 |
Estonia | 5/15 | 0/10 | 0/5/10 |
Finland | 10/15 | 0/15 | 0/5 |
France | 5/15 | 0/10 | 0/5 |
Germany | 10/15 | 0/10 | 0/5 |
Greece | 15 | 0/10 | 0/5 |
Hungary | 10 | 0 | 0 |
Iceland | 5/15 | 0 | 5 |
Ireland | 15 | 10 | 0 |
Kazakhstan | 5/15 | 0/10 | 10 |
Kyrgyzstan | 15 | 0 | 0 |
Kuwait | 0/5 | 0 | 10 |
Latvia | 5/15 | 0/10 | 5/10 |
Lithuania | 5/15 | 0/10 | 5/10 |
Luxembourg | 15 | 0/10 | 10 |
Malta | 15 | 0/10 | 0/10 |
Netherlands | 5/10/15 | 0/10 | 5 |
Norway | 15 | 0/15 | 5 |
Poland | 10 | 0/10 | 10 |
Portugal | 15 | 0/15 | 12 |
Romania | 0/5 | 0/5 | 5 |
San Marino | 0/5/15 | 0/13 | 0/10 |
Slovak Republic | 15 | 0 | 0/5 |
Slovenia | 5/15 | 0/10 | 5 |
Spain | 15 | 0/12 | 4/8 |
Sweden | 10/15 | 0/15 | 5 |
Switzerland | 15 | 12.5 | 5 |
United Kingdom | 5/15 | 0/10 | 8 |
Notes
- The actual applicable rate depends on the nature of the recipient. Applicable rates are as follows: 0% applies on loan agreements and ordinary notes when the recipient is a corporation; 26% rate in all other cases.
- For resident individuals, generally a 26% WHT applies, but there is a grandfathering regime for dividends received by ‘qualified’ shareholders (i.e. holding more than 20% of voting rights or 25% of the share capital, 2% or 5% in case of listed companies). The rate applicable to ‘non-qualified shareholders’ is always 26%. Non-residents are always subject to a 26% WHT, irrespective of whether or not they are ‘qualified’.
- The domestic rate applies on 75% of the gross amount of the royalty paid; however, treaty ceilings apply on the gross amount of the royalty paid.
- Pursuant to the EU Directives and provided that the requirements set forth therein are met, payments of dividends, interest, and royalties made by an Italian company to an EU resident group company can be WHT exempt. Specifically for the dividends, the minimum shareholding requirement (to benefit from this exemption) is currently equal to 10%; for interest and royalties, it is 25% of voting rights; a one-year minimum holding period applies for both.
- Should the full WHT exemption not apply, 1.2% applies on dividends paid to EU and EEA tax resident corporations.
- Pursuant to the Swiss – EU tax agreement and provided that the requirements contained therein are met, payments of dividends, interest, and royalties made by an Italian company to a Swiss tax resident group company can be WHT exempt.
- Non-resident persons have the right to obtain reimbursement for up to 11/26 of the withholding effected, upon proof of the actual taxation of the dividends in the foreign country where the recipient is a resident.
- Provided that all conditions are met, domestic tax legislation is applicable if more favourable for the taxpayer. In a number of circumstances, tax treaties may provide for particular tax rates mainly dependent on the nature of the instruments and on the profile of the recipients/payers. In such cases, the applicable WHT rate must be verified from an analysis of the relevant tax treaty.
This document summarises the rules on the application of registration and transfer taxes in Italy, and provides the tax rates.
Registration and transfer taxes
Capital transactions resulting in an increase in capital in cash or in the transfer of movable goods, if they are subject to VAT, are subject to registration tax at a fixed amount of €200. Sales of real property are subject to a registration tax of between 1% and 15% depending on the type of property involved plus mortgage and cadastral taxes (about 3% as whole). Such tax is levied on deeds entered into within Italy and relates to the market value of such deeds, regardless of the values declared in the deeds themselves.
Contracts for the transfer of rights are subject (depending on the type of deed) to proportional rates ranging from 0.5% to 3%. In some cases contracts of transfer are subject to VAT provided that, in accordance with the principle of alternative applicability between VAT and the registration tax, such contracts are only subject to registration tax at a fixed amount of €200.
On the sale of property and on the performance of services by companies in Italy, VAT is applied at the rate of 21 percent on the amount of the sale or on the declared value of the services. This rate is reduced to 4 percent or 10 percent, as the case may be, if the company is involved in sales of particular categories of goods. This document explains the application of VAT on companies under Italian law.
Value Added Tax (VAT)
On the sale of property and on the performance of services by companies in Italy, VAT is applied at the rate of 22% on the amount of the sale or on the declared value of the services. This rate is reduced to 4% or 10%, as the case may be, if the company is involved in sales of particular categories of goods (such as agricultural products, agronomic goods, fish, milk and dairy products, etc).
VAT is also paid on imports from non EEC countries and on transactions abroad, but it is excluded, on the basis of the territorial principle, on particular export transactions (within the limits and the conditions provided by law). Transactions carried out in Italy by non-resident entities which have a permanent establishment in Italy are also subject to VAT.
EC Directive no 91/680, amending Council Directive 2006/112/EC, set forth a transitional regime for cross-border sales between business operations in the European Community. In the case of sales of goods, the VAT must be paid in the place where the goods are located. On the performance of services, there is a distinction: if the purchaser is a VAT subject, VAT must be paid in the State where the purchaser is resident or domiciled for tax purposes; if the purchaser is a consumer, VAT must be paid in the State where the performer is resident or domiciled for tax purposes. VAT is paid on the basis of the returns made either on a monthly or on a quarterly basis.
Any sales of national or nationalised real estate or moveable property located in Italy are considered to be performed in Italy.
The act governing the application of VAT provides that certain transactions are exempt from tax (for example, credit and financing transactions; insurance transactions; foreign currency transactions; transactions concerning shares and bonds). VAT is based on the principle of ‘compulsory recourse’. Therefore, each commercial agent is bound to pay to the Italian Government, on a monthly or quarterly basis (depending upon the realised turnover) any VAT collected after deducting any VAT paid on the transactions in relation to which it was a beneficiary.
There are a series of steps involved in the application of VAT including the obligation of the performer of the service or seller of the goods to issue an invoice; the obligation to keep and maintain a book with a list of all invoices issued and purchases performed. Each year, companies must file a VAT return, at the same time as their income tax return, stating the turnover transactions performed, as well as the amount of VAT collected and the amount of VAT paid. By 16 March of each year any amount due in addition to the amount paid on a monthly or quarterly basis must be paid.
‘Capital gains’ (redditi diversi di natura finanziaria) are income deriving from the disposal of previously invested capital, including shares (or quotas in a society with restricted liability (srl)), foreign currency and bonds. As part of this commentary on company law in Italy, this document explains the tax treatment of capital gains, setting out the options as to how they may be taxed as well as the conditions for the application of the participation exemption regime.
Capital Gains Taxes
‘Capital gains’ (`redditi diversi di natura finanziaria’) are income deriving from the disposal of previously invested capital, including shares (or quotas in an Srl), foreign currency and bonds.
Capital gains of an individual may be taxed, each having different advantages which are not dealt with in detail herefollows:
(1) Regime della dichiarazione(‘tax return option’), which taxes the gains effectively realised at a rate of 26%, on an annual basis.
(2) Regime Amministrato(‘Administration option’), which taxes the gains effectively made at the completion of each transaction at a rate of 26%. It is not applicable to qualified shareholdings, and allows anonymity for the taxpayer.
(3) Regime Gestito(‘asset management option’), where the taxation is based on a ‘yearly accrual basis’ regardless of the income realised. It is not applicable to qualified shareholdings and the tax rate is 26%.
A particular regime is applied to capital gains from participations performed by companies: if certain conditions are met (see below)the capital gain is levied only on 5% of the taxable amount (the percentage of exemption is 95%). In order to enjoy this participation exemption regime four conditions must be satisfied:
(a) uninterrupted possession of the participation from the first day of the twelfth month preceding its sale (the `holding period’);
(b) the participation must be classified as a financial fixed asset (`Immobilizzazioni finanziarie‘) in the first financial statement closed during the first holding period;
(c) the residence of the company in which the stake is held must not be in a State which is not a non-resident in “low tax countries”;;
(d) the subsidiary must carry on business activity.