Italy highlights for foreigners investors
Accounting principles/financial statements
Italian GAAP and IFRS/IAS. Financial statements must be prepared annually. Consolidated accounts must be prepared if certain thresholds are exceeded.
Principal business entities
There are joint stock company (società per azioni or SPA), limited liability company (società a responsabilità limitata or SRL) and branch of a foreign company.
A company is considered as resident for tax purposes if its legal seat, place of effective management or main business activity is in Italy for the greater part (i.e. 183 days) of the financial year. Foreign companies holding controlling participations in Italian companies or managed by Italian residents representing the majority of their board of directors also are considered Italian tax resident, unless the contrary is demonstrated.
Corporate income tax(es)
IRES (imposta sul reddito delle società) at 27.50%. Also IRAP (imposta regionale sulle attività produttive) at 3.9% is added.
Resident companies are taxed for IRES purposes on worldwide income while non-residents on Italian source income. Special rules are provided for IRAP taxable basis. No surtax is provided for.
Taxation of dividends
Domestic and foreign source dividends paid by subsidiaries to Italian resident corporate taxpayers are 95% exempt from IRES. If the subsidiary is resident in a Country located in a low tax jurisdiction or the dividends are distributed by such Countries through an interposed “fair” Country, the exemption does not apply.
Capital gains are generally treated as ordinary income at accordingly taxed at 27.50%. Capital gains derived from the sale of participations, however, are 95% exempt from the taxation even if some requirements provided for by the law are met (e.g. holding period of 12 months).
Losses may be carried forward and off-set against taxable income of the 5 subsequent tax periods, but only for IRES purposes. Losses incurred by a company during the first 3 financial years may be carried forward indefinitely but only if they relate to a newly established business activity (e.g. they are not derived by a merger or business contribution). Losses carry back is not allowed.
Foreign tax credit
A foreign tax credit is allowed against Italian net tax for final tax paid on foreign earnings in the year in which the final foreign tax was paid. The amount of the credit may not exceed the amount of Italian tax due.
Holding company regime
There is no specific holding company regime.
There are some incentives, which are based on the location and size of the business, must comply with European rules. Incentives are available in the form of capital grants, easy-term loans or tax credits. Some incentives are granted automatically, as long as applicants meet the requirements. Others require successful completion of evaluation procedures. Incentives available for larger local development programs, involving the central and local government, have a negotiation procedure.
Withholding tax (wht)
Dividends paid to non-resident corporations are generally subject to 27% wht (with a potential refund of the foreign tax paid on the dividend by the recipient, up to 4/9 of the wht) unless the rate is reduced according to an available double tax treaty or the dividends qualify for the exemption under the European Parent-Subsidiary Directive. A domestic wht of 1.375% applies to dividends distributed to shareholders resident in the EU and in the EEA Countries with no low tax jurisdiction according to the Italian rules.
Unless reduced by a treaty, Italian source interest paid to non-resident companies is generally subject to a 27% or 12.5% wht. The 27% wht applies to interest paid on bank deposits and bonds with a maturity date of less than 18 months and all certificates of deposit. Also interest paid to low tax jurisdictions is subject to 27%. The 12.5% wht applies in the other cases. Under Italy’s implementation of the European Interest and Royalties Directive, qualifying interest payments are exempt from wht.
Royalties paid to non-resident companies are subject to a 30% wht on 75% of the gross value, resulting in a final wht of 22.5%. The rate may be reduced according to the European Interest and Royalties Directive.
The business income of a resident enterprise arising from transactions with non-residents that directly or indirectly control the resident company, are under its control or are controlled by the same entity that controls the resident company, is assessed on the basis of the “normal value” of the goods transferred, services rendered or services received. The “normal value” is similar to the “arm’s length” value as provided for by the OECD. Although no mandatory transfer pricing documentation exists, taxpayers are allowed to take advantage of a penalty protection if appropriate documentation is kept according to criteria issued by tax authorities.
Controlled foreign companies (CFC)
Under the CFC regime, profits of a non-resident entity are attributed to an Italian resident where the resident directly or indirectly controls the non-resident entity and the non-resident is resident for tax purposes in a Country with a low tax jurisdiction. The income of the CFC is attributed to the Italian resident in proportion to its participation in the CFC and the profits of the CFC are taxed in the hands of the Italian resident at its average tax rate (no lower than 27%).
Specific anti-avoidance provisions may apply and primarily deal with low tax jurisdictions. The so-called “abuse of law” doctrine, emphasizing the importance of a business purpose in any transaction where tax savings are generated, may also apply.
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