A Q&A guide to tax on corporate transactions in Italy.
The Q&A gives a high level overview of tax in Italy and looks at key practical issues including, for example: the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.
To compare answers across multiple jurisdictions, visit the Tax on corporate transactions Country Q&A tool.
The Q&A is part of the PLC multi-jurisdictional guide to tax on corporate transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.
The competent tax authorities are the:
Revenue Agency (Agenzia delle Entrate).
Land Registry Agency (Agenzia del Territorio).
Customs Agency (Agenzia delle Dogane).
Government Property Agency (Agenzia del Demanio).
The Guardia di Finanza (Tax Police) has special powers to ensure tax compliance.
Several tax ruling procedures are available.
Taxpayers can file for advance ordinary tax rulings on the interpretation of tax provisions, provided there is objective uncertainty on the interpretation of the law. This ruling procedure does not provide an opinion on the specific facts (such as whether a permanent establishment exists or whether a company qualifies as a resident) but only clarification on the interpretation of the law.
The request must include the personal details of the taxpayer, as well as a description of the actual case and the proposed interpretation. The tax authorities must reply within 120 days. A reply is binding on the tax authorities, but only in respect of the requesting taxpayer. If no reply is given within 120 days, it is assumed that the tax authorities agree with the interpretation of the requesting taxpayer.
A specific tax ruling procedure is available to obtain clarification on the operation of the following provisions to the specific facts:
General anti-avoidance provision.
Provision under which fictitious interposition (sham) is disregarded.
Provision limiting the deductibility of advertising and entertainment expenses.
Provision setting out conditions for the deduction of payments to companies and other entities domiciled in tax-privileged jurisdictions.
Taxpayers can apply for an advance tax ruling to claim the non-application of specific anti-avoidance provisions (including dummy companies legislation) by showing that, despite the fact that the conditions for the application of the specific anti-avoidance provision are met, no undue tax benefit is achieved (and, therefore, the anti-avoidance provision does not apply).
Multinational companies can request a ruling from a specific unit of the tax authorities on transfer pricing (a unilateral advanced pricing arrangement) and the tax treatment of the cross-border payment of dividends, interest and royalties.
The international tax ruling is binding on both parties for three tax years. The Italian tax authorities send a copy of the ruling to the competent authorities in the relevant EU member states of the taxpayers involved in the ruling for information transparency purposes.
The main transfer tax is registration tax. This is a tax on deeds (including contracts) either executed in Italy or regarding real estate or a business located in Italy.
Under the Registration Tax Act (Presidential Decree 131/1986) the deed of transfer is subject to registration tax either at the fixed amount of EUR168 (as at 1 March 2012, US$1 was about EUR0.7) or at a proportional rate, depending on the nature of the deed. If the deed of transfer is within the scope of VAT (even if exempt or zero rated), registration tax applies at the fixed amount.
If the deed of transfer is executed abroad (and does not concern real estate or a business located in Italy) or by exchange of correspondence (where possible), registration tax is only due on the following events:
The deed is filed for voluntary registration.
The deed is deposited with a judiciary office for an administrative purpose, or with an administrative authority, unless the deposit is required by law (caso d'uso).
The deed is cross-referred to. According to the cross-reference principle (enunciazione), if a deed requiring registration refers to another agreement entered into between the same parties (meaning that all parties to the cross-referred deed must be also parties to the cross-referring deed) and that deed was not previously subjected to registration tax, the execution of the former agreement also triggers registration tax on the latter.
The parties involved in the transaction and the notary (in the case of public deeds or registered private deeds) are jointly liable to pay registration tax.
Resident companies and, in relation to their Italian-source income, non-resident companies (and non-resident partnerships) are subject to IRES.
The tax base is equal to the difference between revenues, proceeds and other positive items of income (certain exemptions, particularly for dividends and capital gains on shares, may apply), and costs and other negative items of income (restrictions apply on the deductibility of negative items of income).
The deduction of business expenses is allowed on an accrual basis in a fiscal year provided that they have been charged to the profit and loss account of such fiscal year (or of a previous year if the tax deduction was deferred pursuant to tax provisions); and they are certain and can be objectively computed.
IRES is generally levied at the rate of 27.5%.
Companies (as well as partnerships) are subject to IRAP.
The tax base of IRAP is the net value of production generated in Italy. The net value of production generally equals the difference between gross revenues from operations and operating expenses calculated according to the IRES rules. However, the following income items are excluded from the tax base:
Capital gains on non-business assets and on sales or contributions of a business.
Other income of an extraordinary nature.
The following expenses are not deductible:
Capital losses on non-business assets and on sales or contributions of a business.
Personnel or overhead costs (certain exceptions apply).
Other costs of an extraordinary nature.
IRAP generally applies at the rate of 3.9%. However, the base rate can differ depending on the activity carried out and can be increased or decreased on a regional basis by 0.92%. Additionally, a 0.15% increase may apply in certain regions due to budget deficits.
There are special rules for calculating the tax base and the applicable rates for banks, financial institutions, holding companies and insurance companies.
100% of IRAP related to personnel or overhead costs and 10% of IRAP deriving from not deductible interest expenses can be deducted from the tax base of corporate income tax.
VAT (Imposta sul valore aggiunto) is a general consumption tax levied on transfers of goods and supplies of services by entrepreneurs, artists or professionals in the course of an entrepreneurial, artistic or professional activity.
The following transactions are taxable:
Supply of goods and services in Italy by a VAT taxpayer.
Intra-EU acquisition of goods in Italy by a VAT taxpayer.
Import of goods from outside the EU into Italy by any person (including a non-VAT taxpayer).
Exports and intra-EU sales of goods are zero-rated.
The general rate is 21% (starting from 1 July 2013 the general tax rate will increase to 22%. Reduced rates of 10% and 4% may apply.
Immovable property located in Italy is subject to IMU, generally at the rate of 0.76% on the cadastral value (the value of the property resulting from the cadastral registers, which can be several times lower than the fair market value).
Deeds executed in Italy may be subject to stamp duty. The tax ordinarily amounts to EUR14.62 for every four pages or 100 lines of the document.
Mortgage and cadastral taxes generally apply, in addition to registration tax, to deeds of transfer or mortgages on Italian real estate. These taxes can also apply to the sale of a business if real estate is included.
For the sale of real estate, the overall tax rate is usually 3% (4% for buildings that are business assets "by nature"). If the sale of real estate is subject to VAT, mortgage tax and cadastral tax (as well as registration tax) apply at the fixed amount of EUR168 each.
Mortgages are subject to mortgage tax at the rate of 2% of the guaranteed amount (a 0.5% charge may apply on the cancellation of the mortgage), on top of registration tax, which applies at the rate of 0.5% of the guaranteed amount. (Guarantees granted by the same debtor are subject to registration tax at the fixed amount of EUR168.)
This tax applies at the rate of 0.25% on facilities:
With maturity of at least 18 months.
Granted by resident banks, by Italian permanent establishments of non-resident banks or by banks established in other EU member states.
Executed in Italy.
The payment of the substitute tax franks payment of all indirect taxes, such as registration tax, mortgage tax, cadastral tax and stamp duty, otherwise due and payable on:
The facility agreement and all deeds, contracts and formalities pertaining to the same facility agreement and its implementation, modification and extinction.
Any kind of security (including assignment of receivables) granted by anyone, at any time, to secure the performance of the obligations arising from the facility agreement.
Registration tax applies regardless of the residence of the taxpayer, if it is a party to a deed subject to registration tax (see Question 3).
Non-resident companies are subject to IRES on their Italian-source income. Italian-source income includes, among other things:
Business income attributable to an Italian permanent establishment.
Income from Italian real estate.
Income from capital (including dividends and interest) paid by an Italian resident or an Italian permanent establishment of a non-resident.
Other income (including capital gains and income from derivatives) derived from activities carried on in Italy or from assets situated in Italy. Capital gains on the sale of participations in Italian companies are Italian-source income unless they qualify for the exclusion for non-substantial shareholdings in a listed company. There is an exemption available for non-substantial shareholdings sold by white-listed foreign investors.
IRAP applies to non-resident companies carrying on business activities in Italy for at least three months through a permanent establishment.
Non-resident companies that carry on taxable transactions in Italy are subject to VAT. In 2010, Italy implemented Directive 2008/8/EC on the place of supply of services.
Non-resident companies without an Italian permanent establishment can either apply for a direct VAT registration or be VAT registered by appointing a representative to exercise their rights and fulfil their obligations.
IMU is levied on real estate located in Italy regardless of the owner's residence (see Question 6).
Stamp duty applies regardless of the parties' residence (see Question 6).
Mortgage and cadastral taxes apply on Italian real estate regardless of the parties' residence (see Question 6).
This tax also applies to foreign companies (see Question 6).
The distribution of capital reserves does not trigger the realisation of income at the level of the shareholder, but reduces the tax base of the shares. However, if the distribution of capital reserves exceeds the tax base of the shares, the exceeding amount qualifies as income (more correctly, as capital gain) for the shareholder (the participation exemption regime for capital gains on shares may apply).
In relation to profit reserves distributions (dividends), it is worth noting that any distribution is deemed to be a profit distribution up to the amount of freely distributable profit reserves, regardless of the fact that it qualifies from a legal perspective as a distribution of capital reserves.
Dividends are included in the taxable income of Italian resident companies. Only 5% of the dividend amount is subject to IRES at the current rate of 27.5%, provided that the dividends do not derive (directly or indirectly) from companies resident in states with a privileged tax regime (in which case the full amount is subject to the 27.5% rate). Dividends are not subject to IRAP.
Outbound dividends are generally subject to a 20% withholding tax. However, this is reduced to 1.375%, provided that the beneficial owner of the dividends is a company resident in another EU member state or a state of the European Economic Area (EEA) that allows an adequate exchange of information with the Italian tax authorities, and is subject to corporate income tax in such jurisdiction.
Dividends distributed to the foreign shareholder may benefit from the exemption from the domestic withholding tax provided under Directive 90/435/EEC on the taxation of parent companies and subsidiaries (Parent-Subsidiary Directive) if:
The recipient owns at least 10% of the share capital of the Italian distributing company for an interrupted period of one year before the dividend distribution.
The recipient is incorporated under a legal form listed in the Parent-Subsidiary Directive annex.
The recipient is resident for tax purposes in an EU member state and, under the terms of a double taxation agreement concluded by the member state where it is resident with third states, is not considered to be resident for tax purposes in a state outside the EU.
The recipient is subject to a corporate tax listed in the Parent-Subsidiary Directive annex.
The domestic withholding tax may be reduced under the applicable tax treaty (if any).
Generally, gains from the disposal of capital assets (including shares) are included in the taxable income and subject to corporate tax at the ordinary rates (see Question 4). The capital gain is equal to the difference between the consideration for the share transfer and the tax base of the shares. The disposal of shares can occur through, for example, a straight sale, a share-per-share exchange or the assignment to the shareholders for no consideration.
However, a participation exemption regime on shares disposals may be available (see Question 10).
From a corporate income tax perspective, there is an anti-abuse provision denying the carry-forward of tax losses if both the majority of voting rights over the company are transferred and (in the change of control period or in the two preceding or following periods) the transferred company changes its activity. An exclusion from the operation of the provision applies if the transferred company fulfills a vitality test (either more than ten employees at any time in the two-year period preceding the change of control, or subject to the condition that the profit and loss accounts of the transferred company show, for the period preceding the change of control, an amount of revenues and an amount of labour costs exceeding 40% of the average of these items for the two previous periods).
Capital gains on share disposals generally qualify as extraordinary or financial items of income and therefore are not included in the IRAP tax base.
The transfer of shares may be subject to registration tax at the fixed amount of EUR168. It is VAT exempt.
Capital gains realised by resident companies on the disposal of shares are exempt for 95% of their amount (and the possible capital loss is wholly non-deductible) provided that the following conditions are simultaneously met:
The securities must have been held uninterruptedly since the first day of the 12th month preceding the month of sale.
The securities must have been entered as fixed financial assets in the first balance sheet after the acquisition.
The company issuing the securities must carry out a business activity (certain real estate investment activities are deemed not to be business activities).
The company issuing the securities must not be resident of a black-listed jurisdiction.
The conditions in the last two bullet points above must have been met for at least three tax periods before disposal. Further, if the participating company is a holding company, the conditions must be met at the level of the underlying companies.
If the disposed shares have been classified as fixed financial assets in the last three balance sheets, the taxpayer can opt for the deferment of tax on the capital gain realised (if the participation exemption regime does not apply).
Depending on the facts and circumstances, a ruling (for the non-application of anti-avoidance rules, see Question 2) can be filed to avoid the anti-avoidance rule unduly jeopardising the carry-forward of tax losses.
The transaction taxes for the buyer (income taxes, registration tax and VAT) on share disposal transactions are not material.
The step-up of the underlying business assets is not immediately recognised for tax purposes. However, it is common practice to set up an Italian new company (newco) acquiring the shares and to merge the acquired company by absorption into newco.
In such a case, the merger deficit (generated from the latent capital gains) may, under certain conditions, be wholly or partially recognised for tax purposes subject to the payment, on an optional basis, of a substitute tax. The rates range from 12% to 16%. The 12% rate applies to the recognised merger deficit up to EUR5 million; the 14% rate to the part of the recognised merger deficit between EUR5 million and EUR10 million; and the 16% rate applies to the part of the recognised merger deficit exceeding EUR10 million.
Another disadvantage is that the company whose shares are transferred is liable for any tax liabilities arising in the pre-acquisition tax periods that are still subject to tax assessment. If a merger occurs after the acquisition of the shares, such tax liabilities are inherited by the absorbing company (or company resulting from the merger).
The seller may benefit from the participation exemption regime.
The buyer will request a discounted consideration, taking into account the hidden tax liabilities connected with the difference between the market value and the book value of the target company's assets.
The transfer of a business can be implemented through a range of transactions, including:
Transfer of the shares in the company in which the business is vested (see Questions 9 to 12).
Direct transfer of the business (see Questions 14 to 17).
Indirect transfer of the business, comprising of a contribution of the business to a newco, followed by the transfer of the shares received in exchange.
The contribution of a business in exchange for shares is a tax neutral transaction (no tax of latent capital gains, no step-up of the tax base of the contributed assets).
Registration tax applies on the contribution at the fixed amount of EUR168 (the same for mortgage and cadastral taxes if the business comprises Italian real estate). The contribution of a business (as well as the contribution of single assets) is outside the scope of VAT.
The sale of the shares received in exchange by the contributing company may benefit, subject to certain conditions (the holding period of the contributed assets is rolled over on the shares received in exchange (see Question 10)), from the 95% participation exemption, therefore resulting in an effective 1.375% rate applicable to the latent capital gains.
Further, the latent capital gains that may be expressed in the balance sheet of the company receiving the contribution can, under certain conditions, be wholly or partially recognised for tax purposes subject to the optional payment of a substitute tax at rates ranging from 12% to 16% (see Question 11).
Another benefit of this two-step transaction is that the tax liability regime applying to the buyer of a business (see Question 16) should also apply to the transferee of a business by way of contribution in exchange for shares. Therefore, the company receiving the business by way of contribution can request from the tax authorities a certificate on the tax liabilities (as well as outstanding tax debts for claims already settled) and be liable only for the amounts resulting from such a certificate.
By express statutory provision, the two-step transaction under examination is deemed not to be "designed to avoid income tax". On the contrary, for transfer tax purposes, there is no express provision preventing the tax authorities from objecting to the indirect transfer tax at a proportional rate based on anti-tax-avoidance legislation. Indeed, tax authorities have challenged the registration tax regime of several transactions of this type, claiming the levy of registration tax applicable in case of transfer of business.
In principle, the transfer of a business can also be carried out through a partial proportional split-up followed by the transfer of the shares in the beneficiary newco. The split-up is a tax neutral transaction. However, in the absence of valid economic grounds, the split-up made under a neutral tax regime for the sale of a controlling shareholding of either the beneficiary company or of the split company will be deemed by the tax authorities to be aimed at avoiding the income tax regime applying to the direct transfer of the business.
Capital gains realised through the sale of a single asset trigger the levy of IRES at the ordinary rate of 27.5%. After this it is assumed, unless otherwise stated, that the object of the sale is a business. The same regime applies to the disposal of a business.
The tax authorities have confirmed that the capital gain from the sale of a business, recorded among the "extraordinary" items of income, is not computed in the IRAP tax base (but the capital gain on the sale of single assets may be within the scope of IRAP).
The sale of a business falls outside the scope of VAT (but the sale of single assets may be within the scope of VAT).
The deed of sale of a business is subject to proportional registration tax according to the rates applicable to the sale of each asset of the business. The following rates apply:
3% for personal property including goodwill.
7% for buildings and attachments.
15% for agricultural land.
8% for other real estate assets.
0.5% for receivables.
The tax base is given by the market value of the assets comprising the business, including goodwill. For the application of the different tax rates, liabilities are charged to the different assets in proportion to their respective value. If the transfer deed does not indicate different prices for the assets subject to different rates, the highest rate applies.
The transfer of the real estate included in the whole business transferred is (also) subject to mortgage and cadastral taxes, respectively at a rate of 2% and 1% (or 3% and 1%, for buildings that are "by nature" business assets). These rates apply to the market value of the real estate as determined for registration tax purposes (without deducting any liabilities).
If the seller has owned the business (or the single asset) being transferred for at least three years, the capital gain might be subject to straight-line tax within a maximum of five tax periods by exercising an option to this effect at the time of the income tax return.
The buyer can benefit from the step-up in the tax basis of the business assets.
Another benefit for the buyer is that it can obtain a certificate on the tax liabilities and outstanding tax debts for claims already settled from the tax authorities. Indeed, the buyer of a business is jointly and severally liable for the payment of the taxes and penalties arising from breaches committed in the year the transfer occurred and in the two previous years, as well as for those already applied and alleged to be paid in the same period but arising from breaches committed in previous periods. This liability is limited to the value of the business purchased, without prejudice to the prior liability of the seller. However, the buyer is discharged from the above liability to the extent that the tax authorities release a certificate stating the absence of tax liabilities and outstanding tax debts for claims already settled.
The burden of transaction taxes (income taxes, registration tax, VAT, mortgage and cadastral taxes) is significant.
The business disposal triggers a taxable event in the hand of the seller, who cannot benefit from the participation exemption regime.
See Question 13.
A merger is a tax neutral transaction for all parties involved (that is, the absorbing company, absorbed company and shareholders of the companies involved). Irrespective of the value attributed to the transferred assets and liabilities for civil and accounting purposes, the absorbing company will take over the same tax values that were recognised in the hands of the absorbed company.
The merger can be backdated for tax and accounting purposes.
Any existing tax losses at the level of the absorbed company are attributed to the absorbing company. However, the carry-forward of the pre-merger tax losses of all the companies participating in the merger may be affected by specific anti-avoidance provisions, meant to avoid the trading of shell companies with tax losses. In particular, pre-merger tax losses can be carried forward:
For an amount not exceeding the net equity of the absorbed company, resulting from the previous year's company financial statements or, if lower, from the balance sheet prepared by the directors for the purpose of the merger (equity test). For this purpose, equity injections made in the 24 months preceding the merger are not taken into account.
Subject to the condition that the profit and loss accounts of the absorbed company show, for the period preceding that in which the merger is resolved, an amount of revenues and an amount of labour costs exceeding 40% of the average of these items for the two previous periods (vitality test).
If the merger is backdated for tax purposes, the above tests also apply (to both the absorbing and absorbed companies) to the tax loss incurred in the financial year in which the merger is executed, up to the date of effect of the merger.
Similar limits may apply to the carry-forward of excess interest (that is, net interest expenses that exceed 30% EBITDA and therefore cannot be deducted in the year of accrual and can be carried forward and used to the extent that the 30% EBITDA exceeds net interest expenses).
The deed of merger is subject to registration tax at the fixed amount of EUR168.
If a merger involves real estate assets, the deed of merger is also subject to mortgage and cadastral taxes at the fixed amount of EUR168 each.
It is possible, under certain conditions, to step-up the tax base of the assets transferred by way of a merger by paying a substitute tax at rates ranging from 12% to 16% on the whole or part of the merger deficit (see Question 11).
Depending on the facts and circumstances, a ruling for the non-application of anti-avoidance rules (see Question 2) can be filed to avoid the anti-avoidance rules on the carry-forward of tax losses and excess interest being unduly jeopardised.
The merger process must be structured in a way to minimise the impact of the anti-avoidance rules on the carry-forward of tax losses and excess interest. In this regard, it may be worth backdating the merger, upstream or downstream. These decisions impact on the application of the merger rules: the absorbing company does not close its tax period due to the merger and, therefore, if the merger is not backdated, the excess interest or tax loss incurred by the absorbing company during such tax period is not subject to the above mentioned merger rules.
Joint venture companies (JVCs) are not specifically regulated by Italian civil and tax law. The tax ramifications arising from other transactions (such as contribution of a business, merger, demerger, or exchange of shares) may be relevant.
Controlled foreign company (CFC) rules may apply to JVCs established in a black-listed jurisdiction if an Italian resident is entitled to at least 20% of the profits of the joint venture.
Several forms of contractual joint ventures can operate in Italy. Examples include (unincorporated) associations, consortia, or simply execution of a contract to carry out projects or deliver services. In some circumstances, these forms of contractual co-operation may be regarded as an autonomous taxable entity.
Not applicable (see Question 22).
Not applicable (see Question 22).
Corporate income tax. Demerger (either total or partial) is a tax neutral transaction for the companies participating in the demerger and their shareholders. The tax base of the business assets is therefore rolled-over.
According to the tax authorities, the tax base of the shares in the demerged company is split among the shareholdings in the companies resulting from the demerger based on the portion of the book net equity assigned to each company.
The merger rules apply to demergers.
Registration tax. The deed of demerger is subject to registration tax at the fixed amount of EUR168.
Other indirect taxes. If a demerger involves real estate, the deed of demerger is also subject to mortgage and cadastral taxes at the fixed amount of EUR168 each.
Corporate income tax. The exchange of shares (that is, the contribution of shares in exchange for shares issued by the company receiving the contribution) is in principle an event triggering the realisation of the latent capital gains based on the fair market value of the contributed shares.
However, depending on the circumstances, the exchange may be subject to specific provisions whereby the computation of the gain depends on the accounting treatment of the contribution in the hands of the receiving company and, in certain instances, also of the contributing company.
These specific regimes may require, among others, that the receiving company acquires, integrates or increases a controlling interest in the company whose shares are contributed or that the contributed shareholding exceeds certain percentages. In such a case, a specific anti-abuse provision stipulates that the capital gain is computed based on the general regime (that is, based on the fair market value of the contributed shares) if shares that do not qualify for the participation exemption are contributed in exchange for shares that may qualify for such exemption.
Registration tax. The deed of exchange of shares is subject to registration tax at the fixed amount of EUR168.
See Question 13.
The domestic legislation implementing Directive 90/434/EEC on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different member states (Merger Directive) provides for a tax neutrality regime for qualifying EU cross-border mergers, demergers, contributions of a business in exchange for shares, transfers of a foreign permanent establishment and exchange of shares.
Regarding demergers and contributions of a business, subject to certain conditions, the option for the payment of the 12% to 16% substitute tax (see Question 11) may be opted for (to step-up the tax base of the business assets).
Regarding demergers, depending on the facts and circumstances, a ruling may be filed to avoid unduly jeopardising the anti-avoidance rules on the carry-forward of tax losses and excess interest (see Question 20).
For an exchange of shares, the possible capital gain may be reduced from the participation exemption regime or through tax deferral (see Question 10).
Subject to certain conditions, the demerger process can be structured in a way to minimise the impact of the anti-avoidance rules on the carry-forward of tax losses and excess interest (see Question 21).
There are various insolvency procedures available for companies in financial distress:
Judicial settlement with creditors (concordato preventivo).
Arrangement with creditors before bankruptcy (concordato fallimenttare).
Large enterprise receivership (amministrazione straordinaria grandi imprese in crisi).
Companies in financial distress may also apply for a consensual debt restructuring procedure:
Debt restructuring agreement (accordo di ristrutturazione del debito).
Certified recovery plan (piano attestato di risanamento).
The tax regime of the consensual debt restructuring procedure has been partially assimilated to insolvency procedures.
Waivers of credits granted to debtors under one of the above-mentioned procedures do not determine a taxable contingent asset for the debtor (with some limitations in cases of consensual debt restructuring procedures), regardless of whether the creditor is a shareholder of the indebted company.
Capital gains and losses realised from the assignment of the debtor's assets to the creditor (cessio bonorum) during a judicial settlement with creditors are not tax relevant. That provision is not extended to consensual debt restructuring procedures.
On the creditor's side, there is a presumption that credit losses are always deductible if the debtor is under an insolvency procedure. That provision can also be applied to a debt restructuring agreement that has been judicially approved.
Regarding converting bank debt into new equity of companies in temporary financial difficulty, Italian resident banks can apply for a ruling from the tax authorities to allow the financial instruments to maintain within the Italian tax regime applicable to the converted receivables.
Taxpayers involved in settlement with creditors and a debt restructuring agreement can propose a tax settlement plan that provides for the partial payments of debts due to the tax authorities.
Such a proposal can provide for the full or partial payment of the taxes administered by the tax authorities, as well as for the full or partial payment of the social security duties administered by the Social Security Agency. This, applies in respect of all taxes collected by the tax authorities (see Question 1), except for taxes that constitute the own resources of the EU.
The proposed plan can also provide for deferred payment, but, if the tax credits were privileged, the percentage, timing and any guarantee cannot be less than those offered to creditors who had a lower or equal ranking than the tax authorities.
The tax authorities have clarified that VAT is excluded from tax settlements.
When shares are bought back to be cancelled, the shareholder can, depending on the circumstances (such as the nature of the shareholder and availability of retained profits at the level of the issuer), realise either dividend income or a capital gain.
As far as the issuer is concerned, cancellation of the shares does not trigger any taxable or deductible item of income, irrespective of any difference between the purchase price paid by the issuer and the portion of net equity corresponding to the cancelled shares.
The income realised by the shareholder on the sale of the shares to the issuer may, depending on the circumstances, benefit from the exemption regimes available for either dividends or capital gains (otherwise, subject to the relevant conditions, the capital gain may benefit from the deferred taxation).
There are no common structures to minimise the tax burden. The most efficient tax structure must be determined based on the specific facts and circumstances.
General rules on interest deduction. The deductibility of net interest expenses (interest expenses which exceed interest income) is allowed up to 30% of EBITDA (gross operating income without taking into account depreciation, amortisation and financial leasing costs) as shown in the annual income statements (irrespective of the residence of the borrower and whether the loan is from a related party).
Any interest expenses non-deductible in the year of accrual can be carried-forward without time limitations. Starting from fiscal year 2010, if the net interest expenses are lower than 30% of EBITDA, any residual 30% EBITDA amount can be carried forward to the following fiscal years (without limits).
Tax consolidation versus merger. The finance costs on the acquisition debt are incurred by newco (incorporated to carry on the acquisition) but the operating profits of the business would arise at the (lower) level of the target company. There are two ways that these finance costs can be set against the operating profits for tax purposes: the two companies can either enter into a tax consolidation or a merger. A merger is the usual and preferred method of debt pushdown as it avoids a number of financial assistance difficulties that would otherwise arise.
Tax consolidation. For a tax-consolidated group, the 30% limit applies at group level. Further, under certain conditions, the 30% of EBITDA of non-resident controlled companies can also be taken into account, even if non-tax consolidated.
The tax consolidation is not effective until the beginning of the first tax period following acquisition. Domestic dividends are subject to tax for 5% of their amount, so that the tax consolidation can lead to a tax leakage (dividends may be required to fund the newco's interest expenses).
Tax assessments on interest deduction in MBO transactions. The tax authorities and Tax Police have recently issued assessments and minutes of tax investigations, respectively, whereby they have challenged the deduction of interest expenses in the context of leveraged buyout (LBO) transactions.
The common feature is that LBO transactions are viewed as abusive to the extent that no business advantages (other than the matching of the debts of newco with the income generated by the operating target company) are achieved by the target company through the merger with newco, which has received third party loans to purchase the shareholding in the target company.
In particular, the LBO transaction (incorporation of newco and its merger with the target company) is viewed as aimed at achieving the undue tax benefit of the pushdown of the debt and interest at the level of the merged target company (newco), rather than such interest being incurred by the investor, which will benefit from the LBO transaction by selling the quota of newco (possibly under a tax treaty capital gain exemption).
Assuming that the facility agreement is executed abroad (or through exchange of letters), registration tax will not fall due on execution of the agreement but will only fall due on the use of the agreement (caso d'uso) or on cross-reference to the agreement (enunciazione) (see Question 3).
If the guarantee is executed abroad or through exchange of letters, then it is generally subject to registration tax only on use, cross-reference or voluntary registration (see above). This may be the case for, for example, pledges over shares of Italian companies, pledges over shares or quotas of foreign companies, or pledges over receivables. In other cases, such as pledges on quotas of an Italian S.r.l. or mortgages, the guarantee cannot be executed abroad or through exchange of letters and therefore is subject to registration tax.
If registration tax is payable in respect of a guarantee, guarantees granted by the funded party in respect of its borrowing should only be subject to registration tax at the fixed amount of EUR168 (apart from the levy of mortgage tax on mortgages and assignment of receivables (see below)).
If registration tax is payable in respect of a guarantee, guarantees granted by parties other than the funded party in respect of its own borrowing (for example, across guarantee) should be subject to registration tax at the 0.5% proportional rate. The tax base of registration tax for guarantees is the guaranteed amount or, if the guarantee is represented by cash or securities, the lower amount between the value of the pledged securities or cash and the guaranteed amount.
If registration tax is payable in respect of an assignment of receivables, registration tax is always levied at the 0.5% proportional rate, even if the assignment is granted by the funded party in respect of its borrowing only.
In addition to registration tax, mortgages (if any) would also be subject to mortgage tax at a rate of 2%. A 0.5% mortgage tax may also apply on the cancellation of the mortgage. Mortgage tax applies on the amount guaranteed (including interest).
Interest paid to a resident bank or an Italian permanent establishment of a non-resident bank is exempt from withholding tax. Treaty exemption for outbound interest may also be available, although in very limited circumstances.
Interest paid to a qualifying EU-related party may be exempt from withholding tax under the domestic regime implementing Directive 2003/49/EC on interest and royalty payments (Interest and Royalty Directive).
Provided that certain conditions are met (see Question 6), the facility agreement may be subject to the 0.25% substitute tax on facility agreements. In such a case, no indirect taxes are due on the security package.
The capital injected into newco on incorporation must be adequately computed, as it may impact on the operation of the anti-abuse rules affecting the carry-forward of pre-merger losses.
Careful planning is required to optimise the deduction of input VAT on deal fees, the deduction of deal fees for corporate income tax purposes and the tax regime on the possible future exit.
A reform of corporate tax is expected. However at this stage it is premature to describe the possible effect of such a reform.
Description. The website provides text of legislation, case law and guidelines of the tax authorities in Italian. It is not available in an official English translation.
Description. In this section of the Italian Ministry of Economics and Finance website every Double Tax Conventions signed and ratified by Italy are available. Most of them are officially translated in English.
What is the withholding tax requirement on dividends or other distributions?
Are any tax exemptions or reliefs available on a share disposal?
Pursuant to domestic legislation, outbound dividends are generally subject to a 20% withholding tax. An exemption from withholding tax applies under the domestic regime implementing the EU Parent Subsidiary Directive. Furthermore, outbound dividends paid to an EU company subject to corporate tax in its state of residence are subject to a 1.375% withholding tax. The domestic withholding tax may be reduced under the applicable tax treaty (if any). Domestic dividends are subject to a 1.375% effective tax rate.
Capital gains realised by non-residents may be exempt under domestic law (see question 7) or under treaty provisions. Capital gains realised by resident companies upon the disposal of shares of companies are exempt for 95% of their amount (and the possible capital loss is wholly non-deductible) provided that the same specific conditions are simultaneously met.
Areas of practice. Domestic and international tax law; tax for M&A and corporate restructuring; corporate and group taxation: taxation of financial transactions; VAT; transfer pricing; estate planning and trusts; tax planning for high net worth individuals; tax litigation.
Languages. Italian, English, French
Professional associations/memberships. Professor of International Tax Law at the Catholic University of Piacenza; member of the delegated Board of Trustees of the International Bureau of Fiscal Documentation (IBFD) in Amsterdam; member of the Permanent Scientific Committee of the International Fiscal Association; represents the Italian Association of Industries at the OECD Business Industry Advisory Committee in Paris; acted as a consultant to the Ministry for European Community Affairs; member of the EU Joint Transfer Pricing Forum.