Italy Tax Alert Hlbi Cyprus Def

ITALY TAX Alert 2012

HLB International European ConferenceLimassol, Cyprus ‐ January 13, 2012

Francesco Marconi HLB Consultants Italia ‐ Studio Associato De Vecchi ‐Milan

Italy’s Tax System – Direct Taxes (1)Corporate Income Tax (IRES)• Companies resident in Italy for IRES tax purposes are subject to IRES for income

earned in Italy and abroad. Companies not resident in Italy for tax purposes aresubject to IRES only for income earned in Italy.

• Taxable income is taxed at a 27.50 % rate.

The Regional Business Tax (IRAP)• The Regional Business Tax (IRAP) is a local tax levied on the value of production

generated in each tax period in Italian Regions by subjects engaged in businessactivities. Non‐resident companies are subject to IRAP only on the value ofproduction generated by permanent establishments in Italian territory.

• IRAP is currently applied at the 3.9% rate, possibly increased by a regionalsurcharge of up to 0.92%.


Italy’s Tax System – Direct Taxes (2)Individual Income Tax (IRPEF)• A progressive scale is applied to successive portions of taxable income under

IRPEF. Personal Tax rates range from 23% to 43% (2011).

• In addition, a “solidarity surcharge” (Contributo di Solidarietà) of 3% will be leviedon the portion of annual personal income exceeding EUR 300,000 for the fiscalyears 2011, 2012 and 2013. Taxpayers, however, will be entitled in the year ofpayment to a tax deduction for the amount of solidarity surcharge paid.

• In addition, a regional surcharge ranging from 0.9% to 1.4% is levied under IRPEFdepending on the level of income and region of residence, together with amunicipal surcharge of up to 0.8% depending on the municipality of residence.


Italy’s Tax System ‐ New measuresOn 14 September 2011, the Italian Parliament

approved the austerity package (Law Decree

138/2011) and on 29 December 2011, approved

the Law Decree 216/2011 containing a set of

extraordinary measures to address the financial

crisis and stabilize public finances.

The most significant tax

………………………… measures can be summarized

……………………………as follows.


Italy’s Tax System – Key Issues (1)VAT• The standard tax rate increased from 20% to 21% starting from

September 17 2011

• New increase in the standard rate of VAT from 21% to 23% and thereduced rate from 10% to 12%.

The increased rates will be effective from 1st October 2012.

• The decree also envisages a further increase in the standard rate of0.5% from 1st January 2014


Italy’s Tax System – Key Issues (2)Allowance for Corporate Equity (ACE) Decree allows a new deduction ("ACE Deduction") in the computation of the taxable profitsof certain entities and individuals.

The ACE Deduction will be available to Italian resident corporations, public and privatecommercial entities, commercial trusts and Italian permanent establishments of non‐Italianresident entities, resident individuals, general partnerships and limited partnerships.

The ACE Deduction will be equal to a certain percentage of the equity increase accruedafter the financial year as at 31 December 2010 (the "Eligible Equity").

The applicable percentage, to be calculated on the average return rate of public bonds, willbe determined by a Ministerial Decree on a yearly basis.

For the fiscal year as at 31 December 2011 and for the two subsequent fiscal years, theapplicable rate will be 3%.


Italy’s Tax System – Key Issues (3)Allowance for Corporate Equity (ACE)As to the first fiscal year of application of ACE Deduction, the Eligible Equity will becalculated as the difference between:

i. the amount of equity existing at the end of the relevant financial year; and

ii. the amount of equity existing at the end of the financial year as at 31 December2010, which will be equal to the net equity reported in the relevant balance sheet;the profit or loss realized in the financial year will not be taken into account in thecalculation.

With respect to newly incorporated companies, the Eligible Equity will be equal to the netequity reported in the balance sheet of the first financial year, excluding the relevant profitor loss realized in such a year.

In case the ACE Deduction is higher than the net business income, the excess will beavailable for carry‐forward to increase the ACE Deduction in the subsequent fiscal years.


Italy’s Tax System – Key Issues (4)Carrying forward tax losses – Abolition of time limitsThe new feature essentially consists of the abolition of the time limit for carrying themforward, a maximum of 5 years in the past, in favor of a new quantitative time limit.

The new features will be applicable from 2011.

Losses may be carried forward in future years, in fact, but only up to a limit of 80% of theprofit produced.

In essence, a change of course which will, nevertheless, entail subjecting a quota of 20% ofthe profit realized by companies, even with large previous losses, to taxation.

EXCEPTION

The exception for losses realized in the first three years of the startup of a new companyremains unaffected (indefinitely deductible ).


Italy’s Tax System – Key Issues (5)Regional Business Tax “IRAP” taxable incomeTaxable income for IRAP purposes is equal to the net value of production generated in eachItalian Region and calculated as the difference between the macro‐categories A and B (with theexception of a number of items) of the income statement as drawn up on the basis of ItalianNational Accounting Standards (for entities drawing up their financial statements in accordancewith International Accounting Standards ‐ IAS, the corresponding items are considered).• For industrial and commercial enterprises:

– Positive components include all income, with the exception of: a. capital gains generated by the disposal of companies and equity investments); b. specified extraordinary income components; c. financial income (dividends, interest)

– Negative components include all costs and expenses, with the exception of: a. labour costs (with some exceptions);b. interest and finance charges; c. specified capital losses and negative components of extraordinary income.


Italy’s Tax System – Key Issues (6)Deduction of IRAP on employment costs and new deductions from IRAP taxable basisDecree allows deduction from business income of the portion of the Regional Tax onBusiness Activities ("IRAP") relating to employment costs. The IRAP portion relating toemployment costs is deductible from the Corporate Income Tax ("IRES") and the IncomeTax ("IRPEF") taxable basis and applies from the fiscal year as at 31 December 2012.Furthermore, starting from the fiscal year following the fiscal year as at 31 December 2011,the deduction from IRAP taxable basis allowed on each open‐term employee employed inthe relevant fiscal year, will be increased from € 4,600, on a yearly basis, to:i. € 10,600, on a yearly basis, with respect to each female employee and to each

employee under the age of 35. This deduction is not available to companies operating underconcessions and tariffs in the following sectors: energy, water, transport, infrastructure, postal services,telecommunications, wastewater collection and purification and waste collection and disposal; and

ii. € 15,200, on a yearly basis, with respect to each female employee and to eachemployee under the age of 35 employed in the following Regions: Abruzzo,Basilicata, Calabria, Campania, Molise, Puglia, Sardegna and Sicilia. This deduction is notavailable to banks, insurance companies and other financial institutions and to companies operating underconcessions and tariffs in the following sectors: energy, water, transport, infrastructure, postal services,telecommunications, wastewater collection and purification and waste collection and disposal.


Italy’s Tax System – Key Issues (7)Introduction of a new Property Tax (IMU)

Decree replaces the existing municipal tax (Imposta Comunale sugli Immobili, "ICI") with a newproperty tax (Imposta Municipale Propria, "IMU").

ICI was a property tax applicable yearly on the value of the relevant property, as determined bythe local land office, at a rate ranging from 0.4% to 0.7%, depending on the municipalities. The“home residence” was excluded.

IMU is a property tax applicable yearly on the value of the relevant property, as determined bythe local land office. Decree set the standard IMU rate at 0.76%. However, such ordinary rate canbe either increased to 1.06% or decreased to 0.46% depending on the municipalities.Municipalities can also determine an ordinary 0.4% IMU rate for either properties having afunction within an enterprise (i.e. beni strumentali) or rented properties.

Decree also set a 0.2% IMU rate, which could be decreased to 0.1% by the municipalities, for ruralproperties having a function within an enterprise (i.e. fabbricati rurali ad uso strumentale).


Italy’s Tax System – Key Issues (8)New Flat tax rate on income from financial investments (1)The Italian Government has introduced a 20% flat rate of tax on income from financialinvestments.

The following measures will be effective as of January 2012:

• Tax on dividends from non‐qualified shareholdings will increase from 12.5% to20%.

• Tax on dividends from listed companies located in blacklisted countries willincrease from 12.5% to 20%.

– No increase has been levied in respect of dividends received from non‐listedcompanies located in blacklisted countries.

• Tax on bank interestwill be reduced from 27% to 20%.


Italy’s Tax System – Key Issues (9)New Flat tax rate on income from financial investments (2)• Interest from bonds with a duration greater than 18 months will be taxed at an

increased rate of 20%, compared with the previous 12.5% rate.

• Interest from bonds with a duration of less than 18 months will be taxed at areduced rate of 20% compared with the previous 27% rate.

• Interest from Government bonds and post bonds will continue to be taxed at12.5%.

• Capital gains tax on non‐qualified shareholdings will be increased from 12.5% to20%.

• Maturing life insurance investmentswill be taxed at an increased rate of 20%.

No amendments have yet been made to the tax rates applicable to dividends andcapital gains arising from companies and qualified shareholdings.


Italy’s Tax System – Key Issues (10)Important Sentence on beneficial owner (1)

The sentence 124/09/10 issued by Turin Tax Commission on the beneficial owner

of a foreign company is an important reference document on non‐fulfillment of

international treaties.

Within the dispute between the Italian Tax Authority and an Italian company

accused of paying royalties to a Luxembourgian company with a concessionary

tax 10% deduction (instead of the ordinary 30% tax deduction), the Turin Tax

Commission has stressed that no evidence was presented that the beneficiary

company was the final royalties beneficiary.


Italy’s Tax System – Key Issues (10)Important Sentence on beneficial owner (2)The sentence has dismissed the appeal by the Italian society for the followingreasons:

• on the basis of article 12 of the Italian convention, a 10% subsidized taxdeduction is applicable in Luxembourg; the supplying company has to prove thatthe beneficial owner is actually the final and effective beneficiary

• the ‘formal’ interpretation of the concept of beneficial owner is incorrect, onlythe ‘substantive’ interpretation has to be taken into account. TheLuxembourgian company lacks substance and is owned by a Bermudiancompany, it has received patents from other societies of the group it belonged tofor free, therefore it was considered to be a money collector and not the finalroyalties beneficiary.


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