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Corporate income tax (i.e. IRES - Imposta sui Redditi delle Società)

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Corporate-income-tax-1From January 1st, 2004, all income produced by companies and institutions has been subject to corporate in- come tax known as IRES.
IRES is due on all income produced within the scope of the company.

The tax rate has been reduced from 27,5% to 24% starting from January 1st, 2017 and it is applied on the ta- xable income (tax assessment basis). The relevant payments are made up of two initial payments on accounts and one balance payment.
The tax period is generally 12 months and corresponds to the calendar year.
Withholding taxes are generally fully deductible from IRES. If the sum of the payments on account and withhol- ding taxes exceed the tax payable, such excess may be carried forward and deducted from the tax payable re- lating the following tax period, reimbursed or used to offset any other tax and social security debts.
Entities liable for tax
The following entities are liable to pay IRES:
• limited liability companies with share capital, cooperative companies and mutual insurance compa- nies resident in Italy;
• public and private commercial institutions other than companies and trusts resident in Italy;
• public and private non-commercial institutions other than companies and trusts resident in Italy;
• non-resident companies and institutions, including trusts, with or without legal personality, with refe- rence to the income produced in Italy or where there is a branch located in Italy.
Companies and institutions are considered to be resident when one of the following conditions is met for most of the tax period:
• the registered office is located in Italy;
• the administrative office is located in Italy;
• the main object of the activities is located in Italy.
Tax assessment basis
The profit taxable to corporation tax (PCTCT) is determined on a worldwide basis by applying increases and reductions to profit as stated in the statutory financial statements or annual accounts, prepared in accordance with the Italian accounting standards.
From 2011, tax losses may be carried forward for an indefinite period of time but may be used to offset only 80% of PCTCT.
Income produced abroad contributes to the creation of the PCTCT; however, in order to avoid double taxation any foreign tax withheld at the source may be deducted, with specific limitations, from the net Italian tax due.
There is no tax relief for foreign underlying tax. Specific anti-abuse rules have been provided for.
Deductibility of expenses
In order to calculate the taxable income, it has to be taken into consideration that there is a wide range of ex- penses that can be deducted from the profit as indicated in the profit and loss accounts. Some of those expen- ses are fully deductible, some of them are partially deductible and others are not deductible.
As a general principle, all the expenses incurred to carry out the company activity are eligible to be fully de- ducted from the profit. However, if some of these costs are incurred both for company and for private purposes, the percentage of deductibility is less than 100%. Only the costs booked in the P&L statement can be deducted for tax purposes.
The following list provides some examples of deductible costs and extent of their deductibility:
depreciation: they are deductible pursuant to a Ministerial 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 deduc- tible in the fiscal year they have been paid;
provisions: most provisions cannot be deducted for tax purposes since they are not relevant from a tax perspective;
telephone costs: 80% of their amount is deductible;
costs related to cars: if a car is used exclusively for business purposes, the costs are entirely deduc- tible, otherwise they can be deducted in different percentages (70% or 20%) 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:
- 1.5% of the annual sales (for annual sales below EUR 10 million)
- 0.6% of the annual sales (for annual sales within EUR 10 million and EUR 50 million)
- 0.4% of the annual sales (for annual sales of more than EUR 10 million)
Controlled foreign company (CFC)
According to Article 167 of Italian Tax Code (ITC) the income realized through a company, or other entities, re- sident, or established in countries with a privileged tax status, controlled directly or indirectly by a resident per- son (individual, company, etc.), is subject to CFC rules. The same rules are also applied to the permanent establishment (PE) of the subsidiary located in the countries previously mentioned.
The income gained by a mentioned company, entities, or PE, is attributed directly to the resident taxpayer, in proportion to the participation held, regardless of its distribution.
The same article 167 of ITC establishes that all the countries in which the nominal tax rate is lower than 50% that the tax rate applicable in Italy are qualified as countries with a privileged tax status.
However, the CFC rules are not applied if: (i) the taxpayer shows that the controlled entity carries out a real bu- siness, (ii) where a positive advance ruling is given by the tax authorities, intended to prove that specific con- ditions required by the Law are satisfied.
The point (i) is not applicable when the subsidiary's income is made up of passive income (dividends, royalty, etc.), for more than 50% or of revenues related to services provided to the parent company, controlled company or other related parties, included financial services.
The CFC income is computed according to the Italian tax Laws and is subject to separately taxation in tax return, with the application of a medium tax rate not lower than the Italian corporate tax rate, equal to 24%. From the tax due the taxes paid abroad are deductible.
The dividends subsequently distributed by the subsidiary will be treated as exempted up to the taxed income.
CFC rules also apply to controlled entities established in EU countries or SEE or in other countries without a privileged tax status, if the following conditions are met:
• the income is subject to tax rates lower than 50% of the effective Italian tax rate; and
• more than 50% of the income earned is passive income (i.e. interests, dividends, royalties and services provided to related parties).
Advanced ruling for exemption by CFC rules is available.
Transfer pricing
Transfer pricing rules in line with OECD Guidelines are applicable in Italy. In particular, the rules apply to:
• foreign companies which control the Italian enterprises they perform transactions with;
• Italian enterprises which control the 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” are 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 esta- blishments of foreign companies set up in Italy.
The inter-company transactions subject to Transfer pricing rules are taxable/deductible on the basis of the Arm’s Length principle, which is the principle recommended by the OECD Guidelines, according to which the intercompany prices negotiated should be the same as those agreed between independent parties operating in conditions of free competition and under comparable circumstances.
There are no legal obligations in terms of documenting the price policy used within the international group; however, it is advisable for the Italian Company to have the proper documentation that can explain the transfer pricing method adopted within the group. Avoiding transfer pricing issues is also possible by using one of the means provided by the tax authorities, such as:
• advanced pricing agreement (APA);
• safe harbors;
• International standard ruling.
An annual tax return must include the following information:
• the kind of control (see the above point a) b) c)) applicable to the company;
• the amount of the transaction relating to the transaction subject to the Transfer pricing rules;
• if the company has the documentation to prove the transfer pricing method adopted within the group.
In relation to the above documents, the Italian regulations make explicit reference to the OECD Guidelines, 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 Documen- tation” or “EU TPD”. This includes the Master Fil and Country File document, although with some points of dif- ference, towards a more comprehensive informative package.
Dividends
Dividends received by Italian entities are subject to taxation as follows:
• dividends received by resident companies are taxed at 5% of their amount;
• dividends received by companies located in countries with a preferential tax system are fully taxable.
Dividends paid to companies based in member states of the European Union (EU) and in members of the Eu- ropean Economic Area (EEA) that allow a suitable exchange of information with Italy, are subject to a 1,20% wi- thholding tax rate at source.
Participation exemption
Capital gains on the transfer of shareholdings, under certain conditions, are 95% exempt from taxation.
The legal conditions for exemption are the following:
1. uninterrupted holding 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);
2. classification of holdings as fixed asset investments from the first balance sheet closed during the period of ownership;
3. tax residence of the subsidiary in a country or territory other than those with a preferential tax sy- stem;
4. carrying out of actual commercial activities by the subsidiary;
The conditions set out in paragraphs c) and d) must be met without interruption at least from the beginning of the third tax period prior to the one of the transfers.
Capital losses on shares that met the abovementioned conditions are not deductible
Deducibility of interest payable
Interest payable and assimilated charges can be deducted in each tax period, up to the limit of the interest re- ceivable and assimilated revenue.
Any excess of interest payable can be deducted up to 30% of the EBITDA plus cost of financial leases. Any fur- ther excess cannot be deducted during the taxation period, but can be carried forward and eventually deducted in later periods, on the condition that 30% of the ROL relevant to each financial year is higher than the difference between the total interest payable plus assimilated costs and the total of interest receivable and assimilated revenue.
On the other hand, any excess of the above ROL can be carried forward in later periods in order to offset any excess of interest payable.
Tax transparency option
The tax transparency is a tax regime by which the company is not taxed on the PBT realized, but the PBT is at- tributed to each shareholder, in proportion to their share in the profits.
Such an option can be used if formally chosen by all the shareholders. The requirements for exercising the option are as follows:
• the shareholders must all be limited liabilities companies, cooperative companies or mutual insurance companies resident in Italy;
• each shareholder must hold a percentage of voting rights and profit-sharing of a minimum of 10% and a maximum of 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 lasts for 3 fiscal year. Under certain conditions, this regime may also be applied if one or more shareholders are non-resident. In the event of the di- stribution of dividends, consisting of profit smatured during the periods included in the period under the tran- sparency regime, those dividends will not be taxed.
This system is also applicable to limited liability company or cooperatives provided that:
• all the shareholders are individuals, up to 10 for a limited liability company or 20 for cooperative com- panies;
• the subsidiary has an income not exceeding EUR 7,500,000;
• the company does not have participations within the participation exemption requirements.
Domestic and world tax consolidation
Companies belonging to the same group may opt for the consolidation of their income.
Domestic tax consolidation
Domestic tax consolidation is an optional regime that lasts for a 3-year period, to which company groups may have access. To exercise the regime, the law provides for the controlling company to participate directly or in- directly in an amount exceeding 50% of the share capital and profits of the subsidiary for the year.
The regime consists in the consolidation of the taxable income, calculated separately by each company, irre- spective of the percentages of participation of the different companies which take part to the consolidation.
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, without making any consolidation adjustment;
• proceed with payment of the group taxation (IRES).
Any excess interest payable and non-deductible assimilated costs borne 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 borne 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 Tax Authorities.
Companies belonging to the group and using IRES rate reductions may not exercise the option. The following conditions must also be met:
• all 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 regime with a 5-year period, based on which a controlling company re- sident 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 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 un- dertaking to provide any collaboration required to establish the tax assessment basis and to comply with the requests of the Tax Authorities.
A suitable appeal should be made to the Tax Authorities to check the requirements for the valid exercise of the option.

 

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