Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

December 8, 2022

Italy releases initial draft of 2023 Budget Law

  • The Italian Council of Ministers approved a draft of the Budget Law for 2023 (the Draft).

  • The Draft provides for several tax measures that may be of interest to multinational enterprises (MNEs) with Italian operations, including: (i) Limited deduction of costs incurred with black-listed jurisdictions; (ii) Transition tax on undistributed profits from low-tax subsidiaries; (iii) Nonresident’s capital gains on indirect transfers of Italian real estate; (iv) Step-up of Italian participations held by nonresident entities; (v) Exemption for investment management activities; and (vi) a One-off energy windfall tax. These measures are summarized in this Alert.

Executive summary

On 21 November 2022, the Italian Council of Ministers approved a draft of the Budget Law for 2023 (the Draft).

The Draft provides for several tax measures that may be of interest to multinational enterprises (MNEs) with Italian operations, including the following:

  • Limited deduction of costs incurred with black-listed jurisdictions
  • Transition tax on undistributed profits from low-tax subsidiaries
  • Nonresident’s capital gains on indirect transfers of Italian real estate
  • Step-up of Italian participations held by nonresident entities
  • Exemption for investment management activities
  • One-off energy windfall tax

The Draft will now need to undergo the Parliamentary approval process thus being subject to potential changes. The final 2023 Budget Law is expected to be approved and published in the Official Gazette by the end of December 2022. We will monitor any further developments and report once the Budget Law becomes final.

Detailed discussion

Limited deduction of costs incurred with black-listed jurisdictions

The Draft contains a provision that would limit the deduction of expenses and other negative components arising from transactions carried out with enterprises resident or located in non-cooperative jurisdictions for tax purposes.Such limit is represented by the “normal value” of the relevant goods and services.2 It follows that any cost in excess of the “normal value” should be disallowed.

Full deduction should, in any case, be recognized for Italian companies providing evidence that the relevant transactions respond to: (i) a real economic interest; and that (ii) they have been concretely executed.

Such limitation should not apply to transactions with subsidiaries qualifying under the Italian provision on Controlled Foreign Corporations (CFCs).

Transition tax on undistributed profits from low-tax subsidiaries

The Draft contains an innovative provision allowing for a voluntary one-off reduced taxation on undistributed earnings of foreign subsidiaries subject to low- tax regimes.

Under current tax rules, dividends paid by foreign subsidiaries to Italian companies are generally subject to a 95% participation exemption resulting in an effective tax rate of 1.2%. However, depending on the circumstances, full taxation (24%) or 50% taxation (12%) may apply to dividends distributed by subsidiaries benefitting from low-tax regimes (unless such profits have been already directly imputed to the Italian shareholder under the CFC transparency regulations).

The new rule would provide for a 9% transition tax (30% for individual entrepreneurs) computed on qualifying undistributed earnings. The payment of such tax would make the relevant earnings be treated as if they had been repatriated (i.e., they will not be taxed upon actual collection). Once a distribution occurs, an ordering rule applies according to which earnings that were subject to the transition tax are deemed to be received first.

The 9% transition tax (and the 30% for individuals) would also allow taxpayers to step-up their basis in the relevant participation up to the limit of any sales price (i.e., by reducing or avoiding a taxable gain in any future sale) by an amount equal to the earnings on which the transition tax was paid. Accordingly, the basis will be reduced to the extent the proceeds are distributed.

As an alternative to the mentioned 9% tax, companies with control shareholdings may avail of a further reduced 6% transition tax under the following conditions: (i) the foreign earnings should be concretely repatriated by the deadline for the income tax balance payment for fiscal year 2023 (i.e., generally 30 June 2024 for calendar year entities); and (ii) the Italian company should set aside the repatriated earnings to a special equity reserve and keep them for at least two years.

Failing such conditions would cause a recapture of the benefit with additional taxes (3%), penalties (20%), and interest.

Both the 9% (or 30% for qualifying individuals) and the 6% transition tax elections should be available only with reference to qualifying earnings, i.e., (i) earnings undistributed as of the date of entry into force of the new rule (purportedly 1 January 2023); and provided that (ii) such earnings result from the 2021 financial statements of the relevant subsidiaries (or from the last financial statements closed before 1 January 2022 for non-calendar year entities).

The reduced tax is determined in proportion to the interest share held in the foreign company but may also apply to a fraction of the undistributed profits share under a cherry-picking approach. The tax is due in full by the deadline for the payment of the tax balance for fiscal year 2022 (i.e., generally 30 June 2023 for calendar year entities).

Such one-off election must be made in the 2022 tax return (generally to be filed by November 2023).

Nonresident’s capital gains on indirect transfers of Italian real estate

The Draft proposes a substantial change in the tax treatment of capital gains realized by nonresidents from the indirect sale of Italian real estate, including the indirect sale of participations in Italian land-rich entities.

Under current rules, Italy taxes foreign entities only on capital gains derived from a direct sale of Italian immovable property or from a direct sale of stock in Italian companies (irrespective of being land-rich or not).

The new rule, which reflects paragraph 4 of Article 13 of the Organisation for Economic Co-operation and Development (OECD) Commentary, would introduce capital gain taxation also in the case of indirect transfers of Italian property. Therefore, taxation would apply to gains derived from the sale of a foreign company owning (directly or indirectly) Italian real estate or from the sale of a foreign entity owning (directly or indirectly) a participation in an Italian company with local immovable assets. In both circumstances, Italian capital gain tax (26%) would be triggered if: (i) the foreign entity is transferred in exchange for consideration; and (ii) its value is represented (directly or indirectly) by more than 50% by Italian real estate; (iii) at any time during the 365 days preceding the sale. Such treatment should also apply to gains derived from minority shareholdings. However, a general exclusion from the new rule should apply for gains derived from the sale of participations listed in regulated markets.

This provision, if confirmed, may have a relevant impact for foreign entities residing in countries without a double taxation treaty (DTT) with Italy or that are not protected by an existing DTT either for lacking treaty entitlement prerequisites or because the relevant DTT does not protect in the case of gains deriving from the sale of participations whose value is mainly represented by Italian real estate (e.g., United States, Canada, Israel, France Hong Kong). Also, this proposed provision will have an even greater impact once Italy ratifies the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). In fact, once ratified, the MLI also may cause other treaties to fall under a real estate clause allowing taxation of gains whose value is mainly represented by Italian immovable property.

Step-up of Italian participations held by nonresident entities

The Draft revamps a special one-off opportunity for nonresident entities to elect a tax step up of participations in Italian companies held at least from 1 January 2023 through the payment of a 14% substitute tax. The step-up may also be achieved with reference to qualifying Italian land and is now extended, for the first time, to Italian shares traded on regulated markets or multilateral trading systems.

The provision may be of specific interest to foreign entities which, in the case of a disposal, would not be eligible for exemption from the Italian 26% capital gain tax either absent a DTT or because the relevant DTT does not protect. The basis of the 14% substitute tax is represented by the value of the participations (or land) as of 1 January 2023.

The relevant basis needs to be certified by a sworn appraisal prepared not later than 30 June 2023, an exception is made for shares traded on regulated markets or multilateral trading systems for which the relevant basis is equal to the average value of the last month before the sale.

The substitute tax may be either paid in full by 30 June 2023 or through three annual installments beginning 30 June 2023 with the second and third installment subject to a 3% interest rate.

Another novelty concerns the possibility of stepping-up units in mutual investment funds held at the date of 31 December 2022. In this case, the 14% tax is not calculated on the entire value but on the difference between the prospectus value on 31 December 2022 and the purchase or subscription cost. The election needs to be exercised by 30 June 2023 and the tax is withheld by the intermediary by 16 September 2023.

Exemption for investment management activities

The Draft proposes a change to the domestic definition of permanent establishment (PE) by excluding, under certain circumstances, that nonresident investment vehicles availing of asset managers in the Italian territory may form an Italian PE.

The asset manager is defined as the person who, in the name and/or on behalf of a foreign investment vehicle (or of its direct or indirect subsidiaries), habitually concludes contracts and /or negotiations, or in any case assists, also through preliminary activities, for the purchase and/or sale of financial instruments, even if availing of a discretionary power. The asset manager, either an Italian resident or a nonresident entity operating through an Italian PE, is not considered a “dependent agent” provided that:

  • The nonresident investment vehicle (and its direct or indirect subsidiaries) reside in a State that allows an adequate exchange of information with Italy.
  • The investment vehicle qualifies as an independent vehicle (the independence definition should be provided through a Ministerial Decree).
  • The asset manager operating in Italy does not hold positions in the administrative bodies of the nonresident investment vehicle, or any of its subsidiaries, nor holds a stake in the economic results of the investment vehicle up to a certain threshold.
  • The remuneration received by the asset manager from its management activity is calculated at arm’s length and duly documented.

The proposed rule also clarifies that, under the above-mentioned conditions, a nonresident investment vehicle is not necessarily deemed to have a “fixed place of business” at its disposal in Italy only because a resident entity carries out an activity, in its own premises and with its own personnel, that may trigger benefits to the foreign vehicle.

One-off energy windfall tax

The Draft contains an extraordinary new levy, intended as a “solidarity surcharge,” only for the year 2023 applying to entities that produce, import, sell electricity, natural gas, and oil products (in the case of oil products, distributors are also subject to such tax).

The levy applies at a rate of 50% on the portion of the corporate income computed for fiscal year (FY) 2022 that exceeds by at least 10% the average income for the four years prior to FY 2022 (if such average is negative, the basis is assumed to be zero). The special contribution cannot in any case exceed 25% of the value of the shareholders' equity on 31 December 2021 (in the case of calendar-year entities).

The new 50% windfall tax should be paid by 30 June 2023 for companies with a calendar year and is not deductible from the corporate income tax and local tax bases.

The contribution should not be due by businesses organizing and managing platforms for the exchange of electricity, gas, environmental certificates, and fuel.

This levy should replace the previous extraordinary tax applied in 2022 and equal to 25% of any positive difference of the value-added tax (VAT) balance of active and passive transactions related to the period 1 October 2021 to 30 April 2022 compared to period 1 October 2020 to 30 April 2021. Such tax was due only if the VAT balance increase resulted higher than €5 million and higher than 10%.

Other tax measures

Other tax measures proposed by the Draft include:

  • Increase and extension of the tax credits for energy and natural gas expenses incurred by qualifying companies for energy and natural gas consumed in the first quarter of 2023
  • Postponement of the entry into force of the Sugar and Plastic taxes from 1 January 2023 to 1 January 2024
  • A package of tax amnesty measures
  • Tax rules on crypto currencies
  • An increase from €65,000 to €85,000 of the income threshold for the application of a 15% lump sum tax for qualifying individuals engaged in business and professional income


For additional information with respect to this alert, please contact the following:

Studio Legale Tributario, International Tax and Transaction Services, Milan

Studio Legale Tributario, International Tax and Transaction Services, Rome

Studio Legale Tributario, Business Tax Advisory, Rome

Studio Legale Tributario, Bologna

Studio Legale Tributario, Florence

Studio Legale Tributario, Torino

Studio Legale Tributario, Treviso

Studio Legale Tributario, Verona

Ernst & Young LLP (United Kingdom), Italian Tax Desk, London

Ernst & Young LLP (United States), Italian Tax Desk, New York



  1. Non-cooperative countries or territories for tax purposes are those jurisdictions identified in Annex I of the European Union (EU) list of non-cooperative jurisdictions for tax purposes, adopted by conclusions of the EU Council (see: EU list of non-cooperative jurisdictions for tax purposes - Consilium (

  2. According to Article 9 of Presidential decree n. 917/86 (Italian income tax code), “normal value” generally means the average price or consideration charged for goods and services of the same or similar kind under conditions of free competition and at the same stage of marketing, at the time and place where the goods or services were sold or rendered, and, failing that, at the nearest time and place. Specific determination rules are provided for stocks, bonds and other securities.


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


Copyright © 2024, Ernst & Young LLP.


All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.


Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.


Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or Please refer to the privacy notice/policy on these sites for more information.

Yes, I accept         Find out more