January 10, 2023
Italy issues 2023 Budget Law
On 29 December 2022, the Italian Parliament issued Law n. 197 which was published on the same day in the Official Gazette and became effective as of 1 January 2023.
The Law provides for several tax measures that may be of interest to MNEs with Italian operations, including the following:
Other relevant tax measures relate to:
Limited deduction of costs incurred with black-listed jurisdictions
The Law contains a provision that limits 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.1 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 a real economic interest and that 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 Law contains an innovative provision allowing for a voluntary one-off reduced tax on undistributed earnings of foreign subsidiaries subject to low-tax regimes.
Under ordinary 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 provides for a 9% transition tax (30% for individual entrepreneurs) computed on qualifying undistributed earnings. The payment of such tax makes 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) also allows 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 shall 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 shall set aside the repatriated earnings to a special equity reserve and keep them for at least two years.
Failing such conditions causes 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 (i.e.,1 January 2023); 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 Law introduces 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 previous rules, Italy would tax 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, effective from 1 January 2023, reflects paragraph 4 of Article 13 of the Organisation for Economic Co-operation and Development (OECD) Commentary. As such, it introduces 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 participation in the foreign entity is transferred in exchange for consideration; and (ii) such participation 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. In making this computation, immovable property to the production and exchange of which the business activity is directed as well as those used directly in the business activity of the company should not be considered.
Such treatment also applies to gains derived from minority shareholdings. However, a general exclusion from the new rule applies for gains derived from the sale of participations listed in regulated markets.
In order to avoid discrimination issues at the European Union (EU) level and preserve the capital gain exemption regime introduced by the 2021 Budget Law 3 for qualifying investment funds, the new provision does not apply to investment funds established in the EU, or in qualifying countries of the European Economic Area (EEA), either compliant with the Undertakings for Collective Investment in Transferable Securities (UCITS) IV Directive or having a manager subject to regulatory supervision in the foreign country of establishment under the Alternative Investment Fund Management (AIFM) Directive.
This provision 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 derived 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 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 Law 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 16% substitute tax (initially provided at 14% rate by the Draft Budget Law and then changed during the Parliamentary approval process). 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 16% 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 15 November 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 15 November 2023 or through three annual installments beginning 15 November 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 substitute tax applies at a lower rate, i.e., 14% and it is not calculated on the entire value but on the difference between the 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.
Permanent establishment exemption for investment management activities
The Law introduces 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 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 Law contains an extraordinary new levy, intended as a “solidarity surcharge,” only for the year 2023 applying to entities that derived at least 75% of the fiscal year 2022 revenues from any of the following activities: production, import, sale of 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 2022 that exceeds by at least 10% the average income for the four years prior to 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 the 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%.
Tax amnesty measures
The Law contains a package of measures in favor of taxpayers regarding the possibility to settle qualifying challenges raised by the Italian Tax Authorities (ITA) and certain litigation procedures.
Settlement procedures in the context of tax assessments. Under this measure, all the ongoing settlement procedures related to tax audit reports notified by 31 March 2023, as well as tax assessments still subject to appeal at the effective date of the Law and notified by 31 March 2023, can be settled by applying penalties reduced to 1/18 of the minimum provided for by the law (plus taxes and interest). Deeds of tax credit collection are included in such provision, e.g., with reference to Research & Development (R&D) tax credits.
Settlement of pending tax litigation. Under this measure, tax litigation proceedings pending at any level (including before the Supreme Court) at the effective date of the Law, can be settled by paying an amount proportional to the value of the dispute (i.e., only assessed taxes). The amount due depends on the outcome of the procedure as per the summary table below:
The appeal must have been notified to the other party by the effective date of the Law and the related dispute must have not been concluded with a final decision at the date of filing of the request of settlement. The procedure is perfected with the filing of the application and the payment of the amounts due by 30 June 2023. The amounts already paid during the litigation procedure can be offset against the amounts due, but no refund is due in the case of payments already made in excess.
If the deadline for the appeal is included between the effective date of the Law and 31 July 2023, such deadline is automatically suspended for nine months. In the other cases, a suspension must be specifically requested.
A potential settlement rejection by ITA must be notified by 31 July 2024. Any rejection may be appealed by the taxpayer within 60 days before the court where the dispute is pending.
Special judicial settlement. Under this measure, 1st and 2nd level tax litigation procedures may be resolved with a judicial settlement allowing the application of penalties reduced to 1/18 of the minimum provided for by the law. The deadline to benefit from this measure is 30 June 2023.
Resolution of Supreme Court proceedings. Proceedings pending before the Supreme Court may be dropped by the taxpayer by reaching an agreement with ITA and paying the taxes settled (with interest) and penalties reduced to 1/18 within 30 June 2023. Refunds of any amount already paid in excess during the litigation procedure are not allowed.
Settlement of automated checks. This measure allows the settlement of challenges raised by ITA as a consequence of automated checks on tax returns related to the fiscal years (FYs) in progress on 31 December 2019, 31 December 2020, and 31 December 2021, benefiting from the reduction of penalties to 3% of the minimum provided for by the law (plus taxes and interest). This measure is applicable only if the term of the payment was not expired at the effective date of the Law or if the deeds of challenge are notified later than such date.
Regularization of formal violations. This measure allows the regularization of any formal violation not affecting the taxable base computation (neither for direct nor for indirect tax purposes) by paying a lump sum equal to €200 for each FY and by removing the formal irregularities.
Special self-regularization. This measure allows a voluntary regularization of all tax breaches (not eligible to be resolved with the previously mentioned provisions and not already challenged by ITA with a formal act), related to tax returns submitted for FYs in progress on 31 December 2021 and previous FYs, by paying penalties reduced to 1/18 of the minimum provided for by the law (plus taxes and interest) and by removing the irregularities. This amnesty should apply only to main direct and indirect taxes managed at central level by ITA (not including other taxes managed at local level, nor custom duties).
Other regularizations. The Law provides for the regularization of omitted or deficient installments/payments due by the taxpayer after acquiescence or administrative and judicial settlements. This procedure is applicable with a one-off or installments payment by 31 March 2023.
Tax bills amnesty. This measure includes tax bills entrusted to the Tax Collection Agent (TCA) from 1 January 2000 to 30 June 2022. The taxpayer can extinguish its debit position before the TCA without paying penalties, interest, nor collection fees. This procedure is applicable with a one-off or installments payment by 31 July 2023.
Postponement of sugar and plastic taxes
The entry into force of the sugar and plastic taxes has been postponed from 1 January 2023 to 1 January 2024.4
Other relevant matters
Simplified assets assignments to shareholders
The Law provides for a simplified tax regime to assign assets to shareholders by 30 September 2023 through the payment of a substitute tax of 8% (and an additional 13% tax for any corresponding tax-deferred reserves). For such assignments, any applicable registration tax rates are reduced by half.
Tax credits for new business assets
The Law provides for an extension from 30 June 2023 to 30 September 2023 of the deadline for making investments in new tangible business assets for the obtainment of the related tax credit, provided that purchase orders have been accepted by the seller by 31 December 2022 and at least 20% of their price has been paid by the same date.
Tax credits for energy and gas expenditures
The Law increases and extends the tax credits for expenses incurred by qualifying companies for energy and natural gas consumed in the first quarter of 2023.
Tax credits for investments in certain southern regions of Italy
The Law extends from 2022 to 2023 the tax credit for companies that purchase assets for production facilities and carry out R&D investments in specific regions of southern Italy.
Accelerated depreciation for real estate assets held by qualifying retailers
The Law provides for the cost of immovable properties used in qualifying retail businesses (including supermarkets, grocery shops, and other retailers) to be depreciated at 6% annual rate vs. ordinary 3%.
Taxation of crypto currencies
An ad hoc tax regime is introduced for crypto currencies and other crypto assets (i.e., 26% substitute tax applied to the capital gain determined based on the difference between the consideration received, or the normal value of the permutated assets, and the cost of their purchase). An election is also introduced to step up the cost or purchase value of crypto currencies and other crypto assets with the payment of a substitute tax of 14%. Positive and negative components resulting from the valuation of crypto assets are not taxable for corporate income tax (IRES) and regional tax for productive activities (IRAP) purposes.
Tax credits for IPO advisory costs for SMEs
The tax credit available for advisory costs incurred by SMEs for the purpose of IPOs is extended to 2023 with an increase of the maximum qualifying cost from €200,000 to €500,000. The tax credit is equal to 50% of such cost.
Lump sum income tax for individuals
The Law provides for an increase from €65,000 to €85,000 of the revenue threshold for the application of a 15% lump sum substitute tax applied on an adjusted income, in lieu of the ordinary individual income tax regime, for qualifying individuals engaged in business and professional activities (Qualifying Individuals). An exit from the lump sum tax regime is provided for if, during the year, revenues exceed €100,000.
Only with reference to fiscal year 2023, individuals engaged in business and professional activities who, for different reasons, do not qualify for the above-mentioned lump sum tax regime, can still benefit from a 15% lump sum substitute tax on an adjusted income exceeding the highest income generated in any of the three preceding fiscal years, up to €40,000.
For additional information with respect to this alert, please contact the following:
Studio Legale Tributario, International Tax and Transaction Services, Milan
Studio Legale Tributario, Tax Controversy, 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