January 23, 2024
Italy issues 2024 Budget Law and tax reform decrees
The implementation process of the comprehensive tax reform framework continues through the release of several legislative decrees by the Italian Government according to the principles set forth by Law n. 111/2023 (the Enabling Law), dated 9 August 2023.1
Legislative decree n. 209, dated 27 December 2023 (International Tax Decree) was published in the Official Gazette n. 301 of 28 December 2023, and became effective as of 29 December 2023. Among other things, the International Tax Decree implements Pillar Two provisions, amends the CFC regulations, introduces a penalty protection regime for ATAD 2 hybrids and an income exemption regime for business onshoring.2 The International Tax Decree also modifies tax residence rules for corporations and individuals by also introducing relevant changes to the "Inbound workers regime."
Legislative decree n. 219, dated 30 December 2023 (Tax Ruling Decree) was published in the Official Gazette n. 2 of 3 January 2024 and became effective as of 18 January 2024. In part, the Tax Ruling Decree increases the degree of protection available to taxpayers during the preliminary stages of tax audits.
Legislative Decree n. 220, dated 30 December 2023 (Tax Controversy Decree) was published in the Official Gazette n. 2 of 3 January 2024 and became effective as of 4 January 2024. Among other things, the Tax Controversy Decree sets forth provisions encouraging the resolution of tax disputes through the strengthening of the existing in-court settlement methods.
Legislative Decree n. 221, dated 30 December 2023 (Cooperative Compliance Decree) was published in the Official Gazette n. 2 of 3 January 2024 and became effective as of 18 January 2024. Among other things, the Cooperative Compliance Decree provides significant enhancements to Italy's existing cooperative compliance program (originally introduced by Legislative Decree n. 128/2015), which aims to promote an ongoing cooperation between tax authorities and taxpayers to prevent tax litigation and reduce or even avoid tax penalties.3
Legislative Decree n. 216, dated 30 December 2023 (Income Tax Decree) was published in the Official Gazette n. 303 of 30 December 2023 and became effective as of 31 December 2023. In part, the Income Tax Decree repealed the Notional Interest Deduction (NID) regime and reshuffled the individual income tax brackets and respective rates for 2024.
Finally, on 29 December 2023, the Italian Parliament gave the definitive green light to Italy's Budget Law n. 213, dated 30 December 2023 (2024 Budget Law). The 2024 Budget Law was published in the Official Gazette n. 303 dated 30 December 2023 and became effective as of 1 January 2024. The main tax measures introduced by the 2024 Budget Law concern the extension of the participation exemption regime to qualifying nonresident companies and the introduction of a step-up regime for Italian participations held by nonresidents.
A recap of the main tax changes introduced by the recently enacted set of provisions follows.
Introduction of BEPS Pillar Two provisions
In general, the Italian Pillar Two provisions introduced by the International Tax Decree do not present significant differences from the EU Minimum Tax Directive (nor from the draft already circulated for public consultation).4
In brief, the Italian Pillar Two regulations introduce the global minimum top-up taxation rules by providing for the main interlocking measures, i.e., the Income Inclusion Rule (IIR) — translated in Italian as "imposta minima integrativa" — and the Undertaxed Payments Rule (UTPR) — translated in Italian as "imposta minima suppletiva" — as well as a Qualifying Domestic Top-Up Tax (QDMTT) under the safe-harbor OECD standards — translated in Italian as "imposta minima nazionale." 5
The new rules are effective with reference to financial years (FY) starting on or after 31 December 2023, except for the UTPR provisions that are due to apply to FYs starting on or after 31 December 2024.
Penalty protection regime for ATAD 2 hybrid mismatches
The International Tax Decree introduces a new provision regarding the EU Anti-Avoidance-Tax-Directive (ATAD 2) hybrid mismatch rules with the aim of encouraging cooperation between tax authorities and taxpayers. In particular, under the new provision, in the event of a dispute concerning hybrid mismatch rules leading to a higher tax assessed, the penalty for filing an inaccurate tax return (currently ranging from 90% to 180%) shall not apply if, in the course of the field agents' activity, the taxpayer delivers documentation in compliance with the instructions to be issued by the Ministry of Finance by the end of February 2024 (Qualified Documentation). The Qualified Documentation must be prepared before the deadline for the submission of the relevant FY's tax return and before the start of any audit activity.
For tax periods prior to the entry into force of the International Tax Decree (i.e., 2020, 2021 and 2022 for calendar year companies), the penalty protection regime applies if the Qualifying Documentation is prepared by the later of: (i) the deadline for submitting the tax return relating to the tax period ongoing at the date of entry into force of the International Tax Decree, or (ii) six months from the date that the Ministry of Finance enacts the decree.
Completely and truthfully describing the case as well as timely communicating the relevant documentation to the tax authorities constitutes proof that the taxpayer who carried out the described transaction did not intend to evade income taxes and, as such, should significantly mitigate any criminal law implications.
Coordination of CFC rules with Pillar Two provisions
Under current rules, the income of CFCs is attributed to the Italian parent under a flow-through taxation principle if the foreign subsidiary meets two conditions: (i) it is subject to an effective tax rate (ETR) lower than 50% of the Italian ETR that would have applied if the entity resided in Italy, and (ii) more than one-third of its revenues qualify as passive income. The ETR test comparison requires a complex computation to redetermine the CFC's taxable income according to the Italian tax rules and — if both conditions are met (i.e., low ETR and more than 1/3 passive income) — such income is taxed to the Italian parent at 24% corporate income tax (CIT). An exception applies for CFCs having an adequate level of local economic substance, in which case the CFC's income is not imputed to the Italian parent.
The International Tax Decree intend to simplify the mentioned ETR test by providing for a 15% ETR based on the accounting results of the CFC. This simplification is driven by the need to align the required minimum level of CFC's taxation with the minimum global tax under Pillar Two provisions. The minimum 15% ETR test is based on the accounting results of the CFC as a ratio between the foreign tax burden and the foreign accounting earnings before taxes. The foreign tax burden includes current taxes, deferred taxes, and the fraction of the local QDMTT (if any) attributable to the CFC. For the CFC to utilize this simplified ETR test, the CFC's financials must be certified by locally authorized professional auditors, and the findings of the CFC's audit must be used for the purpose of the certified stand-alone or consolidating accounts of the parent. If the ETR is lower than 15%, the Italian controlling company may still avoid the CFC income imputation by proving that the latter is subject to a tax burden at least equal to 50% of the theoretical Italian one. This 50% theoretical Italian tax test remains mandatory for CFCs with financials that have not been certified by authorized auditors.
As an alternative to the mentioned 15% minimum ETR test (which, if failed, would require a complex redetermination of the CFC's income and taxation at 24% CIT), Italian companies may elect for a further simplified regime requiring a mandatory minimum payment on a three-year basis. If elected, this regime provides for a substitute tax at 15% applied on the local adjusted accounting profits (i.e., grossed up by current and deferred taxes, as well as by assets' write-offs and provisions). The election made by the Italian parent company involves all CFCs with more than one-third passive income and remains mandatory for a three-FY lock-in period (automatically renewable unless explicitly revoked) irrespective of the minimum 15% ETR test. As a precondition to elect this simplified CFC taxation regime, the CFC's financials must be certified by locally authorized professional auditors.
The new rules are effective 1 January 2024.
Onshoring income exemption
The International Tax Decree introduces a temporary 50% exemption from CIT (currently levied at 24%) and Local Tax (Imposta Regionale sulle Attivita' Produttive, IRAP, currently levied at standard 3.9%) of the income deriving through business activities moved from a foreign jurisdiction, other than EU or EEA member states, to Italy. Based on the language of the provision, the exemption should cover the transfer to Italy of either business activities originally started in Italy and then relocated abroad (i.e., reshoring) or business activities performed abroad since their beginning (i.e., onshoring). However, such an exemption is not applicable to business activities that were performed in Italy during the 24 months preceding their transfer. Regarding the nature of the relevant migrated "business activities," it is currently debated if the provision requires that the business activity transferred should qualify — on a stand-alone basis — at least as a business going concern, or a simple transfer of functions, risks and/or assets (to be remunerated under the OECD Transfer Pricing Guidelines) would suffice. From a timing perspective, the exemption applies for the FY of the migration and the following five FYs.
The mentioned income exemption is subject to recapture (with interest but without penalties) if the business going concern is again migrated, even partially, from Italy to any other foreign jurisdictions (including EU and European Economic Area (EEA) countries) in the five years following the expiration of the regime or 10 years for large enterprises as defined by the EU recommendation n. 361 of 6 May 2003 (i.e., with at least 250 employees plus a turnover of at least €50m or, alternatively, total assets of at least €43m in value). It has been also clarified that the recapture works also in the case in which the re-transfer takes place during the FYs in which the exemption applies. Conversely, it is unclear if, in the case of partial re-transfer, the recapture would apply only proportionally to the income arising from the portion of business activity re-transferred abroad.
Although subject to the EU Commission's approval under the relevant EU State-aid principles, the new rule entered into force as of 1 January 2024.
Review of tax residence rules for corporations
Under current rules, companies are considered tax-resident of Italy if they meet one of the following requirements for the most part of the FY: (i) have a registered office in Italy, (ii) have an administrative office in Italy, or (iii) have a principal activity in the territory of the Italian state.
According to the new provisions, the first requirement, (i.e., (i) the registered office) is confirmed, while the second and third requirements are replaced respectively by (ii) the place of effective management and (iii) the place of day-by-day management.
The above amendment aims at providing a higher degree of legal certainty by also aligning the Italian provision to international practice and double-tax-treaty principles about tax residency. The "registered office" is a formal prerequisite that remains unchanged by assuring continuity with the current law. In contrast, the place of "effective management" and the place of "day-by-day management" are innovative substantial criteria that refer, respectively, to the place where strategic decisions are made and where the management activity is carried out in practice.
The new rule is effective as of 1 January 2024.
Extension of capital gain exemption regime to EU and EEA companies
The 2024 Budget Law includes an amendment to the domestic 95% Participation Exemption (PEX) provision by extending the regime, with reference to capital gains deriving from substantial participations,6 to nonresident companies without an Italian permanent establishment (PE), residing in the EU or in certain European Economic Area (EEA) jurisdictions with an exchange-of-information clause in place with Italy. 7
The change in law follows the decisions of the Italian Supreme Court (n. 21261 of 19 July 2023 and n. 27267 of 25 September 2023) stating that, based on EU fundamental freedoms, EU and EEA companies (without an Italian PE) disposing of Italian participations should not be treated worse than Italian companies in a comparable situation.8
Under the new rule, if the same PEX prerequisites required for Italian companies are met by EU and qualifying EEA companies, the latter would be subject to 26% foreign capital gain tax computed only on 5% of the relevant gain (i.e., 95% exemption), thus to 1.3% effective taxation. Also, according to the new provision, EU and qualifying EEA residents should be allowed to offset 5% of the gain with any capital loss incurred from the disposal of participations qualifying for the PEX regime. Any excess capital loss can be carried forward for five fiscal years.
The benefits of the new provision should be limited to companies residing in EU and qualifying EEA jurisdictions that, while availing of an adequate level of economic substance in the country of residence, cannot benefit from a bilateral treaty with full capital gains tax protection. For example, French companies deriving gains from the disposal of Italian subsidiaries are not protected by the Italy-France treaty capital gains provision under which gains from substantial participations are taxable in Italy.9
The new rule is effective as of 1 January 2024.
Repeal of the NID benefit
As part of the announced comprehensive tax reform, the Income Tax Decree provides for the repeal of the NID, set at 1.3% of the qualifying net equity. However, the new rule provides that companies may carry out any residual excess NID without time limitation.
The new rule is effective as of 1 January 2024.
Enhancement of the Cooperative Compliance Regime and penalty protection
Legislative Decree n. 221/2023 has substantially innovated the current Cooperative Compliance Regime: in addition to the progressive reduction of the minimum threshold for access (up to €100m in turnover/revenue as from 2028), the new regime introduces more favorable effects from a penalties perspective with the elimination of administrative and certain criminal penalties if the relevant tax risks are fully disclosed in advance and the tax control framework (TCF) is certified by a qualified professional.
One of the other main benefits remains the reduction by two years of the statute of limitations for the issuance of tax assessments (even by three years, under certain circumstances).
As for the new provisions, the cooperative regime may even apply to FYs prior to the access to the regime with a 50% reduction of the penalties for any risk fully communicated within 120 days from the admission to the regime, provided that no tax audit or tax assessments have been already started/noticed to the taxpayer.
Reduced penalties are available even absent requirements to apply for cooperative compliance for companies electing to draft and communicate a TCF to the tax authorities. The election is irrevocable for two years and the penalty relief will cover any tax risk communicated in advance through the filing of a tax ruling, with the application of 1/3 of the administrative penalties ordinarily applicable and the exclusion of certain criminal liabilities.
Step-up of Italian participations held by nonresident corporations
The 2024 Budget Law has revamped a one-off opportunity for resident individuals and nonresident entities to elect a tax step-up of participations in unlisted Italian companies held at the date of 1 January 2024 through the payment of a substitute tax.
The base of the substitute tax equals the value of the participation on 1 January 2024 and must be certified by a sworn appraisal prepared no later than 30 June 2024. The rate of the substitute tax is 16%.
The substitute tax may either be paid in full by 30 June 2024 or through three annual installments beginning 30 June 2024 (with the second and third installments due by 30 June 2025 and 30 June 2026 and subject to an annual 3% interest surcharge).
Extra deduction for new hires
The Income Tax Decree provides that companies that, through 2023, have carried out business activities in Italy may deduct for corporate income tax (CIT) purposes 120% of the labor costs in relation to new hires in 2024 (up to 130% for specific categories of employees).
The extra deduction is granted under two concurrent conditions: if (i) the number of employees hired on a permanent basis in 2024 is greater than the average of the same category of employees in 2023 (employment decreases in controlled companies should be factored into the computation), and (ii) the number of all the employees (including temporary employees) at the end of the 2024 is greater than the 2023 average.
The eligible cost for the increased tax deduction (20% or 30% depending on the case) is the lower of the cost for the new hires or the increase in the labor costs based on the profit and loss statement.
The new rule is effective as of 1 January 2024.
Review of tax residence rules for individuals
Article 1 of the International Tax Decree has amended the notion of residence of natural persons for purposes of the Individual Income Tax (IRPEF).
Under the new provision, individuals are deemed to be tax residents of Italy if, for the greatest part of the FY (i.e., for more than 182 days or 183 in case of leap year, also considering fractions of a day), alternatively:
In addition, unless proven otherwise, individuals registered in the Italian registry of the resident population for the greatest part of the fiscal year are deemed as tax residents.
As a result of the mentioned amendments, unlike the previous definition of residence, the notion of domicile is no longer linked to the Italian Civil Code's notion (i.e., the main location of an individual's business and interests). Also, the enrollment in the Italian registry of the resident population for the greatest part of the FY no longer represents an absolute presumption of tax residence.
Changes to the Inbound workers regime
The International Tax Decree introduced significant changes to the "Inbound workers regime," until then regulated by article 16 of Legislative decree n. 147, dated 14 September 2015.
The new version of the regime will not apply, inter alia, to the individuals enrolled in the Italian registry of the resident population by 31 December 2023 who will still be able to benefit, if eligible, from the former version.
Under the new regime, a 50% reduction of taxable income is provided to workers transferring their tax residence to Italy if the following conditions are met:
The above 50% exemption (increased to 60% in specific instances) applies to employment income, quasi-employment income (like directorship fees) and self-employed income, up to €600,000 per annum, in the FY in which the tax residence in Italy is acquired and in the following four fiscal years. Individuals who enroll in the Italian population registry in 2024, may benefit from the regime for additional three years if they purchase, by 31 December 2023 (and, in any case, in the 12 months preceding their transfer to Italy) an Italian residential property used as main residence. The percentage of income exemption for the additional three fiscal years is equal to 50%.
Individual Income Tax: new tax rates applicable for FY 2024
Article 1, paragraph 1, of the Income Tax Decree, reshuffled the individual income tax brackets and respective rates for 2024, as follows.
Specific rules are provided to ensure the consistency of the new 2024 IRPEF brackets with the regional and provincial tax surcharges.