Executive summary

On 6 December 2024, the Italian government issued a measure that implements the penalty protection regime (formerly introduced by Legislative Decree n. 209 of 27 December 2023)¹ pertaining to tax-hybrid mismatches (Implementing Decree).

If duly prepared, the relevant documentation (Documentation) can protect taxpayers from administrative penalties. The aim of the provision originally introduced with the mentioned Legislative Decree is to encourage cooperation between tax authorities and taxpayers. In particular, in the event of a dispute concerning hybrid mismatch rules that lead to a higher tax being assessed, the penalty for an unfaithful tax return (ordinarily ranging from 90% to 180% for violations committed by the end of August 2024 and equal to 70% for violations committed starting from 1 September 2024) should not apply if, in the course of the field agents' activity, the taxpayer delivers Documentation that complies with the instructions contained in the Implementing Decree.

To serve as penalty protection, the Documentation must be prepared in compliance with a number of instructions set forth by the Implementing Decree (explained below). Among other things, the penalty protection will apply only with respect to transactions duly described in the Documentation, for which the taxpayer has truthfully and thoroughly disclosed any relevant element and shown the survey criteria followed to ascertain the existence of the potential hybrid transaction.

The documentation must be prepared in Italian and electronically signed with a timestamp showing a date not subsequent to that of the filing of the corporate income tax (CIT) return for the fiscal year (FY) covered by the Documentation. For FYs ongoing on 29 December 2023, the deadline for the electronic signature and the timestamp is the deadline for the filing of the CIT return related to the FY during which the Implementing Decree has come into force (e.g., the deadline for a calendar year taxpayer that wants to benefit from the Documentation for FY 2023 and FY 2024, will be the deadline for filing the 2024 CIT return — i.e., end of October 2025). For FYs prior to the FY ongoing on 29 December 2023, the Documentation will need to be properly prepared and signed by the sixth month after the Implementing Decree enters into force (e.g., the deadline for a calendar year taxpayer that wants to benefit from the Documentation for FYs 2020—2021 will be a day in June 2025, assuming that the Implementing Decree becomes effective in December 2024).

The penalty protection regime is not available for transactions that tax authorities audited prior to 29 December 2023.

Detailed discussion

The Implementing Decree consists of 13 articles and is accompanied by three Annexes. Annex A lists the information that the Documentation must include about the taxpayer and its group, as well as with respect to the reported transactions. Annex B shows the procedure that the taxpayer must follow to identify any relevant hybrid mismatch (direct and imported). Annex C provides guidelines for the taxpayers to investigate the existence of any structured arrangement.

Article 1 (Definitions) — Among various definitions (mostly following those of the Italian anti-hybrid provisions, i.e., Legislative Decree n. 142 of 29 November 2018),² the Implementing Decree defines a "Relevant Transaction" as a transaction that triggers, or may reasonably trigger, one of the tax-hybrid mismatch outcomes regulated by the Italian anti-hybrid provisions (Covered Tax-Hybrid Mismatch). The Decree defines "Homogeneous Group" as a set of Relevant Transactions put in place in the same FY, with the same or different counterparties, and triggering for the taxpayer the same or substantially equivalent legal and economic effects, as well as the same treatment under the Italian anti-hybrid provisions. The Implementing Decree also defines "Transitional Period" as the period between 29 December 2023 (i.e., the effective date of the Legislative Decree introducing the penalty protection regime for hybrid transactions) and the later of the deadline for the filing the tax return related to the FY ongoing as of such date (i.e., for calendar year companies, the end of October 2024) or the sixth month after the entry into effect of the Implementing Decree.

Article 2 (Subjective scope) — The Documentation may be filed by any Italian tax resident or by any permanent establishment of a foreign resident. Each Italian company of a group must file its own documentation unless the group appoints one Italian company as the filer for all the members (Empowered Taxpayer). In this case, the documentation must include separate sections for each taxpayer.

Article 3 (Survey criteria) — To identify a Relevant Transaction or a Homogeneous Group, the taxpayer must explain the process applied to ascertain the existence of tax-hybrid mismatches. In this respect, Annex A provides a list of information that the taxpayer must include to make the Documentation suitable for the penalty protection regime, such as:

• Information on the group: Description of the multinational group, corporate diagram showing the place of incorporation and tax residence of each company, the tax transparent or tax-opaque nature under the perspective of the country of incorporation as well as of the company's country of residence and that of the investors' residence, information about any permanent establishment and any tax grouping
• Information on the taxpayer: General data, tax residency, tax nature under the perspective of Italy and the investors' jurisdictions, existence of any disregarded permanent establishment
• Description of the process: Description of the internal procedure implemented to investigate the existence of any tax-hybrid mismatch
• Relevant Transactions: Detailed description of each Relevant Transaction, including an indication of the type of hybrid and tax treatment in any relevant jurisdiction by providing evidence (e.g., of the possible reaction applied by one jurisdiction or by explaining why the taxpayer believes that there is no hybrid) and describing the analysis process utilized

On the other hand, Annex B provides the procedure the taxpayer must follow to identify the Relevant Transactions and Homogeneous Groups with respect to the potential existence of Covered Tax Hybrids. For example, in the case of a "deduction-with-no-inclusion" mismatch, the taxpayer must disclose the features of the deducted item of income, explain how the other involved jurisdictions view this deducted item of income, identify the beneficiary of the payment from the perspective of each relevant state, analyze the tax-transparent/opaque nature of the beneficiary from the different perspectives of the involved jurisdictions, and explain any absence of reaction by any of the involved jurisdictions. A similar procedure must be followed in the case of an imported hybrid mismatch — information must first be obtained by the top parent company and, if the taxpayer believes there is no hybrid mismatch outcome, a final documented explanation must be prepared to explain why.

Article 4 (Structure and content of the Documentation) — The Documentation must be prepared for each FY and will provide for penalty protection only to the extent that it covers the relevant transaction and includes the requirements specified in Annex A for each relevant taxpayer.

Article 5 (Form of the Documentation) — The documentation must be prepared in Italian and electronically signed by the company's legal representative (or by a delegate) with a timestamp showing a date not subsequent to that of the CIT return filing for the FY covered by the Documentation. For the FY ongoing on 29 December 2023, the deadline for the electronic signature and the timestamp is the deadline for the CIT return filing related to the FY during which the Implementing Decree has come into force. For instance, a calendar year taxpayer that wants to benefit from the Documentation for FYs 2023 and 2024 will have to electronically sign and apply the timestamp by the deadline for filing the 2024 CIT return (i.e., the end of October 2025 or by the end of the tenth month following the end of the FY). If the taxpayer avails of the 90-day extension term to file the CIT return (which includes the notice about the existence of the Documentation), the date of the electronic signature and timestamp may be extended accordingly. In any case, the Documentation notice in the CIT return can be made only after having drafted the Documentation and duly complied with the electric signature and timestamp requirements. The Empowered Taxpayer that prepares the Documentation is responsible for complying with the electronic signature and timestamp deadlines. The Documentation must be drafted in electronic format and provided to the tax authorities no later than 20 working days from the tax authorities' request date. The Documentation may be provided in paper format, as long as an electronic format (with the date of the relevant electronic signature and timestamp compliant with the above-mentioned rules) is then filed by a congruous term indicated by the authorities.

Article 6 (Terms for Documentation delivery) — As mentioned, the Documentation must be provided to the authorities within 20 working days of their request for it. The authorities may ask for more information by providing an additional 30-working-day term and another 60-day maximum term. Complying with such terms is a prerequisite to benefit from the penalty protection.

Article 7 (Effects of the Documentation) — The penalty protection applies only with regard to the Relevant Transactions and Homogeneous Groups covered by the Documentation and only if the Documentation was properly prepared. If one Relevant Transaction is not duly reported, the Documentation will have no effect with regard to that transaction but may still be valid with respect to other covered Relevant Transactions. For imported hybrid mismatches, the penalty protection will apply, among other things, only if the Documentation shows that the taxpayer followed an internal investigation process as requested under Article 3.

Article 8 (Extension and conditions for the effectiveness of the Documentation) — The effects of the Documentation are limited to the relevant FY. The Documentation must be preserved until the expiration of the applicable statute of limitation. The Documentation will provide penalty protection only to the extent the information included in it is truthful, complete and in compliance with the Implementing Decree's instructions; the Documentation must also include a qualifying electronic signature and timestamp. Minor omissions or inaccuracies that do not impede a proper analysis should not result in a denial of penalty protection.

Article 9 (Documentation Notice) — Taxpayers shall provide notice to the tax authorities regarding the existence of the Documentation in the CIT return related to the FY covered by the Documentation. Taxpayers preparing Documentation for FYs preceding the FY ongoing on the date the Implementing Decree enters into force must provide notice via the CIT return model approved by the tax authorities after such date (e.g., a calendar year taxpayer that wants to notify the tax authorities about the existence of the Documentation for FYs 2020—2022, as well as for FY 2023, should do so by using the CIT return for FY 2024).

Article 10 (Absent or noncompliant Documentation) — If no Documentation has been prepared or the prepared Documentation is not in compliance with the Implementing Decree's provisions, the missing or deficient Documentation cannot be considered as an element in favor of the existence of a hybrid mismatch.

Article 11 (Documentation for FYs prior to the one ongoing on 29 December 2023) — Any Documentation prepared for FYs prior to the one ongoing on 29 December 2023 is valid if it has been electronically signed and marked with a timestamp by the final term of the "Transitional Period" (i.e., in practice by the sixth month following the entry into effect of the Implementing Decree), and it complies with the requirements laid out in Articles 4,5,6,8 and 9 of the Implementing Decree. However, access to the penalty protection regime is barred for Relevant Transactions that, prior to 29 December 2023, the tax authorities had assessed as violating the Italian anti-hybrid provisions and for which audit activities had already begun.

Article 12 (Interaction with the cooperative compliance program) — This article provides guidance regarding the interaction between the tax-hybrid penalty protection regime and the Italian cooperative compliance program.³

Article 13 (Transitional measures) — This article further expands on interactions between the new regime and the mentioned cooperative compliance program. In addition, it clarifies that, even if not respecting the requirements under Article 3.2 above, for FYs prior to the one ongoing when the Implementing Decree enters into force, the penalty protection regime may still apply if the applied analysis process is adequate to identify any Relevant Transaction or Homogeneous Group and the potential existence of Covered Tax Hybrids.

Implications

Multinationals with Italian subsidiaries or Italian permanent establishments should carry out annual analyses to ascertain the existence of any Relevant Transaction that may potentially qualify as a tax-hybrid, including a retroactive analysis for FYs 2020, 2021, 2022 and 2023. Once the analysis is concluded, depending on the outcome, they should consider preparing the relevant Documentation according to the Implementing Decree to potentially benefit from penalty protection in the case of a future audit.