ITALY

Corporate Tax News Issue 65 - February 2023

2023 budget law measures impact MNEs with Italian operations

Italy’s budget law for 2023, which generally became effective on 1 January 2023, contains a number of tax measures that will impact multinational enterprises with Italian operations. Some of the most relevant measures are as follows:

  • New restrictions on the deductibility of costs incurred in transactions with companies in noncooperative jurisdictions;
  • Option to pay a substitute tax on profits of entities located in low-tax jurisdictions;
  • Expanded capital gains taxation on transfers of Italian real estate;
  • Opportunity for a one-time step-up of participations in Italian companies and Italian real estate;
  • Measures to prevent an asset manager from triggering a permanent establishment (PE) for a nonresident investment vehicle;
  • Introduction of a one-time surcharge on the excess profits of energy producers;
  • New tax treatment of crypto assets; and
  • Deferral of the effective date of the taxes on sweetened drinks and plastic.

Limit on deductibility of expenses incurred with noncooperative jurisdictions

Limits are imposed on the deductibility of expenses incurred in transactions with companies located in countries/territories that are deemed to be noncooperative for tax purposes (based on the EU list of noncooperative jurisdictions), as well as expenses incurred for services provided by professionals that are resident/domiciled in noncooperative countries/territories. Under the new restrictions, some expenses may be deducted only up to the amount of their “normal value,” determined in accordance with Italy’s Corporate Income Tax Law. However, the restriction will not apply if a resident enterprise can demonstrate that the transaction(s) involved a real economic interest and were actually carried out. The Italian tax authorities must issue a special notice to the taxpayer and the taxpayer has 90 days to produce the relevant evidence. If the taxpayer fails to do so or if the tax authorities do not consider the evidence provided to be sufficient, they can issue an assessment notice but must expressly state the reasons for the assessment.

Deductible expenses and other negative components must be indicated separately in the income tax return, with penalties being imposed for failure to comply.

Low-tax jurisdiction company profits and profit reserves

If certain requirements are met, taxpayers that hold equity investments in foreign entities located in countries/territories with a preferential tax regime may pay a substitute tax, rather than the normal tax imposed on a distribution of profits and profit reserves that were not distributed as of 1 January 2023 (the date the budget law became effective).

The substitute tax is levied at rates of 9% or 30%, depending on whether the taxpayer is subject to corporate income tax or individual income tax. The rates are reduced to 6% and 27%, respectively, for profits that are actually repatriated by the due date for payment of the balance of taxes for fiscal year 2023 and the earnings are set aside in a specific equity reserve for at least two fiscal years. Failure to comply these requirements will result in the recapture of the substitute tax, as well as the imposition of interest and penalties.

Taxpayers may benefit from the substitute tax only with respect to qualifying undistributed profits that result from the 2021 financial statements of the relevant foreign investees. The option may be exercised separately for each foreign investee and for all or part of the profit reserves. However, the election to pay the substitute tax must be made in the tax return filed for fiscal year 2022, and the substitute tax must be paid in full by the deadline for payment of the tax balance for the 2022 fiscal year (i.e., 30 June 2023).  

Capital gains of nonresident entities on transfers of Italian real estate

Significant changes are made to the tax treatment of capital gains derived by nonresidents on the alienation of shareholdings in Italian companies, including real property companies. Before 1 January 2023, nonresidents were subject to capital gains tax only on gains derived from the direct transfer of such participations, but as from 2023, the rules are extended to capture gains derived on indirect transfers. Nonresidents deriving gains from the sale of participations in other nonresident real property companies will be subject to Italy’s 26% capital gains tax where the alienation is for consideration and at any time during the 365 days preceding the sale, the participation derives more than 50% of its value, directly or indirectly, from real estate situated in Italy.

It should be noted that the scope of the term “real property situated in Italy” does not include “commodity property,” property used directly in the operation of the business, the disposal of securities traded on regulated markets and capital gains derived from the disposal of holdings by EU/EEA mutual funds.

Tax step-up of nonresidents’ participations in Italian companies and real estate

Qualifying nonresidents may elect to step up the value of certain participations in Italian companies and real estate held on 1 January 2023 by paying a 16% substitute tax. The budget law revises the legislation that allows nonresident individuals, non-commercial entities and nonresidents without a PE in Italy to benefit from a one-time upward revaluation of the cost or purchase value of Italian unlisted equity investments and Italian real estate (agricultural and buildings) where the asset is not held for trading purposes by paying the substitute tax. The scope of the relief is extended to apply to shares traded on regulated markets or multilateral trading facilities. The revaluation has the effect of reducing or eliminating any taxable gains at the time of disposal of the asset.

The following requirements must be met for a nonresident to qualify for the step-up:

  • The nonresident must own the assets on 1 January 2023;
  • The decision to make a revaluation of the tax cost of equity investments and real estate must be made by 15 November 2023;
  • The revaluation of equity investments and real estate that are not traded on regulated markets must be certified by a sworn appraisal by 15 November 2023; and
  • The substitute tax must be paid in full or in up to three instalments beginning 15 November 2023. Interest at a rate of 4% per year will be charged on the second and third instalments.

For traded equity investments, the substitute tax is levied on the normal value determined with an arithmetic average of the relevant prices in December 2022.

Investment management exemption

A nonresident investment vehicle that operates in Italy through an independent entity that carries out investment management activities (i.e., an asset manager) on its behalf will not be deemed to create an agency or PE in Italy if the following requirements are met:

  • The investment vehicle and its subsidiaries are resident or located in a white list (i.e., cooperative) country/territory;
  • The investment vehicle meets independence requirements to be established in a special decree issued by the Minister of Economy and Finance;
  • The asset manager does not hold a position in the management and/or oversight bodies of the investment vehicle and/or its directly or indirectly controlled subsidiaries and is not entitled to more than 25% of the economic results of the investment vehicle; and
  • The remuneration of the Italian asset manager or Italian PE of the nonresident investment vehicle for services provided under agreements with entities in the group is on arm’s length terms and supported by appropriate documentation.

One-time energy solidarity surcharge

The budget law includes a one-time energy solidarity surcharge on entities that derived at least 75% of their fiscal year 2022 revenue from the production, import or sale of electricity, natural gas or oil products. Businesses based on platforms for the exchange of electricity, gas, environmental certificates and fuel are not subject to this surcharge. The surcharge is equal to 50% of the 2022 revenue that is at least 10% higher than the average income reported during the period 2018-2021 but cannot exceed 25% of the value of the entity’s net assets as of 31 December 2021. Payment of the surcharge must be made by 30 June 2023 and is not deductible for corporate income tax purposes. This levy replaces the previous extraordinary tax that applied in 2022 (for prior coverage, see the article in the August 2022 issue of Corporate Tax News).

Taxation of crypto assets

The budget law introduces a definition of a crypto asset, as well as a capital gains tax on gains from crypto trading. A crypto asset is a digital representation of value or rights that can be transferred and stored electronically using distributed ledger or similar technology. A 26% capital gains tax will be levied on gains derived from crypto trading where the gains exceed EUR 2,000 in a tax period. Gains for these purposes are defined as the difference between the consideration received or the nominal value of the exchanged crypto assets and the purchase cost. Any losses incurred may be deducted. As an incentive to encourage taxpayers to declare the value of their crypto assets held on 1 January 2023, taxpayers can pay a substitute tax of 14% in lieu of the 26% capital gains tax on the purchase cost.

The valuation of crypto assets is not considered for purposes of the corporate income tax and the tax on productive activities.

Sugar and plastic taxes

The effective date of the single-use consumption tax on manufactured goods (plastic tax) and the tax on the consumption of sweetened soft drinks (sugar tax), both of which were introduced by Budget Law 2020, has been postponed to 1 January 2024.
 

Eleonora Briolini
Ciro Pisacane