Italy Country Report
February 2008
1
CONTRACT
SI2.ICNPROCE009493100
IMPLEMENTED BY
FOR
DEMOLIN, BRULARD, BARTHELEMY
COMMISSION EUROPEENNE
- HOCHE -
- DG ENTREPRISE AND INDUSTRY -
Study on Effects of Tax Systems on the Retention
of Earnings and the Increase of Own Equity
Jean ALBERT
Team Leader
- ANNEX 12 -
- ITALY –
- COUNTRY REPORT -
Submitted by Raffaele Di LANDRO
Country Expert
February 15, 2008
ITALY
Dottori Commercialisti Associati
Raffaele Di Landro
Corso Porta Vigentina 35, Milano
ITALY
+39 02 58201406
INTRODUCTION
The tax reform of 2004 introduced in Italy a number of changes, such as:
• Partecipation exemption,
• Thin capitalization,
• Suppression of the tax credit on the dividends and the partial exemption of the
dividends received,
• Tax consolidation,
• Tax transparency for Limited companies.
Every year different developments are introduced.
For example, in 2005 the Partecipation exemption was modified (only the 9% of the
Capital gains contributes to the tax basis).
In 2006 there were many changes concerning VAT regarding buildings.
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February 2008
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PART 1 – GENERAL QUESTIONS
1. What are the main characteristics of the tax systems applicable on enterprises
and business owners in your Country (corporate income tax, income tax,
capital gains tax, other profit based taxes, capital based taxes, other taxes)?
Corporate income tax (IRES)
Corporations pay taxes on the basis of the net income adjusted according to tax
provisions.
The tax is levied at the rate of 33%
IRAP- Local tax on productive activities
IRAP is computed on the gross margin basis, as shown in the statutory financial
statements, with adjustements due to tax provisions.
The ordinary Irap rate is 4.25%
Personal income tax
The individual persons are taxable on the total income received (building, wage,
capital, enterprise, others, independent work)
All the income received contributes to the tax basis on wich the individual pays IRPEF
(personal income tax).
The tax rate is progressive from 23% to a maximum of 43%
Capital Gains
The capital gains realized by a corporation are considered as revenue that is included
in the tax basis for Ires.
The capital gains ( i.e. sale of shares and buildings) realized by an individual are
taxed as other income that contributes to the tax basis for the personal income tax.
Individuals also pay Irap in case of independent work or business activity
There are not other direct taxes on profits and on capital.
1
D.P.R. 917, 22/12/1986
2
D.LgS. 446, 15/12/1997
3
D.P.R. 917, 22/12/1986 art. 6
4
D.P.R. 917, 22/12/1986 art. 11
5
D.LgS. 446, 15/12/1997 art. 3
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1.1. Corporate
1.1.1
What are the general principles for the computation of taxable
profits?
The computation of taxable profits is based on the operating result adjusted to
specific tax requirements. The general principle is based on the taxation or not of
specific elements of profits and on the deduction or not of specific elements of cost
1.1.2
What are the main differences between the tax balance sheet and
commercial balance sheet?
In Italy a tax balance sheet does not exist. Only the net income is adjusted according
to tax provisions.
1.1.3
What are the most important adjustments for the computation of
taxable profits/taxable gains on the base of accounting profits?
For example: entertainment expenses, directors wages not paid in the year, taxes
(Ires, Irap, ICI).
1.2. Income
1.2.1. What are the general principles of income taxation of business
owners on business income, wages, distributed earnings, interest on
loans and capital gain (sale of shares)?
For individual persons - business owners all kind of incomes are taxable on the basis
of Irpef (Personal income tax) regulation. Irpef is levied at different progressive
6
D.P.R. 917, 22/12/1986, art. 83
7
D.P.R. 917, 22/12/1986, art. 11
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1.2.2. Is there a different tax treatment for income from different income
sources?
In case of individual persons all kinds of income are computed as the whole personal
income subject to Irpef rates.
1.3. Capital
1.3.1. Is there a different tax treatment between distributions of earnings
and capital gains realised by the sale of the business or the shares
in the undertaking?
In case the seller is an individual person, the sale of the shares is taxed on the basis
of personal income tax:
• 40% of the capital gain is taxed in case the shareholding is higher than 20% or
than 2% (in case of listed company)
• If the shareholding is lower than 20% (or 2% ) the capital gain is taxed on the
basis of 12,5% rate
In case the seller is a corporation, the capital gain is taxed on the basis of the
corporation tax.
The sale of the business is subject to the corporation tax in case the seller is a
corporation or it’s subject to the personal income tax in case the seller is an
individual person
1.3.2. Are there different tax treatments for long-term capital gains and
short-term capital gains?
8
D.P.R. 917, 22/12/1986, art. 67
9
D.P.R. 917, 22/12/1986, art. 86
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No.
1.3.3. Are there different tax treatments for capital gain from SME business
stock and capital gain from larger companies’ business stock?
No.
ITALY
RELEVANT TAX PROVISIONS AND SUBSEQUENT CHANGES
For CORPORATIONS (distinguish specific tax rates for SMEs)
2002
2003
2004
2005
2006
Corporate
tax
1. Tax rate
Standard
Irpeg (36%)+ Irap
(4.25%) = 40.25%
Irpeg (34%)+ Irap
(4.25%) = 38.25%
Ires (33%)+ Irap
(4.25%) =
37.25%
Ires (33%)+ Irap
(4.25%) =
37.25%
Ires (33%)+ Irap
(4.25%) =
37.25%
Reduced
Dual Income
Tax: 19% on the
increase in net
equity
Dual Income Tax:
19% on the
increase in net
equity
N.A. N.A. N.A.
Minimum Tax
N.A. N.A. N.A. N.A. N.A.
Special Rates
Particular
business sectors
apply standard
rates on a low
taxable income
Particular
business sectors
apply standard
rates on a low
taxable income
Particular
business sectors
apply standard
rates on a low
taxable income
Particular
business sectors
apply standard
rates on a low
taxable income
Particular
business sectors
apply standard
rates on a low
taxable income
Non profit
tax (local tax
on
corporations,
energy tax…)
on real estate)
rate: can range
from 0.4% to
0.7%. It’s
applied on the
estimated value
of the property.
ICI (local tax on
real estate) rate:
can range from
0.4% to 0.7%. It’s
applied on the
estimated value
of the property.
ICI (local tax on
real estate)
rate: can range
from 0.4% to
0.7%. It’s
applied on the
estimated value
of the property.
ICI (local tax on
real estate)
rate: can range
from 0.4% to
0.7%. It’s
applied on the
estimated value
of the property.
ICI (local tax on
real estate)
rate: can range
from 0.4% to
0.7%. It’s
applied on the
estimated value
of the property.
10
D.Lgs. 504, 30/12/1992
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2. Tax
accounting
rules
N.A. N.A. N.A. N.A. N.A.
3.
Depreciation
Basis
Historical cost
Historical cost
Historical cost
Historical cost
Historical cost
Methods
Proportional Proportional Proportional Proportional Proportional
Rates
Different rates
are applicable
on different
categories of
assets
Different rates
are applicable on
different
categories of
assets
Different rates
are applicable
on different
categories of
assets
Different rates
are applicable
on different
categories of
assets
Different rates
are applicable
on different
categories of
assets
Accounting
N.A. N.A. N.A. N.A. N.A.
Intangibles
Different rates
are applicable
on different
categories of
intangibles
Different rates
are applicable on
different
categories of
intangibles
Different rates
are applicable
on different
categories of
intangibles
Different rates
are applicable
on different
categories of
intangibles
Different rates
are applicable
on different
categories of
intangibles
Non
depreciable
assets
Land
Land
Land
Land
From 01/01/06
depreciation of
building is on
the basis of the
historical cost
minus the land
cost.
4. Provisions
Risks and
futures
expenses
Not deductible
Not deductible
Not deductible Not
deductible Not
deductible
Bad debts
12
Are deductible
in the limit of
0.5% of total
amount of
commercial
credits
Are deductible in
the limit of 0.5%
of total amount
of commercial
credits (excluded
covered by
Are deductible
in the limit of
0.5% of total
amount of
commercial
credits
Are deductible
in the limit of
0.5% of total
amount of
commercial
credits
Are deductible
in the limit of
0.5% of total
amount of
commercial
credits
11
D.P.R. 917, 22/12/1986, art. 102
12
D.P.R. 917, 22/12/1986, art.106
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(excluded
covered by
insurance)
Credit provision
does not exceed
5% of total
amount of
commercial
credits
insurance) Credit
provision does
not exceed 5% of
total amount of
commercial
credits
(excluded
covered by
insurance)
Credit provision
does not exceed
5% of total
amount of
commercial
credits
(excluded
covered by
insurance)
Credit provision
does not exceed
5% of total
amount of
commercial
credits
(excluded
covered by
insurance)
Credit provision
does not exceed
5% of total
amount of
commercial
credits
Pensions
N.A. N.A. N.A. N.A. N.A.
Repairs
Are deductible
in the limit of
5% of total
amount of asset
historical cost at
the date of the
beginning of the
exercice
(without
Intangibles)
considering
acquisition and
sell during the
year.
Are deductible in
the limit of 5% of
total amount of
asset historical
cost at the date
of the beginning
of the exercice
(without
Intangibles)
considering
acquisition and
sell during the
year.
Are deductible
in the limit of
5% of total
amount of asset
historical cost
at the date of
the beginning of
the exercice
(without
Intangibles)
considering
acquisition and
sell during the
year.
Are deductible
in the limit of
5% of total
amount of asset
historical cost
at the date of
the beginning of
the exercice
(without
Intangibles)
considering
acquisition and
sell during the
year.
Are deductible
in the limit of
5% of total
amount of asset
historical cost
at the date of
the beginning of
the exercice
(without
Intangibles)
considering
acquisition and
sell during the
year.
5. Losses
Carry
forward
Losses realized
in the first three
exercises could
be carried
forward without
limitation.
Losses from the
4
th
period could
be carried
forward for
maximum 5
periods.
Losses realized in
the first three
exercises could
be carried
forward without
limitation. Losses
from the 4
th
period could be
carried forward
for maximum 5
periods.
Losses realized
in the first
three exercises
could be carried
forward without
limitation.
Losses from the
4
th
period could
be carried
forward for
maximum 5
periods.
Losses realized
in the first
three exercises
could be carried
forward without
limitation.
Losses from the
4
th
period could
be carried
forward for
maximum 5
periods.
Losses realized
in the first
three exercises
could be carried
forward without
limitation.
Losses from the
4
th
period could
be carried
forward for
maximum 5
periods.
Carry back
N.A. N.A. N.A. N.A. N.A.
Transfer of
Is possible in
Is possible in case
Is possible in
Is possible in
Is possible in
13
D.P.R. 917, 22/12/1986, art. 84
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losses
case of merger
and acquisition
(m&a) operation
and
simultaneous
change of
business activity
under certain
circumstances.
of m&a operation
and simultaneous
change of
business activity
under certain
circumstances.
case of m&a
operation and
simultaneous
change of
business activity
under certain
circumstances.
case of m&a
operation and
simultaneous
change of
business activity
under certain
circumstances.
case of m&a
operation and
simultaneous
change of
business activity
under certain
circumstances.
5.
Inventories
Valuation
rules
LIFO, average
and FIFO
methods are
applicable
LIFO, average and
FIFO methods are
applicable
LIFO, average
and FIFO
methods are
applicable
LIFO, average
and FIFO
methods are
applicable
LIFO, average
and FIFO
methods are
applicable
Allocation
methods
Cost of goods
purchased
Cost of goods
purchased
Cost of goods
purchased
Cost of goods
purchased
Cost of goods
purchased
Personal
Income tax
Interest
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a component
of the individual
person income
that is taxable to
the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
Dividends
n.a. because
there was the
tax credit that
off-set the
corporate
taxation.
n.a. because
there was the tax
credit that off-set
the corporate
taxation.
40% of the
dividend
amount in case
of majority
shareholding
applying the
Irpef rates
. In
case of minority
shareholding it
40% of the
dividend
amount in case
of majority
shareholding
applying the
Irpef rates. In
case of minority
shareholding it
40% of the
dividend
amount in case
of majority
shareholding
applying the
Irpef rates. In
case of minority
shareholding it
14
D.P.R. 917, 22/12/1986, art. 92
15
D.P.R. 917, 22/12/1986, art. 44
16
D.P.R. 917, 22/12/1986, art. 59
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will apply a
definitive
withholding tax
of 12.5% rate.
will apply a
definitive
withholding tax
of 12.5% rate.
will apply a
definitive
withholding tax
of 12.5% rate.
Employment
income
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a component
of the individual
person income
that is taxable to
the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
Capital gains
tax
Sale of fixed
assets
The capital gain
is an income
that is included
in the tax basis
for Ires and Irap
The capital gain
is an income that
is included in the
tax basis for Ires
and Irap
The capital gain
is an income
that is included
in the tax basis
for Ires and Irap
The capital gain
is an income
that is included
in the tax basis
for Ires and Irap
The capital gain
is an income
that is included
in the tax basis
for Ires and Irap
Timing
rules
Normally
taxable in the
period in which
realized or may
be declared in
equal
instalments over
a period not
exceeding 5
years ( it is
possible only if
the company has
owned fixed
asset more than
three years.)
Normally taxable
in the period in
which realized or
may be declared
in equal
instalments over
a period not
exceeding 5 years
( it is possible
only if the
company has
owned fixed asset
more than three
years.)
Normally
taxable in the
period in which
realized or may
be declared in
equal
instalments
over a period
not exceeding 5
years ( it is
possible only if
the company
has owned fixed
asset more than
three years.)
Normally
taxable in the
period in which
realized or may
be declared in
equal
instalments
over a period
not exceeding 5
years ( it is
possible only if
the company
has owned fixed
asset more than
three years.)
Normally
taxable in the
period in which
realized or may
be declared in
equal
instalments
over a period
not exceeding 5
years ( it is
possible only if
the company
has owned fixed
asset more than
three years.)
Accounting
rules
N.A. N.A. N.A. N.A. N.A.
Inflation
N.A. N.A. N.A. N.A. N.A.
17
D.P.R. 917, 22/12/1986, art. 49
18
D.P.R. 917, 22/12/1986, art. 86
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Rates
Ordinary Ordinary Ordinary Ordinary Ordinary
Exemptions
N.A. N.A. N.A. N.A. N.A.
Sale of
If shares have
been held for
more than 3
years may
choose to pay a
substitute tax at
19% rate.
Shares have
been held for
less than 3 years
capital gains are
subject to
income tax
If shares have
been held for
more than 3 years
may choose to
pay a substitute
tax at 19% rate.
Shares have been
held for less than
3 years capital
gains are subject
to income tax
In case shares
are registered
as long-term
investments the
capital gains
are exempt to
taxation.
(Participation
exemption)
In case they are
not registeedr
as long-term
investments
capital gains
are subject to
income tax
Pex Pex
91%
Capital loss
Fixed assets
Deductible costs
Deductible costs
Deductible costs Deductible costs Deductible costs
Shares
The capital loss
realized is
deductible.
The capital loss
realized is
deductible
In case the
participation
exemption is
applicable the
capital losses
are not
deductible.
In case they are
not registered
as long-term
investments are
considered
deductible costs
In case the
participation
exemption is
applicable the
capital losses
are not
deductible.
In case they are
not registered
as long-term
investments are
considered
deductible costs
In case the
participation
exemption is
applicable the
capital losses
are not
deductible.
In case they are
not registered
as long-term
investments are
considered
deductible costs
Wages
Average cost
to the
It could be a 29%
average rate
(cost of
It could be a 29%
average rate
It could be a
29% average
rate
It could be a
29% average
rate
It could be a
29% average
rate
19
D.P.R. 917, 22/12/1986, art. 86-87
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Undertaking
compulsory
contribution for
pension and
health)
Average cost
to the
employee
It could be a 9%
average rate
(compulsory
contribution to
be paid by the
employee)
It could be a 9%
average rate
It could be a 9%
average rate
It could be a 9%
average rate
It could be a 9%
average rate
Overall tax
on
distributed
earnings or
Dividends
Timing
Period in which
the dividend
are cashed
Period in which
the dividend are
cashed
Period in which
the dividend
are cashed
Period in which
the dividend
are cashed
Period in which
the dividend
are cashed
Tax credit
structure
Tax credit of
56,25% of the
dividend
Tax credit of
51,51% of the
dividend
Tax credit is
non applicable
Only 5% of the
dividend
collected is
Tax credit is
non applicable
Only 5% of the
dividend
collected is
taxable
Tax credit is
non applicable
Only 5% of the
dividend
collected is
taxable
Excluding
non profit
tax
Non profit tax
is not
applicable on
the dividend
N.A
N.A
N.A
N.A
Including non
profit tax
N.A
N.A
N.A
N.A
N.A
Deduction of
expenses
General rule
Costs related to
business
activity could
be deducted in
Costs related to
business activity
could be
deducted in the
Costs related
to business
activity could
be deducted in
Costs related
to business
activity could
be deducted in
Costs related
to business
activity could
be deducted in
20
D.P.R. 917, 22/12/1986, art. 95
21
D.P.R. 917, 22/12/1986, art. 89
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February 2008
13
the pertaining
period
pertaining
period
the pertaining
period
the pertaining
period
the pertaining
period
Non-
deductibility
of expenses
Costs related to
cars, taxes.
Some costs like
repairs are
partially
deductible
Costs related to
cars, taxes.
Some costs like
repairs are
partially
deductible
Costs related
to cars, taxes.
Some costs like
repairs are
partially
deductible
Costs related
to cars, taxes.
Some costs like
repairs are
partially
deductible
Costs related
to cars, taxes.
Some costs like
repairs are
partially
deductible
Thin
capitalizatio
n
N.A
N.A
Interests paid
on loan
granted by
shareholders
with at least
25% of shares
are partially
non deductible
in case debt
results five
times major
than the net
equity
attributed to
holding
company.
Interests paid
on loan
granted by
shareholders
with at least
25% are
partially non
deductible in
case debt
results four
times major
than the net
equity
attributed to
holding
company.
Interests paid
on loan
granted by
shareholders
with at least
25% are
partially non
deductible in
case debt
results four
times major
than the net
equity
attributed to
holding
company .
Overall
corporate
tax on
Retained
earnings
Excluding
non profit
tax
N.A
N.A
N.A
N.A
N.A
Including non
profit tax
N.A
N.A
N.A
N.A
N.A
Debt
22
D.P.R. 917, 22/12/1986, art. 98
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financing
Interest
deductibility
Always
deductible
Always
deductible
Always
deductible
Always
deductible
Always
deductible
Limits on
interest
deductibility
There are some
limits to the
deductibility of
interest only
when the
corporation has
exempt
revenue.
There are some
limits to the
deductibility of
interest only
when the
corporation has
exempt revenue.
See above thin
capitalization
rules.
The pro-rata
rule is
applicable
when the
corporation has
shares (to
whom the
Participation
exemption is
applicable)
whose amount
is higher to the
Net equity.
See above thin
capitalization
rules.
The pro-rata
rule is
applicable
when the
corporation has
shares (to
whom the
Participation
exemption is
applicable)
whose amount
is higher to the
Net equity.
See above thin
capitalization
rules.
The pro-rata
rule is
applicable
when the
corporation has
shares (to
whom the
Participation
exemption is
applicable)
whose amount
is higher to the
Net equity.
Interest
deductibility
on business
owner loan
to
Undertaking
Always
deductible in
case of a
remunerative
loan.
Always
deductible in
case of a
remunerative
loan.
Always
deductible in
case of a
remunerative
loan, within
the limits of
the Thin Cap.
Always
deductible in
case of a
remunerative
loan, within
the limits of
the Thin cap.
Always
deductible in
case of a
remunerative
loan, within
the limits of
Thin cap..
ITALY
RELEVANT TAX PROVISIONS AND SUBSEQUENT CHANGES
For PARTNERSHIPS (distinguish specific rates for SMES)
2002
2003
2004
2005
2006
Tax
applicable to
partnerships
1. Tax rate
Standard
Partnership is
Partnership is tax
Partnership is
Partnership is
Partnership is
23
D.P.R. 917, 22/12/1986, art. 97
Italy Country Report
February 2008
15
tax
transparent.
Partnership is
subject to Irap
(4.25%)
transparent.
Partnership is
subject to Irap
(4.25%)
tax
transparent.
Partnership is
subject to Irap
(4.25%)
tax
transparent.
Partnership is
subject to
Irap (4.25%)
tax
transparent.
Partnership is
subject to Irap
(4.25%)
Reduced
Dual Income
Tax: 19% on
the increase in
net equity
Dual Income Tax:
19% on the
increase in net
equity
Minimum Tax
N.A. N.A. N.A. N.A. N.A.
Special Rates
Particular
business
sectors apply
standard rates
on a low
taxable income
Particular
business sectors
apply standard
rates on a low
taxable income
Particular
business
sectors apply
standard rates
on a low
taxable income
Particular
business
sectors apply
standard rates
on a low
taxable income
Particular
business
sectors apply
standard rates
on a low
taxable income
Non profit
tax (local tax
on
corporations,
energy tax…)
ICI (local tax
on real estate )
rate: can range
from 0.4% to
0.7%. It is
applied on the
estimated
value of the
property.
ICI (local tax on
real estate )
rate: can range
from 0.4% to
0.7%. It is
applied on the
estimated value
of the property.
ICI (local tax
on real estate )
rate: can range
from 0.4% to
0.7%. It is
applied on the
estimated
value of the
property.
ICI (local tax
on real estate )
rate: can range
from 0.4% to
0.7%. It is
applied on the
estimated
value of the
property.
ICI (local tax
on real estate )
rate: can range
from 0.4% to
0.7%. It is
applied on the
estimated
value of the
property.
2. Tax
accounting
rules
N.A. N.A. N.A. N.A. N.A.
3.
Depreciation
Basis
Historical cost
Historical cost
Historical cost
Historical cost
Historical cost
Methods
Proportional Proportional Proportional Proportional Proportional
Rates
Different rates
are applicable
on different
categories of
assets
Different rates
are applicable on
different
categories of
assets
Different rates
are applicable
on different
categories of
assets
Different rates
are applicable
on different
categories of
assets
Different rates
are applicable
on different
categories of
assets
Accounting
N.A. N.A. N.A. N.A. N.A.
Italy Country Report
February 2008
16
Intangibles
Different rates
are applicable
on different
categories of
intangibles
Different rates
are applicable on
different
categories of
intangibles
Different rates
are applicable
on different
categories of
intangibles
Different rates
are applicable
on different
categories of
intangibles
Different rates
are applicable
on different
categories of
intangibles
Non
depreciable
assets
Land Land Land Land
From
01/01/06
depreciation of
building is on
the basis of the
historical cost
minus the land
cost.
4. Provisions
Risks and
futures
expenses
Not deductible
Not deductible
Not deductible
Not deductible Not deductible
Bad debts
Are deductible
in the limit of
0.5% of total
amount of
commercial
credits
(excluded
covered by
insurance)
Credit
provision do
not exceed 5%
of total
amount of
commercial
credits
Are deductible in
the limit of 0.5%
of total amount
of commercial
credits (excluded
covered by
insurance) Credit
provision do not
exceed 5% of
total amount of
commercial
credits
Are deductible
in the limit of
0.5% of total
amount of
commercial
credits
(excluded
covered by
insurance)
Credit
provision do
not exceed 5%
of total amount
of commercial
credits
Are deductible
in the limit of
0.5% of total
amount of
commercial
credits
(excluded
covered by
insurance)
Credit
provision do
not exceed 5%
of total
amount of
commercial
credits
Are deductible
in the limit of
0.5% of total
amount of
commercial
credits
(excluded
covered by
insurance)
Credit
provision do
not exceed 5%
of total
amount of
commercial
credits
Pensions
N.A. N.A. N.A. N.A. N.A.
Repairs
Are deductible
in the limit of
5% of total
amount of
asset historical
cost at
the
Are deductible in
the limit of 5% of
total amount of
asset historical
cost at
the date
of the beginning
Are deductible
in the limit of
5% of total
amount of
asset historical
cost at
the date
Are deductible
in the limit of
5% of total
amount of
asset historical
cost at
the date
Are deductible
in the limit of
5% of total
amount of
asset historical
cost at
the date
Italy Country Report
February 2008
17
date of the
beginning of
the exercice
(
without
Intangibles )
considering
acquisition and
sell during the
year.
of the exercice
(without
Intangibles)
considering
acquisition and
sell during the
year.
of the beginning
of the exercice
( without
Intangibles )
considering
acquisition and
sell during the
year.
of the beginning
of the exercice
( without
Intangibles )
considering
acquisition and
sell during the
year.
of the beginning
of the exercice
( without
Intangibles )
considering
acquisition and
sell during the
year.
5. Losses
Carry
forward
Losses realized
in the first
three exercises
could be
carried
forward
without
limitation.
Losses from
the 4
th
period
could be
carried
forward for
maximum 5
periods.
Losses realized in
the first three
exercises could
be carried
forward without
limitation. Losses
from the 4
th
period could be
carried forward
for maximum 5
periods.
Losses realized
in the first
three exercises
could be
carried forward
without
limitation.
Losses from the
4
th
period could
be carried
forward for
maximum 5
periods.
Losses realized
in the first
three exercises
could be
carried forward
without
limitation.
Losses from the
4
th
period
could be
carried forward
for maximum 5
periods.
Losses realized
in the first
three exercises
could be
carried forward
without
limitation.
Losses from the
4
th
period
could be
carried forward
for maximum 5
periods.
Carry back
N.A. N.A. N.A. N.A. N.A.
Transfer of
losses
It is possible in
case of m &a
operation and
simultaneous
change of
business
activity under
certain
circumstances.
It is possible in
case of m&a
operation and
simultaneous
change of
business activity
under certain
circumstances.
It is possible in
case of m&a
operation and
simultaneous
change of
business
activity under
certain
circumstances.
It is possible in
case of m&a
operation and
simultaneous
change of
business
activity under
certain
circumstances.
It is possible in
case of m&a
operation and
simultaneous
change of
business
activity under
certain
circumstances.
5.
Inventories
Valuation
rules
LIFO, average
and FIFO
LIFO, average
and FIFO
LIFO, average
and FIFO
LIFO, average
and FIFO
LIFO, average
and FIFO
Italy Country Report
February 2008
18
methods are
applicable
methods are
applicable
methods are
applicable
methods are
applicable
methods are
applicable
Allocation
methods
Cost of goods
purchased
Cost of goods
purchased
Cost of goods
purchased
Cost of goods
purchased
Cost of goods
purchased
Personal
Income tax
Interest
Income
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a component
of the individual
person income
that is taxable to
the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
Dividends
N.A.
Because
earnings of a
corporation
are treated
transparent
N.A.
Because earnings
of a corporation
are treated
transparent
N.A.
Because
earnings of a
corporation are
treated
transparent
N.A.
Because
earnings of a
corporation are
treated
transparent
N.A.
Because
earnings of a
corporation are
treated
transparent
Employment
income
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a component
of the individual
person income
that is taxable to
the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
It is a
component of
the individual
person income
that is taxable
to the ordinary
progressive tax
rate (Irpef).
Capital gains
tax
Sale of fixed
assets
Taxed with the
standard
method of
partnership
Taxed with the
standard method
of partnership
Taxed with the
standard
method of
partnership
Taxed with the
standard
method of
partnership
Taxed with the
standard
method of
partnership
Timing rules
Normally
taxable in the
period in which
realized or
may be
Normally taxable
in the period in
which realized or
may be declared
in equal
Normally
taxable in the
period in which
realized or may
be declared in
Normally
taxable in the
period in which
realized or may
be declared in
Normally
taxable in the
period in which
realized or may
be declared in
Italy Country Report
February 2008
19
declared in
equal
instalments
over a period
not exceeding
5 years ( it is
possible only if
the company
has owned
fixed asset
more than
three years.)
instalments over
a period not
exceeding 5
years ( it is
possible only if
the company has
owned fixed
asset more than
three years.)
equal
instalments
over a period
not exceeding
5 years ( it is
possible only if
the company
has owned
fixed asset
more than
three years.)
equal
instalments
over a period
not exceeding
5 years ( it is
possible only if
the company
has owned
fixed asset
more than
three years.)
equal
instalments
over a period
not exceeding
5 years ( it is
possible only if
the company
has owned
fixed asset
more than
three years.)
Accounting
rules
N.A. N.A. N.A. N.A. N.A.
Inflation
N.A. N.A. N.A. N.A. N.A.
Rates
N.A. N.A. N.A. N.A. N.A.
Exemptions
N.A. N.A. N.A. N.A. N.A.
Sale of
shares
If shares have
been held for
more than 3
years may
choose to pay
a substitute
tax at 19%
rate.
Shares have
been held for
less than 3
years capital
gains are
revenues that
concur to the
ordinary net
profit of the
partnership
If shares have
been held for
more than 3
years may
choose to pay a
substitute tax at
19% rate.
Shares have been
held for less than
3 years capital
gains are
revenues that
concur to the
ordinary net
profit of the
partnership
In case shares
are booked as
long-term
investments
the capital
gains are
exempt to
taxation on 60%
of the amount.
(Participation
exemption)
In case they
are not register
as long-term
investments
capital gains
concurs to the
ordinary net
profit of the
partnership
In case shares
are booked as
long-term
investments
the capital
gains are
exempt to
taxation on
60% of the
amount.
(Participation
exemption)
In case they
are not register
as long-term
investments
capital gains
concurs to the
ordinary net
profit of the
partnership
In case shares
are booked as
long-term
investments
the capital
gains are
exempt to
taxation on
60% of the
amount.
(Participation
exemption)
In case they
are not register
as long-term
investments
capital gains
concurs to the
ordinary net
profit of the
partnership
Italy Country Report
February 2008
20
Capital loss
Fixed assets
Deductible
only in
ordinary
accounting
system
Deductible only
in ordinary
accounting
system
Deductible only
in ordinary
accounting
system
Deductible only
in ordinary
accounting
system
Deductible only
in ordinary
accounting
system
Shares
The capital
loss realized is
deductible
The capital loss
realized is
deductible
In case of
participation
exemption is
applicable the
capital losses
are not
deductible on
the base of 60%
of the amount.
In case they
are not register
as long-term
investments
are considered
deductible
costs
In case of
participation
exemption is
applicable the
capital losses
are not
deductible on
the base of 60%
of the amount.
In case they
are not register
as long-term
investments
are considered
deductible
costs
In case of
participation
exemption is
applicable the
capital losses
are not
deductible on
the base of 60%
of the amount.
In case they
are not register
as long-term
investments
are considered
deductible
costs
Wages
Average cost
to the
Undertaking
It could be a
29% average
rate (cost of
compulsory
contribution
for pension
and health)
It could be a 29%
average rate
It could be a
29% average
rate
It could be a
29% average
rate
It could be a
29% average
rate
Average cost
to the
employee
It could be a
9% average
rate
(compulsory
contribution to
be paid by the
employee)
It could be a 9%
average rate
It could be a 9%
average rate
It could be a
9% average
rate
It could be a
9% average
rate
Dividends
Timing
N.A N.A N.A N.A N.A
Italy Country Report
February 2008
21
Tax credit
structure
N.A
N.A
N.A
N.A
N.A
Deduction of
expenses
General rule
Costs related
to business
activity could
be deducted in
the pertaining
period
Costs related to
business activity
could be
deducted in the
pertaining period
Costs related
to business
activity could
be deducted in
the pertaining
period
Costs related
to business
activity could
be deducted in
the pertaining
period
Costs related
to business
activity could
be deducted in
the pertaining
period
Non-
deductibility
of expenses
Costs related
to cars, taxes.
Some costs like
repairs are
partially
deductible
Costs related to
cars, taxes.
Some costs like
repairs are
partially
deductible
Costs related
to cars, taxes.
Some costs like
repairs are
partially
deductible
Costs related
to cars, taxes.
Some costs like
repairs are
partially
deductible
Costs related
to cars, taxes.
Some costs like
repairs are
partially
deductible
Thin
capitalization
N.A
N.A
Interests paid
on loan granted
by partners
(25% of quota)
are partially
non deductible
in case debt
results five
times major
than the net
equity
attributed to
the partners.
Interests paid
on loan
granted by
partners are
partially non
deductible in
case debt
results four
times major
than the net
equity
attributed to
the partners.
Interests paid
on loan
granted by
partners are
partially non
deductible in
case debt
results four
times major
than the net
equity
attributed to
the partners.
Retained
earnings
N.A
N.A
N.A
N.A
N.A
Debt
financing
Interest
deductibility
Always
deductible
Always
deductible
Always
deductible
Always
deductible
Always
deductible
Limits on
interest
There are
some limits to
There are some
limits to the
See above thin
capitalization
See above thin
capitalization
See above thin
capitalization
Italy Country Report
February 2008
22
deductibility
the
deductibility of
interest only
when the
partnership has
exempt
revenue.
deductibility of
interest only
when the
partnership has
exempt revenue.
rules.
There is the
pro-rata rule
that is
applicable
when the
partnership has
shares (to
whom the
Participation
exemption is
applicable)
which amount
is superior to
the Net equity.
rules.
There is the
pro-rata rule
that is
applicable
when the
partnership has
shares (to
whom the
Participation
exemption is
applicable)
which amount
is superior to
the Net equity
rules.
There is the
pro-rata rule
that is
applicable
when the
partnership has
shares (to
whom the
Participation
exemption is
applicable)
which amount
is superior to
the Net equity
Interest
deductibility
on business
owner loan
to
Undertaking
Always
deductible in
case of a
remunerative
loan.
Always
deductible in
case of a
remunerative
loan.
Always
deductible in
case of a
remunerative
loan.
Always
deductible in
case of a
remunerative
loan.
Always
deductible in
case of a
remunerative
loan.
Italy Country Report
February 2008
23
2.
What are the main types of business entities and the main differences in
(corporate) income taxation for sole traders, general partnerships, limited
partnerships and corporation and other business entities if relevant?
Corporations (Limited Company, Limited liability company, Limited partnership with
a share capital): they are taxed on the basis of ordinary tax rate.
In some cases, they should opt to be treated transparent for tax purposes.
Partnerships (Unlimited Partnership, Limited Partnership, Informal partnership): they
are treated transparent for tax purposes.
General partnership cannot have only one partner.
Corporations can also have only one partner.
2.1. Are partnerships treated transparent for tax purposes?
Yes
2.2. Can partnerships opt for corporate income tax?
NO, they can not opt for it.
2.3. Once they have opted for a regime is it easy to switch back?
Not applicable
2.4. Is there a difference in this respect between general and limited
partnerships?
Not applicable
Italy Country Report
February 2008
24
2.5. Can corporations opt to be treated tax transparent?
Yes
2.6. Once they have opted for a regime is it easy to switch back?
The regime is valid for a minimum period of three years and they could not switch
back to the original regime until the end of this period.
2.7. Are their differences in this respect between the different types of
corporations?
There are no difference.
INCLUDE RELEVANT TAX PROVISIONS IN 2002 AND
SUBSEQUENT CHANGES UP TO 2007
ITALY
General
Partnership
Limited
Partnership
Corporation
Sole Trader
Corporate
tax
4,25% irap and
irpef
progressive
rates
4,25% irap
and irpef
progressive
rates
4,25% irap
33% ires
N.A.
Income tax
4,25% irap and
irpef
progressive
rates
4,25% irap
and irpef
progressive
rates
4,25% irap
33% ires
The business
income
defines the
individual
person
income that
is subject to
progressive
Italy Country Report
February 2008
25
Irpef rates.
Capital gains
tax
4,25% irap and
irpef
progressive
rates
4,25% irap
and irpef
progressive
rates
4,25% irap
33% ires
…
Option for
Transparent
treatment
It’s always tax
trasparent
It’s always
tax
trasparent
It’s possible
opt for the
tax
trasparency
n.a
…
3.
Are there any special tax regimes for SMEs for (corporate) income tax
purposes?
NO
3.1. What are the conditions to be fulfilled in order to benefit from
these special tax regimes?
Not applicable
3.2. Are there limits on the length of time during which these special tax
regimes are available, or other limits?
Not applicable
Italy Country Report
February 2008
26
4.
Are there any special tax incentives, such as (re-)investment reserves or
provisions, special depreciations/capital allowances deductible for
(corporate) income tax purposes?
YES
Only the cooperative societies have tax deductions on the basis of the retentions
of earnings.
Cooperative pay taxes only on the 30% of net income if all the income is retained.
4.1. Do these elements of internal financing represent an important
alternative to the financing by retained earnings?
NO
4.2. Are there any compulsory measures in relation to the retention of
earnings (e.g. legal constraints for the distribution of profits and
dividend
policy)?
YES
Profits could be distributed only if the amount of legal reserve is equal to 20% of
In case of intangibles registered in accounting, law states that a specific reserve has
to be held for an amount equal to the intangibles cost not yet depreciated, before
distributing profits.
Table 1 – legal reserve
Equity
1000
Legal Reserve
150
Profits
1000
Profits allocated as Legal reserve
50
New Legal Reserve
200
20% of Equity
Profits distribution
950
Table 2 – other reserve
Equity
1000
Legal Reserve
200
Other Reserve
80
Profits
100
Intangibles
100
Profits allocated as Other reserve
20
New Other Reserve
100
Profits distribution
80
5.
Are there any differences in the tax treatment of stock and cash
Italy Country Report
February 2008
27
24
Civil Code, article 2426 and 2430
Italy Country Report
February 2008
28
Dividends are normally paid by cash. It’s possible to pay dividends so that hey are
taxed at the market value. In case of increase of the own equity with reserves, the
shareholders receive more shares that are not taxed until they are sold
6.
Have there been any changes in the tax regulation in recent years - since
2002 – that have had an important effect on the retention of earnings, the
distribution earnings or the reinvestment of profits for a particular
purpose?
YES
Until 2003 the Dual Income Tax was applicable: a rate of 19% was applied on a
specific part of income determined on the basis of the increase in net equity.
From 2004 interests paid on loan granted by holding companies or by
shareholders with at least 25% of shares are partially non deductible in case the debt
results 4 times higher than the net equity attributed to the shareholder
From 2004 a part of interests are non deductible in case the amount of the shares (to
whom is applicable the participation exemption) will be higher than the net equity
7.
Are there any current plans for tax reforms that have as their object to
have an impact on the retention of earnings?
YES
The Government is studying the modification of the taxation of the capital
gain, increasing the tax rate of some kind of capital gain.
25
For the Undertaking stock dividend means increased own equity. For the shareholder it
means additional shares in the Undertaking which may be untaxed until sold, unlike a cash
dividend.
26
D.P.R. 917, 22/12/1986, art. 47
27
D.P.R. 917, 22/12/1986, art. 98, Thin Cap
28
D.P.R. 917, 22/12/1986, art. 97, Pro Rata
Italy Country Report
February 2008
29
This new rule could facilitate the retention of earnings.
Italy Country Report
February 2008
30
PART 2 – TAX ASPECTS OF RETAINED EARNINGS VERSUS DISTRIBUTED PROFITS AND
WAGES
8.
What is the tax treatment of retained earnings compared to distribution of
earnings on the level of the Undertaking and at a combined level of
Undertaking (corporate) and business owner (individual)?
Earnings are taxed on the level of the Undertaking as taxable income.
The distribution of earnings does not involve a second level of taxation. However, in
case of distribution of particular no taxable reserve (for example the reserves
retained for revalutation of buldings) there will be a second level taxation.
Earnings distributed to business owners are partially (5% if the shareholder is a
company, if the shareholder is an individual person at maximum are taxed at 40% of
the amount received) taxed on the bases of individual income tax. In these case,
there is an economic double taxation at the undertaking level and at the business
owner level.
8.1. Is there an economic double taxation of distribution of earnings (taxation
of Undertaking income and then taxation on the distribution of earnings
at the Undertaking level or at the business owner level)?
YES
At first there is the taxation of undertaking income at a rate of 37.25 %. In case it
decides to distribute earnings to business owner he will be taxed on the 40% of the
dividend amount in case of majority shareholding applying the Irpef rates. In case of
minority shareholding, it will apply a 12.5% rate of deduction at source.
Income before tax
159
Tax 37.25 %
59
Earnings 100
Italy Country Report
February 2008
31
1. Owner with majority shareholding receiving 100 of dividends:
Dividend amount taxable 40% of 100 = 40
The income taxable of 40 will be added to others kind of income of the owner and
the total amount will be taxed with Irpef rates
Progressive Irpef rates from 01/01/2007:
Income (EURO)
Rates (%)
Up to 15.000
23
15.000-28.000 27
28.000-55.000 38
55.000-75.000 41
Over 75.000
43
2. Owner with minority shareholding receiving 100 of dividends:
Dividend amount taxable 100% of 100 = 100
Tax applicable 12.5% rate as deduction at source
100 x 12.5% = 12.50
3. Shareholder corporate
Also in this case there will be the taxation of undertaking income at a rate of 37.25
%.
The shareholder corporate will be taxed on 5% of dividends received applying the
normal income rate of 37.25 %.
INCLUDE RELEVANT TAX PROVISIONS IN 2002
AND SUBSEQUENT CHANGES UP TO 2007
Italy
Undertaking
Individual Business owner
Corporate
tax
33% N.A.
Income
tax n.a.
Irpef tax rates (see table
above)
Dividend tax
2002-2003
A) If the
shareholder is
A) the shareholder in this case
doesn’t pay taxes and doesn’t
Italy Country Report
February 2008
32
an individual
who owns less
than 25% of
the shares,
the company
applies on the
dividend
payed a
withholding
tax of 12,5%
b) if the
shareholder
owns more
than 25%, the
withholding
tax is not
applicable
declare the dividend cashed,
because the withholding
applied by the company is
definitive.
b) in this case the shareholder
has to declare the dividend
that concurs to the personal
income tax basis, but can use a
tax credit of 56,25% (51,51%
from 2003) of the dividend
received to avoid the double
taxation
Dividend tax
2004-2007
A) If the
shareholder is
an individual
who owns less
than 25% of
the shares,
the company
applies on the
dividend
payed a
withholding
tax of 12,5%
b) if the
shareholder
owns more
than 25%, the
withholding
tax is not
a)
In
case
of
minority
shareholding it will apply a
12.5% rate of deduction at
source and the shareholder
which received dividend
doesn’t pay anything
b) In case of a majority
shareholding, only on the 40%
of the dividend amount
applying the Irpef rates.
The tax credit was abolished
and was introduced a limited
taxation, but there is always a
limited double taxation
Italy Country Report
February 2008
33
applicable
Dividend
credit 2002-
2003
N.A.
56,25% of the dividend cashed
that off set the corporation
tax.
51,51% from 2003
Dividend
credit 2004-
2007
N.A. n.a.
Capital gains
tax
n.a. n.a.
If option for
Transparent
treatment
chosen 2004-
2007
The earnings of the undertaking
are always taxed by the
shareholder even if not cashed,
so in case of collection of
dividend the shareholder
doesn’t pay taxes anymore
9.
Please described the differences in the tax treatment of distribution of
earnings realised as a capital gain in the context of a sale of the shares or
of the business compared to that (i) of retained earnings, (ii) of wages
salaries paid to the business owner and (iii) of a loan granted by the
Undertaking to the business owner?
The capital gain realized selling shares, if the shares are subject to the Pex, is
taxable only at 9% (in 2006), 16% (in 2007) of the capital gain realized.
The capital gain realized selling an enterprise is completely subject to the
corporation tax.
With the capital gain realized, the company may decide to distribute earnings, retain
it, pay salary to the business owner and grant a loan to the businnes owner.
If the company distributes earnings it is not subject to taxation, but the shareholder
will be taxed.
Italy Country Report
February 2008
34
If the company decides to retain earning no taxes are due and there is an increase of
the net equity that in some case permits to deduce more payable interests (Thin cap
rules- pro rata rules).
The company can decide to pay a salary to the business owner. This salary will be
deductible from the tax basis (subject, for the corporation, to the tax rate of 33%).
This salary will increase the personal income of the businnes owner that is taxed at
the progressive rates. In some case, the total tax burden of the company and the
shareholder can be reduced.
The loan to the shareholder can be remunerative or not.
If it is remunerative, it is necessary to evaluate the total tax burden considering the
tax charge of the company and the tax charge of the shareholder.
INCLUDE RELEVANT TAX PROVISIONS IN 2002 AND SUBSEQUENT CHANGES
UP TO 2007
Italy
Distributed
profits
Retained
Profit
Wages/Salaries
to business
owner
Loan to business owner
Sale of
shares
The net
equity is the
same. The
company
doesn’t have
any tax
consequences
The net
equity
increases.
The company
may have a
reduction of
the basis due
to Thin cap
and pro- rata
(these rules
have been
introduced
from 2004)
The salary cost
are deductible
from the tax
basis. It’ s
possible to
have a
reduction of
the total tax
burden of the
company and
the shareholder
If the loan is
remunerative it’s
possible to modify the
total tax burden of the
company and the
shareholder.
Sale of
business
The net
equity is the
same. The
company
doesn’t have
The net
equity
increases.
The company
may have a
The salary costs
are deductible
from the tax
basis. It’ s
possible to
If the loan is
remunerative it’s
possible to modify the
total tax burden of the
company and the
Italy Country Report
February 2008
35
any tax
consequences
reduction of
the basis due
to Thin cap
and pro- rata.
these rules
have been
introduced
from 2004)
have a
reduction of
the total tax
burden of the
company and
the shareholder
shareholder.
…
….
10.
Is the combination of wages (paid to the business owner by the
Undertaking), profit distributions and retained earnings a tax planning
issue that is anticipated and addressed by business owners in view of
minimising the overall tax burden of the business owner and the
Undertaking?
YES
In case of profit distribution without paying salary, the Undertaking will have a major
taxable income. The owner will pay 40% of the dividend amount in case of majority
shareholding applying the Irpef rates. In case of minority shareholding, it will apply
a 12.5% rate of deduction at source.
Paying a salary, the Undertaking will have a minor taxable income but the owner will
pay more taxes on salary.
11.
In respect to the previous question, is the business owner more interested
in minimising his/her tax burden and then the Undertaking’s or both
equally?
Both cases are equal in view of minimising the overall tax burden.
12.
Are there instances in which minimising the tax burden of the business
owner would mean dramatically increasing the tax burden of the
Undertaking?
In case of profit distribution without paying salary, the Undertaking will have a major
taxable income. The owner will pay 40% of the dividend amount in case of majority
shareholding applying the Irpef rates. In case of minority shareholding, it will apply
a 12.5% rate of deduction at source.
Paying a salary the Undertaking will have a minor taxable income, but the owner will
pay more taxes on salary.
Table 3
Case 1a
Undertaking
Salary
0
Income before tax
159
Tax 37,25%
59
Profit
100
Profit distributed
100
Owner taxation
11,52
Total tax (Undertaking+Owner)
70,52
Case 1b
Profit distributed
100
Owner taxation
12,5
Total tax (Undertaking+Owner)
71,5
calculated on 40% of dividend applying Irpef
rates (2007) in case of majority shareholding
calculated on 100% of dividend applying 12.5%
rate in case of minority shareholding
Table 4
Italy Country Report
February 2008
36
Case 2
Undertaking
Salary
100
Income before tax
59
Tax 37,25%
22
Profit
37
Profit distributed
0
Owner taxation
36,17
Total tax (Undertaking+Owner)
58,17
calculated applying Irpef rates
(2007)without considering the social
contribution of about 10%
13.
For corporate income tax or capital gains tax purposes, are there any
incentives/disincentives to retain earnings rather than distribute them or
pay wages?
YES
Until 2003 the Dual Income Tax was applicable: a rate of 19% was applied on a
specific part of income determined on the basis of the increase in net equity.
From 2004 there are the Thin Cap and Pro Rata rules permitting a major
deduction of payable interest in case of increasing net equity.
13.1.
Are there any limitations or ceilings for these incentives?
Yes
From 2004 interests paid on loan granted by holding companies or by
shareholders with at least 25% of shares are partially non deductible in case debt
results 4 times major than the net equity attributed to the shareholder
From 2004 a part of interests are non deductible in case the amount of the shares (to
whom the participation exemption is applicable) is higher than the net equity
29
D.P.R. 917, 22/12/1986, art. 98 (Thin Cap), art. 97 (Pro Rata)
30
D.P.R. 917, 22/12/1986, art. 98, Thin Cap
31
D.P.R. 917, 22/12/1986, art. 97, Pro Rata
Italy Country Report
February 2008
37
Italy Country Report
February 2008
38
13.2.
Is there a risk that these incentives can be used more than one
time by the business owners by splitting up the business activities
into different legal entities?
NO
Because it is better having a company with a bigger net equity.
14.
What is the tax treatment of declared loans granted by the Undertaking to
the business owner?
The interest collected by the Undertaking is ordinary revenue and concurs to the net
profit and to the tax basis of the Undertaking.
14.1. Is there a minimum interest rate to be charged for tax purposes?
The level of interest must be at the same level of the market price.
14.2. How is the interest rate treated for tax purposes for the
Undertaking?
They are financial revenues that concur to the determination of the tax basis of
the Undertaking.
14.3. How is the interest rate treated for tax purposes for the business
owner?
Italy Country Report
February 2008
39
It is a capital income taxed at the ordinary tax rate applicable to the individual
person.
14.4. What are the combined tax effects of such a loan compared to a
distribution of earnings equivalent in amount?
The distributions of dividends have no tax effects for the Undertaking.
The loan granted by the Undertaking to the Business Owner and the related
interest revenue provide an increase of the net profit and the tax basis.
15.
Are there any other taxes (e.g. net worth tax) which are imposed or based
on the net equity of the Undertaking?
NO
16.
Are there any other tax incentives for either the retention of earnings or
their distribution of profits?
NO
Actually the increase of the net equity permits a major deduction of interest
expenses due to the Thin cap and Pro-rata rules.
Italy Country Report
February 2008
40
PART 3 – TAX ASPECTS OF RETAINED EARNINGS FINANCING VS DEBT FINANCING
17.
In debt financing, what is the tax treatment of interest expenses paid or
accrued by the Undertaking?
Interest expenses are normally deductible.
17.1. Is there a different tax treatment to deductions on interest paid when
the lender is a resident or a non-resident for tax purposes?
It is the same but, in some cases, there are witholding tax problems on the payment
of abroad interest.
17.2. Is there a different tax treatment on interest on long-term debt and
interest on short-term debt?
NO, it is the same.
18.
Are there any tax benefits that are actionable based on specific amounts of
equity (e.g. notional interest expense based on the increase of own equity
or the total amount of equity)?
Interest expenses are normally deductible under three specific conditions: revenues
higher than 7,500,000 euros; loan granted by holding companies or major partner
and annual average financial stock higher than 4 times of holding net equity;
interest expenses are partially non deductible in case debt results major than the net
equity attributed to holding company for a determined quantity.
Italy Country Report
February 2008
41
There is also the Pro Rata rule that indicates that a part of interests are non
deductible in case the amount of the shares (to whom is applicable the participation
exemption)is higher than the net equity.
18.1. What is the exact calculation method used to implement this incentive
and to evaluate the benefits once this incentive is implemented?
The three conditions mentioned above should been verified.
1. evenues higher than 7,500,000 euros,
2. loans should be granted directly by the major partner
3. the total amount of the loan ( calculated on the annual average financial
stock ) should be higher than four times the net equity of the major partner
If the three conditions are verified we could calculate the deductible and not
deductible interest costs.
For example,
taking an annual average financial stock of 1000 and considering the net equity of
the major partner of 200 and considering an average return rate of 5% we obtain an
interest expense of 50.
The ratio between the annual average financial stock (1000) and net equity of the
major partner (200) is equal to 5 major than 4 (condition number 3).
The not deductible interest costs are calculated using the over financing quote
multiply by the average return rate.
The over financing quote (200) is calculated subtracting from the annual average
financial stock (1000) four times the net equity of the major partner (200 x4= 800)
Multipling the over financing quote (200) by the average return rate (5%) we obtain
the not deductible interest costs of 10.
To obtain the deductible interest costs we consider the total interest expenses of 50
from which we subtract the not deductible interest costs of 10 obtaining 40.
In table 5 we summarized the whole calculation
Table 5
Loan granted by holding company
1000
annual average financial stock
1000
Holding company Net Equity
200
Avarage Rate of return
5%
Interest expenses
50
annual average financial stock/ Net equity ratio
5 >
4
Over financialing 1000 - (200x4) = 1000 - 800 =
200
Non deductible interest cost 200 x 5% =
10
Deductible interest cost 50 - 10 =
40
18.2. Are there any other tax provisions favouring increases in own equity?
NO
19.
Is debt financing of an enterprise by the business owner himself of his/her
family recognised for tax purposes (ie. If the business owner or his/her
family lends money to the Undertaking are they treated differently than
other lenders for tax purposes)?
NO
The loan from Business owner is treated from a tax point of view like the loan
from other lenders except for the thin cap rule.
19.1. If so, are there any incentives for the business owners to debt-finance
their enterprise instead of retained earnings financing or equity
financing?
Yes, the only difference regards the Thin Cap and Pro Rata rules.
Italy Country Report
February 2008
42
Italy Country Report
February 2008
43
20.
Is there a general discrimination between retained earnings financing and
debt financing from a tax point of view?
Yes
The only tax rule that can discriminate these different methods of financing is
the Thin cap rule.
20.1. Is there a general discrimination between retained earnings financing
and equity financing from a tax point of view?
NO
It is the same.
20.2. Is there a general discrimination between equity financing and debt
financing from a tax point of view?
Yes
The only tax rule that can discriminate these different methods of financing is
the Thin cap rules.
21.
Are there any debt to equity ratios limiting the deductibility of interest
expenses for tax purposes?
YES
Interest expenses are normally deductible under three specifically conditions:
revenues higher than 7,500,000 euros; loan granted by holding companies or major
partner and annual average financial stock major than 4 times of holding net equity;
interest expenses are partially non deductible in case debt results major than the net
equity attributed to holding company for a determined quantity.
Table 5
Loan granted by holding company
1000
annual average financial stock
1000
Holding company Net Equity
200
Avarage Rate of return
5%
Interest expenses
50
annual average financial stock/ Net equity ratio
5 >
4
Over financialing 1000 - (200x4) = 1000 - 800 =
200
Non deductible interest cost 200 x 5% =
10
Deductible interest cost 50 - 10 =
40
21.1. If so, does the limitation apply to loans granted by the business owner
and affiliated persons or does it include loans granted by third
parties?
The limitation regards only the loans granted or guaranteed by the business
owner and others parties related to the Business Owner.
21.2. What are the consequences if the debt to equity ratio is not
respected?
A part of interest expenses are non deductible.
22.
Are there any tax provisions likely to impact the conversion of retained
earnings into share paid in capital (For example share buy-back)?
NO
Italy Country Report
February 2008
44
Italy Country Report
February 2008
45
23.
Are there any other taxes that have as their object to affect or impact on
either Undertaking debt financing or retained earnings financing?
NO
PART 4 – TAX ASPECTS OF BUSINESS INCOME VERSUS PRIVATE INCOME
24.
In respect to individual business owners, what is the general tax treatment
for private (ie: interest on passive investment) income compared to
business income (ie: income generated from your business activity)?
The interests deriving from private investments are capital income and are taxed
on the ordinary progressive tax rate for individual person.
Other financial investments are subject to a 12.5% tax deduction without
increasing the taxation basis of the individual person.
The income generated by his Business activity depends in which forms the
business activity is carried on:
• If it is carried on by a corporation, the Business owner can have capital
income like dividends or interests, or wages that are considered employee
income,
• If it is carried on by a partnership, the Business owner has participating
income,
• If it is carried on by sole trader, the Business owner has a Business
income.
All income of the individual person (capital, employee, partecipating,
Business activity income are taxed at the same tax rate (Irpef)
19 Countries
INCLUDE RELEVANT TAX
PROVISIONS IN 2002 AND
Italy Country Report
February 2008
46
SUBSEQUENT CHANGES UP
TO 2007
ITALY Private
Investment
Income
Business
Income
…
Irpef Tax rates Irpef
tax
rates
…
24.1. Are there different allowances or special treatments for private
investment income and business income?
YES
Different capital income or capital gains deriving by private
investments are subject to a tax rate of 12,5%.
For example:
• Capital gain deriving from the sale of share of minority,
• Interests deriving from Treasury security.
• Capital gain deriving from investment funds.
For the Business activity the taxation regime depends on the form
utilized to run the activity.( See answer 39)
Italy Country Report
February 2008
47
25.
Is there a different tax treatment for interest income received in a private
investors capacity (ie: business owner investment return in another
Undertaking) and interest income earned through business activity (ie:
business owner investment return from the Undertaking)?
NO
The interest income received by his Undertaking or by another
Undertaking are taxed at the same regime like capital income for the
individual person.
26.
Does the tax system encourage business owners to invest in private assets,
which are subsequently rented or leased to their enterprises?
Depends from each case. There isn’t a ordinary principle. But it’s necessary to
evaluate case by case.
For example the capital gain deriving from a sale of a building owned by an
individual person after 5 years from the purchase is not taxed. The capital gain
deriving from the sale of a building by a corporation is always subject to tax.
27.
By opposition to Question 26, does the tax system encourage that assets be
acquired by the Undertaking and rented or leased to the business owner?
The tax system does not encourage the acquisition by the Undertaking. It would be
necessary evaluate each case.
28.
Are capital gains from private assets taxed in the same way as capital gains
realised within the context of a business activity?
NO
Italy Country Report
February 2008
48
The capital gain realized by a personal individual is taxed in a different way from the
capital gain realized by a Business activity.
The capital gain deriving from the sale of a building are:
• Exempt of tax in case of capital gain realized by a personal individual after 5
years by the purchase.
• It is subject to tax rate of the personal individual (irpef) if the capital gain is
realized before 5 years from the purchased.
It is always subject to tax in case of capital gain deriving from a business activity, if
the business activity is run by a corporation is subject to 37,25% Ires+Irap, if is
exercised by a partnership the taxation is different: 4,25% of Irap for the partnership
and the business owner is taxed like participating income at the irpef tax rate.
28.1. If capital gains from private assets are taxed lower, does this
represent an important incentive for the business not to invest in
their own Undertaking?
YES
Italy Country Report
February 2008
49
29.
Are interest expenses incurred on private debts deductible for tax
purposes?
YES
Interest expenses are partially deductible only for loan for the purchase of the
first house.
30.
Is there a tax advantage for the Undertaking in transferring debts from the
business owner to the Undertaking?
YES
Only if the interest expenses are deductible from the tax basis of the
undertaking.
31.
Is there a tax advantage for the business owner in transferring debts from
the business owner to the Undertaking?
YES
Only if the interest expenses are deductible from the tax basis of the
undertaking.
32.
Are there other taxes such as inheritance tax which have an important
impact on own equity and retention of earnings decisions?
NO
Document Outline
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