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 Country Report 1
February 2008
ITALY
Dottori Commercialisti Associati
Raffaele Di Landro
Corso Porta Vigentina 35, Milano
ITALY
[phone]
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.
Italy Country Report 2
February 2008
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%1.
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%2.
Personal income tax
The individual persons are taxable on the total income received (building, wage,
capital, enterprise, others, independent work)3.
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%4.
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 activity5.
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
Italy Country Report 3
February 2008
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 cost6.
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
rates7.
6
D.P.R. 917, 22/12/1986, art. 83
7
D.P.R. 917, 22/12/1986, art. 11
Italy Country Report 4
February 2008
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% rate8.
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 person9.
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
Italy Country Report 5
February 2008
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
Irpeg (36%)+ Irap Irpeg (34%)+ Irap Ires (33%)+ Irap Ires (33%)+ Irap Ires (33%)+ Irap
Standard
(4.25%) = 40.25% (4.25%) = 38.25% (4.25%) = (4.25%) = (4.25%) =
37.25% 37.25% 37.25%
Dual Income Dual Income Tax: N.A. N.A. N.A.
Reduced
Tax: 19% on the 19% on the
increase in net increase in net
equity equity
N.A. N.A. N.A. N.A. N.A.
Minimum Tax
Particular Particular Particular Particular Particular
Special Rates
business sectors business sectors business sectors business sectors business sectors
apply standard apply standard apply standard apply standard apply standard
rates on a low rates on a low rates on a low rates on a low rates on a low
taxable income taxable income taxable income taxable income taxable income
ICI 10(local tax ICI (local tax on ICI (local tax on ICI (local tax on ICI (local tax on
Non profit
on real estate) real estate) rate: real estate) real estate) real estate)
tax (local tax
rate: can range can range from rate: can range rate: can range rate: can range
on
from 0.4% to 0.4% to 0.7%. It s from 0.4% to from 0.4% to from 0.4% to
corporations,
0.7%. It s applied on the 0.7%. It s 0.7%. It s 0.7%. It s
energy tax& )
applied on the estimated value applied on the applied on the applied on the
estimated value of the property. estimated value estimated value estimated value
of the property. of the property. of the property. of the property.
10
D.Lgs. 504, 30/12/1992
Italy Country Report 6
February 2008
N.A. N.A. N.A. N.A. N.A.
2. Tax
accounting
rules
3.
Depreciation
11
Historical cost Historical cost Historical cost Historical cost Historical cost
Basis
Proportional Proportional Proportional Proportional Proportional
Methods
Different rates Different rates Different rates Different rates Different rates
Rates
are applicable are applicable on are applicable are applicable are applicable
on different different on different on different on different
categories of categories of categories of categories of categories of
assets assets assets assets assets
N.A. N.A. N.A. N.A. N.A.
Accounting
Different rates Different rates Different rates Different rates Different rates
Intangibles
are applicable are applicable on are applicable are applicable are applicable
on different different on different on different on different
categories of categories of categories of categories of categories of
intangibles intangibles intangibles intangibles intangibles
Land Land Land Land From 01/01/06
Non
depreciation of
depreciable
building is on
assets
the basis of the
historical cost
minus the land
cost.
4. Provisions
Not deductible Not deductible Not deductible Not deductible Not deductible
Risks and
futures
expenses
Bad debts12 Are deductible Are deductible in Are deductible Are deductible Are deductible
in the limit of the limit of 0.5% in the limit of in the limit of in the limit of
0.5% of total of total amount 0.5% of total 0.5% of total 0.5% of total
amount of of commercial amount of amount of amount of
commercial credits (excluded commercial commercial commercial
credits covered by credits credits credits
11
D.P.R. 917, 22/12/1986, art. 102
12
D.P.R. 917, 22/12/1986, art.106
Italy Country Report 7
February 2008
(excluded insurance) Credit (excluded (excluded (excluded
covered by provision does covered by covered by covered by
insurance) not exceed 5% of insurance) insurance) insurance)
Credit provision total amount of Credit provision Credit provision Credit provision
does not exceed commercial does not exceed does not exceed does not exceed
5% of total credits 5% of total 5% of total 5% of total
amount of amount of amount of amount of
commercial commercial commercial commercial
credits credits credits credits
N.A. N.A. N.A. N.A. N.A.
Pensions
Are deductible Are deductible in Are deductible Are deductible Are deductible
Repairs
in the limit of the limit of 5% of in the limit of in the limit of in the limit of
5% of total total amount of 5% of total 5% of total 5% of total
amount of asset asset historical amount of asset amount of asset amount of asset
historical cost at cost at the date historical cost historical cost historical cost
the date of the of the beginning at the date of at the date of at the date of
beginning of the of the exercice the beginning of the beginning of the beginning of
exercice (without the exercice the exercice the exercice
(without Intangibles) (without (without (without
Intangibles) considering Intangibles) Intangibles) Intangibles)
considering acquisition and considering considering considering
acquisition and sell during the acquisition and acquisition and acquisition and
sell during the year. sell during the sell during the sell during the
year. year. year. year.
5. Losses
Losses realized Losses realized in Losses realized Losses realized Losses realized
Carry
forward13 in the first three the first three in the first in the first in the first
exercises could exercises could three exercises three exercises three exercises
be carried be carried could be carried could be carried could be carried
forward without forward without forward without forward without forward without
limitation. limitation. Losses limitation. limitation. limitation.
Losses from the from the 4th Losses from the Losses from the Losses from the
4th period could period could be 4th period could 4th period could 4th period could
be carried carried forward be carried be carried be carried
forward for for maximum 5 forward for forward for forward for
maximum 5 periods. maximum 5 maximum 5 maximum 5
periods. periods. periods. periods.
N.A. N.A. N.A. N.A. N.A.
Carry back
Is possible in Is possible in case Is possible in Is possible in Is possible in
Transfer of
13
D.P.R. 917, 22/12/1986, art. 84
Italy Country Report 8
February 2008
case of merger of m&a operation case of m&a case of m&a case of m&a
losses
and acquisition and simultaneous operation and operation and operation and
(m&a) operation change of simultaneous simultaneous simultaneous
and business activity change of change of change of
simultaneous under certain business activity business activity business activity
change of circumstances. under certain under certain under certain
business activity circumstances. circumstances. circumstances.
under certain
circumstances.
5.
Inventories
LIFO, average LIFO, average and LIFO, average LIFO, average LIFO, average
Valuation
and FIFO FIFO methods are and FIFO and FIFO and FIFO
rules14
methods are applicable methods are methods are methods are
applicable applicable applicable applicable
Cost of goods Cost of goods Cost of goods Cost of goods Cost of goods
Allocation
purchased purchased purchased purchased purchased
methods
Personal
Income tax
It is a It is a component It is a It is a It is a
Interest
component of of the individual component of component of component of
Income15
the individual person income the individual the individual the individual
person income that is taxable to person income person income person income
that is taxable the ordinary that is taxable that is taxable that is taxable
to the ordinary progressive tax to the ordinary to the ordinary to the ordinary
progressive tax rate (Irpef). progressive tax progressive tax progressive tax
rate (Irpef). rate (Irpef). rate (Irpef). rate (Irpef).
n.a. because n.a. because 40% of the 40% of the 40% of the
Dividends
there was the there was the tax dividend dividend dividend
tax credit that credit that off-set amount in case amount in case amount in case
off-set the the corporate of majority of majority of majority
corporate taxation. shareholding shareholding shareholding
taxation. applying the applying the applying the
Irpef rates16. In Irpef rates. In Irpef rates. In
case of minority case of minority case of minority
shareholding it shareholding it 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
Italy Country Report 9
February 2008
will apply a will apply a will apply a
definitive definitive definitive
withholding tax withholding tax withholding tax
of 12.5% rate. of 12.5% rate. of 12.5% rate.
It is a It is a component It is a It is a It is a
Employment
component of of the individual component of component of component of
income17
the individual person income the individual the individual the individual
person income that is taxable to person income person income person income
that is taxable the ordinary that is taxable that is taxable that is taxable
to the ordinary progressive tax to the ordinary to the ordinary to the ordinary
progressive tax rate (Irpef). progressive tax progressive tax progressive tax
rate (Irpef). rate (Irpef). rate (Irpef). rate (Irpef).
Capital gains
tax
The capital gain The capital gain The capital gain The capital gain The capital gain
Sale of fixed
is an income is an income that is an income is an income is an income
assets
that is included is included in the that is included that is included that is included
in the tax basis tax basis for Ires in the tax basis in the tax basis in the tax basis
for Ires and Irap and Irap for Ires and Irap for Ires and Irap for Ires and Irap
Normally Normally taxable Normally Normally Normally
Timing
taxable in the in the period in taxable in the taxable in the taxable in the
rules18
period in which which realized or period in which period in which period in which
realized or may may be declared realized or may realized or may realized or may
be declared in in equal be declared in be declared in be declared in
equal instalments over equal equal equal
instalments over a period not instalments instalments instalments
a period not exceeding 5 years over a period over a period over a period
exceeding 5 ( it is possible not exceeding 5 not exceeding 5 not exceeding 5
years ( it is only if the years ( it is years ( it is years ( it is
possible only if company has possible only if possible only if possible only if
the company has owned fixed asset the company the company the company
owned fixed more than three has owned fixed has owned fixed has owned fixed
asset more than years.) asset more than asset more than asset more than
three years.) three years.) three years.) three years.)
N.A. N.A. N.A. N.A. N.A.
Accounting
rules
N.A. N.A. N.A. N.A. N.A.
Inflation
17
D.P.R. 917, 22/12/1986, art. 49
18
D.P.R. 917, 22/12/1986, art. 86
Italy Country Report 10
February 2008
Ordinary Ordinary Ordinary Ordinary Ordinary
Rates
N.A. N.A. N.A. N.A. N.A.
Exemptions
If shares have If shares have In case shares Pex Pex 91%
Sale of
been held for been held for are registered
shares19
more than 3 more than 3 years as long-term
years may may choose to investments the
choose to pay a pay a substitute capital gains
substitute tax at tax at 19% rate. are exempt to
19% rate. Shares have been taxation.
Shares have held for less than (Participation
been held for 3 years capital exemption)
less than 3 years gains are subject In case they are
capital gains are to income tax not registeedr
subject to as long-term
income tax investments
capital gains
are subject to
income tax
Capital loss
Deductible costs Deductible costs Deductible costs Deductible costs Deductible costs
Fixed assets
The capital loss The capital loss In case the In case the In case the
Shares
realized is realized is participation participation participation
deductible. deductible exemption is exemption is exemption is
applicable the applicable the applicable the
capital losses capital losses capital losses
are not are not are not
deductible. deductible. deductible.
In case they are In case they are In case they are
not registered not registered not registered
as long-term as long-term as long-term
investments are investments are investments are
considered considered considered
deductible costs deductible costs deductible costs
Wages
It could be a 29% It could be a 29% It could be a It could be a It could be a
Average cost
average rate average rate 29% average 29% average 29% average
to the
(cost of rate rate rate
19
D.P.R. 917, 22/12/1986, art. 86-87
Italy Country Report 11
February 2008
compulsory
Undertaking
20
contribution for
pension and
health)
It could be a 9% It could be a 9% It could be a 9% It could be a 9% It could be a 9%
Average cost
average rate average rate average rate average rate average rate
to the
(compulsory
employee
contribution to
be paid by the
employee)
Overall tax
on
distributed
earnings or
Dividends
Period in which Period in which Period in which Period in which Period in which
Timing
the dividend the dividend are the dividend the dividend the dividend
are cashed cashed are cashed are cashed are cashed
Tax credit of Tax credit of Tax credit is Tax credit is Tax credit is
Tax credit
56,25% of the 51,51% of the non applicable non applicable non applicable
structure
dividend dividend Only 5% of the Only 5% of the Only 5% of the
dividend dividend dividend
collected is collected is collected is
taxable21 taxable taxable
Non profit tax N.A N.A N.A N.A
Excluding
is not
non profit
applicable on
tax
the dividend
N.A N.A N.A N.A N.A
Including non
profit tax
Deduction of
expenses
Costs related to Costs related to Costs related Costs related Costs related
General rule
business business activity to business to business to business
activity could could be activity could activity could activity could
be deducted in deducted in the be deducted in be deducted in be deducted in
20
D.P.R. 917, 22/12/1986, art. 95
21
D.P.R. 917, 22/12/1986, art. 89
Italy Country Report 12
February 2008
the pertaining pertaining the pertaining the pertaining the pertaining
period period period period period
Costs related to Costs related to Costs related Costs related Costs related
Non-
cars, taxes. cars, taxes. to cars, taxes. to cars, taxes. to cars, taxes.
deductibility
Some costs like Some costs like Some costs like Some costs like Some costs like
of expenses
repairs are repairs are repairs are repairs are repairs are
partially partially partially partially partially
deductible deductible deductible deductible deductible
N.A N.A Interests paid Interests paid Interests paid
Thin
on loan on loan on loan
capitalizatio
granted by granted by granted by
n22
shareholders shareholders shareholders
with at least with at least with at least
25% of shares 25% are 25% are
are partially partially non partially non
non deductible deductible in deductible in
in case debt case debt case debt
results five results four results four
times major times major times major
than the net than the net than the net
equity equity equity
attributed to attributed to attributed to
holding holding holding
company. company. company .
Overall
corporate
tax on
Retained
earnings
N.A N.A N.A N.A N.A
Excluding
non profit
tax
N.A N.A N.A N.A N.A
Including non
profit tax
Debt
22
D.P.R. 917, 22/12/1986, art. 98
Italy Country Report 13
February 2008
financing
Always Always Always Always Always
Interest
deductible deductible deductible deductible deductible
deductibility
There are some There are some See above thin See above thin See above thin
Limits on
limits to the limits to the capitalization capitalization capitalization
interest
deductibility of deductibility of rules. rules. rules.
deductibility
interest only interest only The pro-rata The pro-rata The pro-rata
23
when the when the rule is rule is rule is
corporation has corporation has applicable applicable applicable
exempt exempt revenue. when the when the when the
revenue. corporation has corporation has corporation has
shares (to shares (to shares (to
whom the whom the whom the
Participation Participation Participation
exemption is exemption is exemption is
applicable) applicable) applicable)
whose amount whose amount whose amount
is higher to the is higher to the is higher to the
Net equity. Net equity. Net equity.
Always Always Always Always Always
Interest
deductible in deductible in deductible in deductible in deductible in
deductibility
case of a case of a case of a case of a case of a
on business
remunerative remunerative remunerative remunerative remunerative
owner loan
loan. loan. loan, within loan, within loan, within
to
the limits of the limits of the limits of
Undertaking
the Thin Cap. the Thin cap. 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
Partnership is Partnership is tax Partnership is Partnership is Partnership is
Standard
23
D.P.R. 917, 22/12/1986, art. 97
Italy Country Report 14
February 2008
tax transparent. tax tax tax
transparent. Partnership is transparent. transparent. transparent.
Partnership is subject to Irap Partnership is Partnership is Partnership is
subject to Irap (4.25%) subject to Irap subject to subject to Irap
(4.25%) (4.25%) Irap (4.25%) (4.25%)
Dual Income Dual Income Tax:
Reduced
Tax: 19% on 19% on the
the increase in increase in net
net equity equity
N.A. N.A. N.A. N.A. N.A.
Minimum Tax
Particular Particular Particular Particular Particular
Special Rates
business business sectors business business business
sectors apply apply standard sectors apply sectors apply sectors apply
standard rates rates on a low standard rates standard rates standard rates
on a low taxable income on a low on a low on a low
taxable income taxable income taxable income taxable income
ICI (local tax ICI (local tax on ICI (local tax ICI (local tax ICI (local tax
Non profit
on real estate ) real estate ) on real estate ) on real estate ) on real estate )
tax (local tax
rate: can range rate: can range rate: can range rate: can range rate: can range
on
from 0.4% to from 0.4% to from 0.4% to from 0.4% to from 0.4% to
corporations,
0.7%. It is 0.7%. It is 0.7%. It is 0.7%. It is 0.7%. It is
energy tax& )
applied on the applied on the applied on the applied on the applied on the
estimated estimated value estimated estimated estimated
value of the of the property. value of the value of the value of the
property. property. property. property.
N.A. N.A. N.A. N.A. N.A.
2. Tax
accounting
rules
3.
Depreciation
Historical cost Historical cost Historical cost Historical cost Historical cost
Basis
Proportional Proportional Proportional Proportional Proportional
Methods
Different rates Different rates Different rates Different rates Different rates
Rates
are applicable are applicable on are applicable are applicable are applicable
on different different on different on different on different
categories of categories of categories of categories of categories of
assets assets assets assets assets
N.A. N.A. N.A. N.A. N.A.
Accounting
Italy Country Report 15
February 2008
Different rates Different rates Different rates Different rates Different rates
Intangibles
are applicable are applicable on are applicable are applicable are applicable
on different different on different on different on different
categories of categories of categories of categories of categories of
intangibles intangibles intangibles intangibles intangibles
Land Land Land Land From 01/01/06
Non
depreciation of
depreciable
building is on
assets
the basis of the
historical cost
minus the land
cost.
4. Provisions
Not deductible Not deductible Not deductible Not deductible Not deductible
Risks and
futures
expenses
Are deductible Are deductible in Are deductible Are deductible Are deductible
Bad debts
in the limit of the limit of 0.5% in the limit of in the limit of in the limit of
0.5% of total of total amount 0.5% of total 0.5% of total 0.5% of total
amount of of commercial amount of amount of amount of
commercial credits (excluded commercial commercial commercial
credits covered by credits credits credits
(excluded insurance) Credit (excluded (excluded (excluded
covered by provision do not covered by covered by covered by
insurance) exceed 5% of insurance) insurance) insurance)
Credit total amount of Credit Credit Credit
provision do commercial provision do provision do provision do
not exceed 5% credits not exceed 5% not exceed 5% not exceed 5%
of total of total amount of total of total
amount of of commercial amount of amount of
commercial credits commercial commercial
credits credits credits
N.A. N.A. N.A. N.A. N.A.
Pensions
Are deductible Are deductible in Are deductible Are deductible Are deductible
Repairs
in the limit of the limit of 5% of in the limit of in the limit of in the limit of
5% of total total amount of 5% of total 5% of total 5% of total
amount of asset historical amount of amount of amount of
asset historical cost at the date asset historical asset historical asset historical
cost at the of the beginning cost at the date cost at the date cost at the date
Italy Country Report 16
February 2008
date of the of the exercice of the beginning of the beginning of the beginning
beginning of (without of the exercice of the exercice of the exercice
the exercice ( ( without ( without ( without
Intangibles)
without Intangibles ) Intangibles ) Intangibles )
considering
Intangibles ) considering considering considering
acquisition and
considering acquisition and acquisition and acquisition and
sell during the
acquisition and sell during the sell during the sell during the
year.
sell during the year. year. year.
year.
5. Losses
Losses realized Losses realized in Losses realized Losses realized Losses realized
Carry
in the first the first three in the first in the first in the first
forward
three exercises exercises could three exercises three exercises three exercises
could be be carried could be could be could be
carried forward without carried forward carried forward carried forward
forward limitation. Losses without without without
without from the 4th limitation. limitation. limitation.
limitation. period could be Losses from the Losses from the Losses from the
Losses from carried forward 4th period could 4th period 4th period
the 4th period for maximum 5 be carried could be could be
could be periods. forward for carried forward carried forward
carried maximum 5 for maximum 5 for maximum 5
forward for periods. periods. periods.
maximum 5
periods.
N.A. N.A. N.A. N.A. N.A.
Carry back
It is possible in It is possible in It is possible in It is possible in It is possible in
Transfer of
case of m &a case of m&a case of m&a case of m&a case of m&a
losses
operation and operation and operation and operation and operation and
simultaneous simultaneous simultaneous simultaneous simultaneous
change of change of change of change of change of
business business activity business business business
activity under under certain activity under activity under activity under
certain circumstances. certain certain certain
circumstances. circumstances. circumstances. circumstances.
5.
Inventories
LIFO, average LIFO, average LIFO, average LIFO, average LIFO, average
Valuation
and FIFO and FIFO and FIFO and FIFO and FIFO
rules
Italy Country Report 17
February 2008
methods are methods are methods are methods are methods are
applicable applicable applicable applicable applicable
Cost of goods Cost of goods Cost of goods Cost of goods Cost of goods
Allocation
purchased purchased purchased purchased purchased
methods
Personal
Income tax
It is a It is a component It is a It is a It is a
Interest
component of of the individual component of component of component of
Income
the individual person income the individual the individual the individual
person income that is taxable to person income person income person income
that is taxable the ordinary that is taxable that is taxable that is taxable
to the ordinary progressive tax to the ordinary to the ordinary to the ordinary
progressive tax rate (Irpef). progressive tax progressive tax progressive tax
rate (Irpef). rate (Irpef). rate (Irpef). rate (Irpef).
N.A. N.A. N.A. N.A. N.A.
Dividends
Because Because earnings Because Because Because
earnings of a of a corporation earnings of a earnings of a earnings of a
corporation are treated corporation are corporation are corporation are
are treated transparent treated treated treated
transparent transparent transparent transparent
It is a It is a component It is a It is a It is a
Employment
component of of the individual component of component of component of
income
the individual person income the individual the individual the individual
person income that is taxable to person income person income person income
that is taxable the ordinary that is taxable that is taxable that is taxable
to the ordinary progressive tax to the ordinary to the ordinary to the ordinary
progressive tax rate (Irpef). progressive tax progressive tax progressive tax
rate (Irpef). rate (Irpef). rate (Irpef). rate (Irpef).
Capital gains
tax
Taxed with the Taxed with the Taxed with the Taxed with the Taxed with the
Sale of fixed
standard standard method standard standard standard
assets
method of of partnership method of method of method of
partnership partnership partnership partnership
Normally Normally taxable Normally Normally Normally
Timing rules
taxable in the in the period in taxable in the taxable in the taxable in the
period in which which realized or period in which period in which period in which
realized or may be declared realized or may realized or may realized or may
may be in equal be declared in be declared in be declared in
Italy Country Report 18
February 2008
declared in instalments over equal equal equal
equal a period not instalments instalments instalments
instalments exceeding 5 over a period over a period over a period
over a period years ( it is not exceeding not exceeding not exceeding
not exceeding possible only if 5 years ( it is 5 years ( it is 5 years ( it is
5 years ( it is the company has possible only if possible only if possible only if
possible only if owned fixed the company the company the company
the company asset more than has owned has owned has owned
has owned three years.) fixed asset fixed asset fixed asset
fixed asset more than more than more than
more than three years.) three years.) three years.)
three years.)
N.A. N.A. N.A. N.A. N.A.
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
If shares have If shares have In case shares In case shares In case shares
Sale of
been held for been held for are booked as are booked as are booked as
shares
more than 3 more than 3 long-term long-term long-term
years may years may investments investments investments
choose to pay choose to pay a the capital the capital the capital
a substitute substitute tax at gains are gains are gains are
tax at 19% 19% rate. exempt to exempt to exempt to
rate. Shares have been taxation on 60% taxation on taxation on
Shares have held for less than of the amount. 60% of the 60% of the
been held for 3 years capital (Participation amount. amount.
less than 3 gains are exemption) (Participation (Participation
years capital revenues that In case they exemption) exemption)
gains are concur to the are not register In case they In case they
revenues that ordinary net as long-term are not register are not register
concur to the profit of the investments as long-term as long-term
ordinary net partnership capital gains investments investments
profit of the concurs to the capital gains capital gains
partnership ordinary net concurs to the concurs to the
profit of the ordinary net ordinary net
partnership profit of the profit of the
partnership partnership
Italy Country Report 19
February 2008
Capital loss
Deductible Deductible only Deductible only Deductible only Deductible only
Fixed assets
only in in ordinary in ordinary in ordinary in ordinary
ordinary accounting accounting accounting accounting
accounting system system system system
system
The capital The capital loss In case of In case of In case of
Shares
loss realized is realized is participation participation participation
deductible deductible exemption is exemption is exemption is
applicable the applicable the applicable the
capital losses capital losses capital losses
are not are not are not
deductible on deductible on deductible on
the base of 60% the base of 60% the base of 60%
of the amount. of the amount. of the amount.
In case they In case they In case they
are not register are not register are not register
as long-term as long-term as long-term
investments investments investments
are considered are considered are considered
deductible deductible deductible
costs costs costs
Wages
It could be a It could be a 29% It could be a It could be a It could be a
Average cost
29% average average rate 29% average 29% average 29% average
to the
rate (cost of rate rate rate
Undertaking
compulsory
contribution
for pension
and health)
It could be a It could be a 9% It could be a 9% It could be a It could be a
Average cost
9% average average rate average rate 9% average 9% average
to the
rate rate rate
employee
(compulsory
contribution to
be paid by the
employee)
Dividends
N.A N.A N.A N.A N.A
Timing
Italy Country Report 20
February 2008
N.A N.A N.A N.A N.A
Tax credit
structure
Deduction of
expenses
Costs related Costs related to Costs related Costs related Costs related
General rule
to business business activity to business to business to business
activity could could be activity could activity could activity could
be deducted in deducted in the be deducted in be deducted in be deducted in
the pertaining pertaining period the pertaining the pertaining the pertaining
period period period period
Costs related Costs related to Costs related Costs related Costs related
Non-
to cars, taxes. cars, taxes. to cars, taxes. to cars, taxes. to cars, taxes.
deductibility
Some costs like Some costs like Some costs like Some costs like Some costs like
of expenses
repairs are repairs are repairs are repairs are repairs are
partially partially partially partially partially
deductible deductible deductible deductible deductible
N.A N.A Interests paid Interests paid Interests paid
Thin
on loan granted on loan on loan
capitalization
by partners granted by granted by
(25% of quota) partners are partners are
are partially partially non partially non
non deductible deductible in deductible in
in case debt case debt case debt
results five results four results four
times major times major times major
than the net than the net than the net
equity equity equity
attributed to attributed to attributed to
the partners. the partners. the partners.
N.A N.A N.A N.A N.A
Retained
earnings
Debt
financing
Always Always Always Always Always
Interest
deductible deductible deductible deductible deductible
deductibility
There are There are some See above thin See above thin See above thin
Limits on
some limits to limits to the capitalization capitalization capitalization
interest
Italy Country Report 21
February 2008
the deductibility of rules. rules. rules.
deductibility
deductibility of interest only There is the There is the There is the
interest only when the pro-rata rule pro-rata rule pro-rata rule
when the partnership has that is that is that is
partnership has exempt revenue. applicable applicable applicable
exempt when the when the when the
revenue. partnership has partnership has partnership has
shares (to shares (to shares (to
whom the whom the whom the
Participation Participation Participation
exemption is exemption is exemption is
applicable) applicable) applicable)
which amount which amount which amount
is superior to is superior to is superior to
the Net equity. the Net equity the Net equity
Always Always Always Always Always
Interest
deductible in deductible in deductible in deductible in deductible in
deductibility
case of a case of a case of a case of a case of a
on business
remunerative remunerative remunerative remunerative remunerative
owner loan
loan. loan. loan. loan. loan.
to
Undertaking
Italy Country Report 22
February 2008
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 23
February 2008
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 Limited Corporation Sole Trader
Partnership Partnership
Corporate 4,25% irap and 4,25% irap 4,25% irap N.A.
tax irpef and irpef 33% ires
progressive progressive
rates rates
Income tax 4,25% irap and 4,25% irap 4,25% irap The business
irpef and irpef 33% ires income
progressive progressive defines the
rates rates individual
person
income that
is subject to
progressive
Italy Country Report 24
February 2008
Irpef rates.
Capital gains 4,25% irap and 4,25% irap 4,25% irap
tax irpef and irpef 33% ires
progressive progressive
rates rates
&
Option for It s always tax It s always It s possible n.a
Transparent trasparent tax opt for the
treatment trasparent tax
trasparency
&
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 25
February 2008
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
Italy Country Report 26
February 2008
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
equity24.
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
dividends25?
24
Civil Code, article 2426 and 2430
Italy Country Report 27
February 2008
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 sold26.
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 shareholder27.
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 equity28.
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 28
February 2008
This new rule could facilitate the retention of earnings.
Italy Country Report 29
February 2008
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 30
February 2008
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 33% N.A.
tax
Income tax n.a. Irpef tax rates (see table
above)
Dividend tax A) If the A) the shareholder in this case
2002-2003 shareholder is doesn t pay taxes and doesn t
Italy Country Report 31
February 2008
an individual declare the dividend cashed,
who owns less because the withholding
than 25% of applied by the company is
the shares, definitive.
the company b) in this case the shareholder
applies on the has to declare the dividend
dividend that concurs to the personal
payed a income tax basis, but can use a
withholding tax credit of 56,25% (51,51%
tax of 12,5% from 2003) of the dividend
b) if the received to avoid the double
shareholder taxation
owns more
than 25%, the
withholding
tax is not
applicable
Dividend tax A) If the a) In case of minority
2004-2007 shareholder is shareholding it will apply a
an individual 12.5% rate of deduction at
who owns less source and the shareholder
than 25% of which received dividend
the shares, doesn t pay anything
the company b) In case of a majority
applies on the shareholding, only on the 40%
dividend of the dividend amount
payed a applying the Irpef rates.
withholding The tax credit was abolished
tax of 12,5% and was introduced a limited
b) if the taxation, but there is always a
shareholder limited double taxation
owns more
than 25%, the
withholding
tax is not
Italy Country Report 32
February 2008
applicable
Dividend N.A. 56,25% of the dividend cashed
credit 2002- that off set the corporation
2003 tax.
51,51% from 2003
Dividend N.A. n.a.
credit 2004-
2007
Capital gains n.a. n.a.
tax
If option for The earnings of the undertaking
Transparent are always taxed by the
treatment shareholder even if not cashed,
chosen 2004- so in case of collection of
2007 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 33
February 2008
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 Retained Wages/Salaries Loan to business owner
profits Profit to business
owner
Sale of The net The net The salary cost If the loan is
shares equity is the equity are deductible remunerative it s
same. The increases. from the tax possible to modify the
company The company basis. It s total tax burden of the
doesn t have may have a possible to company and the
any tax reduction of have a shareholder.
consequences the basis due reduction of
to Thin cap the total tax
and pro- rata burden of the
(these rules company and
have been the shareholder
introduced
from 2004)
Sale of The net The net The salary costs If the loan is
business equity is the equity are deductible remunerative it s
same. The increases. from the tax possible to modify the
company The company basis. It s total tax burden of the
doesn t have may have a possible to company and the
Italy Country Report 34
February 2008
any tax reduction of have a shareholder.
consequences the basis due reduction of
to Thin cap the total tax
and pro- rata. burden of the
these rules company and
have been the shareholder
introduced
from 2004)
&
& .
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?
Italy Country Report 35
February 2008
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
calculated on 40% of dividend applying Irpef
rates (2007) in case of majority shareholding
Total tax (Undertaking+Owner) 70,52
Case 1b
Profit distributed 100
Owner taxation 12,5
calculated on 100% of dividend applying 12.5%
rate in case of minority shareholding
Total tax (Undertaking+Owner) 71,5
Table 4
Italy Country Report 36
February 2008
Case 2 Undertaking
Salary 100
Income before tax 59
Tax 37,25% 22
Profit 37
Profit distributed 0
Owner taxation 36,17
calculated applying Irpef rates
(2007)without considering the social
contribution of about 10%
Total tax (Undertaking+Owner) 58,17
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.29.
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 shareholder30.
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 equity31.
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 37
February 2008
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 38
February 2008
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 39
February 2008
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 40
February 2008
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
Italy Country Report 41
February 2008
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 42
February 2008
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
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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
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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
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SUBSEQUENT CHANGES UP
TO 2007
ITALY Private Business
Investment Income
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)
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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
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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
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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
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