An audit guide by Aldo Castoldi
of Deloitte Italy
Like many countries worldwide, the conversation within Italy's transfer pricing market in the past year has focussed almost entirely on the issue of BEPS, and its implications both in Italy and around the world.
One of the key issues that has come up in the jurisdiction is how taxpayers can manage the reputational damage, and potential court dispute, that may occur when their tax and transfer pricing structures are revealed.
"The problem in Italy, as in some other jurisdictions, is that if your company ends up in the papers for tax planning this could also result in criminal investigations, even if in the end nothing is proven it can be severely inconvenient. After all, everyone reads the papers, even the public prosecutors." said Francescho Bonichi, partner at Allen & Overy.
This public engagement with international tax matters has prompted the tax authorities to engage more thoroughly and firmly with taxpayers when it suspects impropriety.
The approach that the authorities are increasingly taking however, is said by advisers to be a positive one. There are hopes that a change of culture is taking place and the tax authorities are beginning to see their role as to co-operate with taxpayers in order to help business.
Italy has been a relatively rapid adopter of the BEPS proposals with a number of key reforms already adopted into local legislation. Country-by-country reporting (CbCR) was introduced in the 2016 Finance Bill and took effect on January 1 2016.
In the same Bill, the Italian government introduced a new advance ruling procedure for multinationals and tax authorities covering a variety of tax issues, including transfer pricing, in line with BEPS Action 14 on making dispute resolution mechanisms more effective. This process is available to all companies with international activities and any rulings issued will bind both the tax authority and the company for five years.
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Tax rates at a glance
(As of April 2016)
|Corporate income tax
|Capital gains tax
|Branch tax rate
Net operating losses (years)
- The corporate income tax (imposta sul reddito delle società, or IRES) rate is 27.5%. However, the 2016 Budget Law provides that, except for banks and other financial entities, the IRES rate will be reduced to 24%, effective from the 2017 fiscal year (fiscal years beginning after 31 December 2016). A 6.5% surcharge (increasing the total tax rate to 34%) had been imposed on oil, gas and energy companies with revenues exceeding €3 million and taxable income exceeding €300,000, with reference to the preceding year (for 2011 to 2013, the surcharge was 10.5%, increasing the total tax rate to 38%). During 2015, the Italian Constitutional Court declared such surcharge unconstitutional and consequently repealed the surcharge without retroactive effect. A local tax on productive activities (imposta regionale sulle attività produttive, or IRAP) is imposed on the net value of production.
- Withholding tax is not imposed on dividends paid to resident companies. The 26% rate applies to dividends paid to resident individuals with non-substantial participations. The 26% rate applies to dividends paid to nonresidents. Non-residents may be able to obtain a refund of the withholding tax equal to the amount of foreign tax paid on the dividends. However, the maximum refund is 11/26 of the withholding tax paid. Tax treaties may provide for a lower tax rate. Effective from January 1 2008, a 1.375% rate applies under certain circumstances. If either the treaty or the 1.375% rate applies, the 11/26 tax refund cannot be claimed.
- Under the European Union (EU) Parent-Subsidiary Directive, dividends distributed by an Italian subsidiary to an EU parent company are exempt from withholding tax, if among other conditions, the recipient holds 10% or more of the shares of the subsidiary for at least one year.
- The 0% rate applies under certain circumstances to interest derived by nonresidents on the white list from treasury bonds, bonds issued by banks and "listed" companies, "listed" bonds issued by "non-listed" companies, nonbank current accounts and certain cash pooling arrangements and in other specific cases. The term "listed" refers to a listing on the Italian exchange or on an official exchange or a multilateral system for exchange of an EU or European Economic Area (EEA) country. Such exchanges are also included in the Italian white list. The 26% rate applies to interest derived by residents and nonresidents from corporate bonds and similar instruments and from loans, in general. The 26% rate also applies as a final tax to interest paid to residents on bank accounts and deposit certificates. The rate applicable to interest paid on treasury bonds issued by the Italian government and by white-list countries is reduced to 12.5%. For resident individuals carrying on business activities in Italy and resident companies, interest withholding taxes are advance payments of tax. In all other cases, the withholding taxes are final taxes.
- No withholding tax is imposed on interest and royalties paid between associated companies of different EU member states if certain conditions are met.
- The withholding tax rate of 30% applies to royalties paid to nonresidents. However, in certain circumstances, the tax applies to 75% of the gross amount, resulting in an effective tax rate of 22.5%. These rates may be reduced under tax treaties.
- Loss carryforwards are allowed for corporate income tax purposes only. Losses incurred in the first three tax years of an activity may be carried forward indefinitely. Losses incurred in the following years can also be carried forward indefinitely but can only be used against a maximum amount of 80% of taxable income. Anti-abuse rules may limit loss carryforwards.
Source: EY 2016 Worldwide Corporate Tax Guide
Firm contact details
Belluzzo & Partners
Hager & Partners
Studio Associato (KPMG)
Studio Tributario e Societario (Deloitte)
Valente Associati GEB Partners
WTS R&A Studio Tributario Associato