PG & Partners

As from 1st January 2004, the income derived by companies and entities is subject in Italy to a new tax called Ires (Corporate Income Tax) based on the prevailing European tax model.

The new tax will replace Irpeg, in force until 2003.

Ires is levied primarily on the income derived in the ordinary business activity, and excludes from taxation extraordinary operations such as company reorganisations or the sale of shares.

Corporate income tax: taxable persons

The following companies and entities which are resident in the territory of the State are subject to Ires.

Companies or corporations
Joint stock companies
Limited partnerships with share capital
Limited liability companies
Cooperative societies
Mutual insurance companies
Public and private commercial entities
Public and private non-commercial entities

All kinds of companies and bodies not resident in the territory of the State are also subject to tax.

The following are excluded:

State and administrative bodies;
Regions;
Provinces;
Municipalities;
Consortia of municipalities in mountain areas;
Consortia among local authorities;
Associations and bodies managing general public lands.

Corporate income tax: rate and taxable base

The rate is determined as 27,5% of the taxable income (taxable base).

It is applied on the difference between income considered as taxable and costs allowed as a deduction, derived within a certain period of time called taxable period. Generally speaking, costs are allowed as a deduction if, and to the extent that, they are entered in the profit and loss account and thy form part of the taxable base during the taxable period in which such an imputation is made.

Notwithstanding this general principle, the following costs are admitted in deduction:

costs also not included in the profit and loss statement of the accounting period in question, on condition that they have been entered in the profit and loss account of a previous financial year, and that their deduction has been postponed under the provisions included in Legislative decree no. 344 dated 12th December 2003;
costs which cannot be entered in the profit and loss account, but are deductible according to provisions of law.

Corporate income tax: tax treatment of capital gains

Capital gains realized from a participation in resident or non-resident companies do not form part of the taxable base, on condition that:

the participation be classified as financial assets in the first financial statement closed during the period of ownership;
the subsidiary actually carries on a regular business activity;
the subsidiary is not resident in a territory with a preferential tax regime or it be demonstrated that no tax benefits were obtained from the shares;
the participation is held uninterruptedly from the first day of the twelfth month preceding the sale.

Corporate income tax: taxation system for dividends

Ninety-five percent of the dividends distributed by companies with legal status do not form part of the income for the accounting period, with the exception of dividends distributed by companies residing in Countries with a preferential tax regime. The companies may also be non-residents and in the winding-up phase.

As regards the taxation of the remaining 5% of the distributed dividends, the costs related to managing the participation shares are totally deductible.

The dividends distributed by companies to shareholders who are individuals with a participation held in a business capacity are subject to personal income tax on up to 40% of their amount, on condition that the dividends are not distributed by companies resident in Countries with a preferential tax regime, in which case instead they would entirely form part of the taxable income.

If the shares are held by individual shareholders in a non-business activity, the form of taxation will differ according to whether the shares are considered as qualified or non-qualified:

non-qualified shares: 12.50% rate;
qualified shares: form part of the taxable income up to 40% of their sum.

Corporate income tax: limitation on deductibility of financing cost.

Expense interests are deductible according to a specific calculation system. They are totally deductible until the amount of the active interests. The amount that exceeds the total of the active interests is deductible until the 30% of EBITDA. The eventual exceedence remains not deductible.

Just the following companies are not subject to the above limits:

banks;
mutual insurance companies;
specific cases of companies dedicates to manage public services.

Corporate income tax: opting for the tax transparency system

Companies with share capital may opt for the tax transparency system, already in force for partnerships. According to this system, the income of a company is not taxed in the hands of the company itself, but the profits or losses are entered in the name of each shareholder proportionally to its share, regardless of whether profits are distributed, on condition that:

the shareholders are in their turn resident companies with share capital;
the shareholders are non-resident companies with share capital and the profits distributed to them are not subject to any tax;
the participation of each shareholder is not less than 10% and not more than 50%;
the subsidiary and each shareholder are jointly and severally liable for the payment of taxes, sanctions, and interests.

The option is irrevocable for three accounting periods of the subsidiary, it must be exercised by all the companies and communicated to the tax authority by the first of the three accounting periods, in accordance with the procedures established in a special provision of the Director of the Revenue Agency.

The income of each shareholder is entered in the ongoing accounting period on the date of closure of the balance of the subsidiary.

Advance withholding tax on the income of the subsidiary, the related tax credits, and the advance payments are deducted from the tax due by the individual shareholders, according to the percentage of profit sharing of each one.

Tax losses of the subsidiary relating to periods in which the option is effective are entered in the name of the shareholders proportionally to the respective shareholding and within the limits of their individual share of the accounting net equity of the subsidiary.

The option is valid also in the event of the entry of new shareholders with the essential requirements. In the first accounting period also the subsidiary must pay advance withholding tax.

If the option is no longer effective:

it will be considered as terminated as from the beginning of the accounting period of the subsidiary;
both the shareholders and the subsidiary must pay any supplementary sums integrating the advance payments made.

An analogous measure is provided for also in the case of limited liability companies with a limited ownership exclusively made up of individuals that fall within the scope of sector studies, with not more than 10 or 20 shareholders, respectively, for limited liability companies and cooperative societies.

Corporate income tax: domestic tax consolidation system

The domestic consolidation system for tax purposes is an optional system, irrevocable for at least three years, which is available to company groups where the majority control requirement is met.

Essential requirements:

residence of all companies in Italy;
identical taxable period;
joint exercise of the option within 6 months after the start of the consolidation period;
each controlled company must declare its elected domicile to be the one of the controlling company or entity.

Companies belonging to the group benefiting from Ires rate reductions cannot exercise this optino.

The system consists in the consolidation of the taxable incomes (in other words the determination of one single taxable base corresponding to the algebraic sum of the taxable income of each of the companies belonging to the group) with the following possible consequences:

optional tax neutrality for some transactions between companies in the same group;
expected payments in the event of the transfer of negative taxable sums;
total exclusion of the dividends distributed by the companies of the group from the taxable income.

Entry and exit from the consolidation system imply, among other things:

a limit to the use of tax losses previously laid aside in the event of entry and regulations on those obtained by the group in the event of exit;
realignment of the goods transferred in tax neutrality, to the values for tax purposes before entry in the group;
increase in the income of the controlling entity, for the financial charges deducted by effect of the pro-rata calculation system, or for the other charges deducted on the basis of the table presented by the controlled company.

If the control requirement is not present, both the controlling company and the controlled company must integrate the advance payments made.

The executive provisions are established by decree of the Ministry of Economy and Finance.

Corporate income tax: worldwide tax consolidation system

The worldwide tax consolidation system is an optional system, irrevocable for at least five of the financial years of the controlling company, which is available to company groups where the majority control requirement is met.

Essential requirements:

Italian residence for the controlling company;
identical taxable period, unless allowed by the foreign legislation;
the accounts of the controlling company and of the controlled companies are audited;
compulsory consolidation of all foreign subsidiaries (all in, all out principle);
statement by the non-resident controlled companies of their consent to audit the accounts and of their commitment to give all the necessary collaboration in determining the taxable base and to fulfil the requests of the Italian tax authority.

The system consists in the consolidation of the percentage of taxable income, obtained by each of the companies belonging to the group, corresponding to the participation owned directly or indirectly.

The same principles as those formulated for the domestic tax consolidation system apply, with the following exceptions:

the principle of open market value for goods and services exchanged between consolidated resident and non-resident companies is maintained;
taxes paid abroad are recognised in such a way as to avoid the effects of economic and juridical double taxation in their deduction from the consolidated tax;
the income derived abroad must be prevailing in the consolidated taxable income.

		Corporate income tax summary
		As from 1st January 2004, the income derived by companies and entities is subject in Italy to a new tax called Ires (Corporate Income Tax) based on the prevailing European tax model. The new tax will replace Irpeg, in force until 2003. Ires is levied primarily on the income derived in the ordinary business activity, and excludes from taxation extraordinary operations such as company reorganisations or the sale of shares. Corporate income tax: taxable persons The following companies and entities which are resident in the territory of the State are subject to Ires. Companies or corporations Joint stock companies Limited partnerships with share capital Limited liability companies Cooperative societies Mutual insurance companies Public and private commercial entities Public and private non-commercial entities All kinds of companies and bodies not resident in the territory of the State are also subject to tax. The following are excluded: State and administrative bodies; Regions; Provinces; Municipalities; Consortia of municipalities in mountain areas; Consortia among local authorities; Associations and bodies managing general public lands. Corporate income tax: rate and taxable base The rate is determined as 27,5% of the taxable income (taxable base). It is applied on the difference between income considered as taxable and costs allowed as a deduction, derived within a certain period of time called taxable period. Generally speaking, costs are allowed as a deduction if, and to the extent that, they are entered in the profit and loss account and thy form part of the taxable base during the taxable period in which such an imputation is made. Notwithstanding this general principle, the following costs are admitted in deduction: costs also not included in the profit and loss statement of the accounting period in question, on condition that they have been entered in the profit and loss account of a previous financial year, and that their deduction has been postponed under the provisions included in Legislative decree no. 344 dated 12th December 2003; costs which cannot be entered in the profit and loss account, but are deductible according to provisions of law. Corporate income tax: tax treatment of capital gains Capital gains realized from a participation in resident or non-resident companies do not form part of the taxable base, on condition that: the participation be classified as financial assets in the first financial statement closed during the period of ownership; the subsidiary actually carries on a regular business activity; the subsidiary is not resident in a territory with a preferential tax regime or it be demonstrated that no tax benefits were obtained from the shares; the participation is held uninterruptedly from the first day of the twelfth month preceding the sale. Corporate income tax: taxation system for dividends Ninety-five percent of the dividends distributed by companies with legal status do not form part of the income for the accounting period, with the exception of dividends distributed by companies residing in Countries with a preferential tax regime. The companies may also be non-residents and in the winding-up phase. As regards the taxation of the remaining 5% of the distributed dividends, the costs related to managing the participation shares are totally deductible. The dividends distributed by companies to shareholders who are individuals with a participation held in a business capacity are subject to personal income tax on up to 40% of their amount, on condition that the dividends are not distributed by companies resident in Countries with a preferential tax regime, in which case instead they would entirely form part of the taxable income. If the shares are held by individual shareholders in a non-business activity, the form of taxation will differ according to whether the shares are considered as qualified or non-qualified: non-qualified shares: 12.50% rate; qualified shares: form part of the taxable income up to 40% of their sum. Corporate income tax: limitation on deductibility of financing cost. Expense interests are deductible according to a specific calculation system. They are totally deductible until the amount of the active interests. The amount that exceeds the total of the active interests is deductible until the 30% of EBITDA. The eventual exceedence remains not deductible. Just the following companies are not subject to the above limits: banks; mutual insurance companies; specific cases of companies dedicates to manage public services. Corporate income tax: opting for the tax transparency system Companies with share capital may opt for the tax transparency system, already in force for partnerships. According to this system, the income of a company is not taxed in the hands of the company itself, but the profits or losses are entered in the name of each shareholder proportionally to its share, regardless of whether profits are distributed, on condition that: the shareholders are in their turn resident companies with share capital; the shareholders are non-resident companies with share capital and the profits distributed to them are not subject to any tax; the participation of each shareholder is not less than 10% and not more than 50%; the subsidiary and each shareholder are jointly and severally liable for the payment of taxes, sanctions, and interests. The option is irrevocable for three accounting periods of the subsidiary, it must be exercised by all the companies and communicated to the tax authority by the first of the three accounting periods, in accordance with the procedures established in a special provision of the Director of the Revenue Agency. The income of each shareholder is entered in the ongoing accounting period on the date of closure of the balance of the subsidiary. Advance withholding tax on the income of the subsidiary, the related tax credits, and the advance payments are deducted from the tax due by the individual shareholders, according to the percentage of profit sharing of each one. Tax losses of the subsidiary relating to periods in which the option is effective are entered in the name of the shareholders proportionally to the respective shareholding and within the limits of their individual share of the accounting net equity of the subsidiary. The option is valid also in the event of the entry of new shareholders with the essential requirements. In the first accounting period also the subsidiary must pay advance withholding tax. If the option is no longer effective: it will be considered as terminated as from the beginning of the accounting period of the subsidiary; both the shareholders and the subsidiary must pay any supplementary sums integrating the advance payments made. An analogous measure is provided for also in the case of limited liability companies with a limited ownership exclusively made up of individuals that fall within the scope of sector studies, with not more than 10 or 20 shareholders, respectively, for limited liability companies and cooperative societies. Corporate income tax: domestic tax consolidation system The domestic consolidation system for tax purposes is an optional system, irrevocable for at least three years, which is available to company groups where the majority control requirement is met. Essential requirements: residence of all companies in Italy; identical taxable period; joint exercise of the option within 6 months after the start of the consolidation period; each controlled company must declare its elected domicile to be the one of the controlling company or entity. Companies belonging to the group benefiting from Ires rate reductions cannot exercise this optino. The system consists in the consolidation of the taxable incomes (in other words the determination of one single taxable base corresponding to the algebraic sum of the taxable income of each of the companies belonging to the group) with the following possible consequences: optional tax neutrality for some transactions between companies in the same group; expected payments in the event of the transfer of negative taxable sums; total exclusion of the dividends distributed by the companies of the group from the taxable income. Entry and exit from the consolidation system imply, among other things: a limit to the use of tax losses previously laid aside in the event of entry and regulations on those obtained by the group in the event of exit; realignment of the goods transferred in tax neutrality, to the values for tax purposes before entry in the group; increase in the income of the controlling entity, for the financial charges deducted by effect of the pro-rata calculation system, or for the other charges deducted on the basis of the table presented by the controlled company. If the control requirement is not present, both the controlling company and the controlled company must integrate the advance payments made. The executive provisions are established by decree of the Ministry of Economy and Finance. Corporate income tax: worldwide tax consolidation system The worldwide tax consolidation system is an optional system, irrevocable for at least five of the financial years of the controlling company, which is available to company groups where the majority control requirement is met. Essential requirements: Italian residence for the controlling company; identical taxable period, unless allowed by the foreign legislation; the accounts of the controlling company and of the controlled companies are audited; compulsory consolidation of all foreign subsidiaries (all in, all out principle); statement by the non-resident controlled companies of their consent to audit the accounts and of their commitment to give all the necessary collaboration in determining the taxable base and to fulfil the requests of the Italian tax authority. The system consists in the consolidation of the percentage of taxable income, obtained by each of the companies belonging to the group, corresponding to the participation owned directly or indirectly. The same principles as those formulated for the domestic tax consolidation system apply, with the following exceptions: the principle of open market value for goods and services exchanged between consolidated resident and non-resident companies is maintained; taxes paid abroad are recognised in such a way as to avoid the effects of economic and juridical double taxation in their deduction from the consolidated tax; the income derived abroad must be prevailing in the consolidated taxable income.