All income earned in Italy, whether by a joint-stock company (S.p.A.), a limited liability company (S.r.l.) or a permanent establishment in Italy of a nonresident company, is subject to the following income taxes:

• IRES – “Corporate Income Tax.”
• IRAP – “Regional Tax on Productive Activities.”

IRES is the main corporate tax and is applied to the net income of resident companies, for the purposes of Italian tax law. On the other hand, nonresident companies are those that, for most of the tax period, have neither their registered office, their administrative headquarters or their main business in Italy.

As of January 1, 2008, the rate was set equal to 24%. This rate is applied to the gross profit from the income statement adjusted according to tax regulations.

In general, costs are allowed as deductions if and to the extent that they are recognized in the income statement and form part of the tax base in the tax period in which such an allocation is made.

Dividends distributed by corporations with legal personality are 95 percent untaxed, with the exception of dividends distributed by companies residing in countries with a preferential tax regime. Companies may also be in the process of liquidation. As for the taxation of the remaining 5 percent of the distributed dividends, the costs related to the management of the shares are fully deductible.

Under certain conditions, 95 percent of the capital gain from t h e transfer of shareholdings by corporations is not subject to taxation. No deductions are allowed for capital losses or expenses.

As a general principle, all costs and expenses related to business activities are deductible (e.g., capital losses, extraordinary losses, labor expenses, royalties), with some limitations with special reference for interest paid, income taxes, auto expenses, and donations.

Interest expense net of interest income is deductible up to 30 percent of Gross Operating Income (EBITDA) without considering leases and capitalized interest.

The reform of the tax system also does not allow the deduction of interest related to debt incurred for the purchase of equity investments unless it is within a group.

Thus, the new legislation plans to discourage the purchase of equity investments, which benefit from the participation exemption treatment, only through debt capital.

This system is not applied if the shares belong to those companies that have opted for the tax consolidation system or the tax transparency system.

Tax losses from the first three years of operation can be offset against taxable income while tax losses incurred from the fourth year of operation onward can be offset up to 80 percent of each year’s earnings.

AMENDMENTS

Italian tax law allows companies to deduct portions of fixed costs from the tax base according to specific depreciation rates, regardless of their allocation to the income statement. The starting point for determining deductible amounts is the historical cost of the asset; the sum of deductible amounts year by year cannot exceed the historical value of the asset.

The Italian tax system mainly allows two types of depreciation:

• Ordinary: the maximum amount deductible each fiscal year can be determined by applying specific coefficients that should reflect t h e actual obsolescence of the asset, as determined by the Ministry. Importantly, with regard to the first year of use of the asset, the depreciation rate should be reduced by half.
• Accelerated: for tangible fixed assets, the ordinary depreciation rate can be increased up to to double(“accelerated depreciation”) during the first year of use and for the following two years. For second – hand tangible assets, the benefit is deductible only in the first year of asset use.

The benefit can be claimed regardless of whether it is first charged to the income statement if the accelerated depreciation does not reflect the actual depreciation of the assets, according to ordinary accounting rules.

IRAP is a tax that has been introduced into the Italian tax system since the year 1998. Since 2008, the IRAP tax base is derived directly from the items in the Profit and Loss Account that is filed with the Companies Register.

Its main feature is the non-deductibility of certain costs incurred by a company, for example, finance charges and personnel expenses. The basic IRAP rate is set at 3.9 percent. The rate is increased by 1 percent for holding companies, financial institutions and insurance companies and in some regions of Italy.

Personnel costs for hiring young people up to the age of 35, the unemployed, young women and in southern Italian regions are partly deductible for IRAP purposes.

Worldwide tax consolidation is an optional system, irrevocable for at least five fiscal years of the parent company, which is available to groups of companies where the requirement of majority control is met.

ESSENTIAL REQUIREMENTS

• Italian residence for the parent company;
• Identical tax period, unless otherwise provided by foreign law;
• The accounts of the parent company and subsidiaries are audited;
• Mandatory consolidation of all foreign branches (all i n , all out line);
• Declaration by the nonresident subsidiaries of their consent to the audit of the accounts and their commitment to give all necessary cooperation in determining the tax base and to comply with the requests of the Italian tax authorities

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

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

• the principle of normal value of goods and services exchanged between consolidated residents and nonresident companies is maintained;
• taxes paid abroad are recognized so as to avoid the effects of double taxation juridical;
• income from abroad must be prevalent in consolidated taxable income.

In a nutshell, the transparency regime implies that the income produced by the company is taxed in the hand soft he shareholders rather than in the hands of the company itself.

Italy has concluded a number of income treaties in order to avoid double taxation. These treaties can change the regime for such items as residency, tax credits and taxation of nonresidents. In addition, the treaties generally provide a more favorable taxation regime for nonresidents than the treatment under Italian law.

Withholding taxes on profits received by Italian resident companies consist of advance payments of income tax payable by beneficiaries. Profits subject to withholding taxes will then be subjected to the beneficiary’s tax base after deducting withholding taxes f r om gross income tax.

In Italy there are three types of withholding taxes applicable at source on certain payments.

1. Withholding taxes on dividends
   In principle, dividends paid to Italian residents with nonqualified holdings in Italian companies (less than 25 percent) are subject to a 26 percent withholding tax by way of definitive.
   Dividends from qualified holdings in Italian companies, as well as dividends paid to Italian resident companies, Italian permanent establishments of nonresident companies are not subject to withholding tax. Dividends paid to nonresident companies with holdings (qualified and nonqualified) in Italian companies are subject to a final 26 percent withholding tax. Reduced rates are possible under tax treaties. Withholding tax is not due, in accordance with the EU Parent-Subsidiary Directive, for dividends paid by Italian resident companies to the EU parent company. The benefit is conditional on the fact that the
   current.
2. Withholding on interest
   Interest from bank accounts, deposits and bonds is subject to withholding tax at rates of 26 percent or 12.5 percent.
   Withholding tax on interest is final for individuals, while for interest received by an Italian company it constitutes an advance payment o f income tax payable by beneficiaries. As such, the gross interest must be included in the beneficiary’s tax base and the withholding tax deducted from total taxable income.
   For non-Italian residents who receive interest from bank and deposit accounts through a qualified holding, no withholding is due.
   For nonresidents who receive interest on loans, through a nonqualified holding, the withholding tax is 26% and is final. The withholding tax rate is set at 26% for beneficiaries located in countries with privileged tax regimes.
3. Withholding tax on royalties
   Royalties paid to Italian resident companies or to permanent establishments of nonresident companies are not subject to withholding tax.
   Royalty payments for nonresidents are subject to a final withholding tax of 30 percent. Under certain conditions, the tax base may receive a 25% deduction. As mentioned above, the withholding tax rate, if due, may be reduced according to the agreement concluded by Italy with the foreign country. The EU Interest and Royalty Directive, which does not provide for withholding taxes between companies resident in different EU member states.