The principal forms of taxation that apply to corporate are the following:

• Corporate income tax (IRES);
• Local Tax on Productive Activities (IRAP - “Imposta Regionale sulle Attività Produttive”).
• VAT;
• Registration Tax,
• Local Tax on Properties (IMU).

All incomes earned in Italy, whether by a corporation (S.p.A.), a limited liability company (S.r.l.), or a permanent establishment in Italy of a non-resident company, is subject to the following income taxes.

IRES is the main corporate tax, and it applies to the net income of resident companies; for Italian tax law purposes, non-resident companies and entities are those which, for most of the tax period, do not have either their registered office, their administrative headquarters or their principal business in Italy.

The tax rate has been fixed equal to 24%. It is applied on the gross profit resulting from the income statement which is adjusted according to the tax law. Generally speaking, costs are allowed as a deduction if, and to the extent that, they are entered in the profit and loss account and they form part of the taxable base during the taxable period in which such an imputation is made.

Dividends distributed by companies with legal status are 95% not subject to taxation, with the exception of dividends distributed by companies residing in Countries with a preferential tax regime. The companies may also be 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.

Participation exemption. Under certain conditions, 95% of gain on the transfer of shareholdings by the companies is not subject to the taxation. As a consequence no deductions are allowed for capital losses or expenses.

DEDUCTION
As a general principle, all costs and expenses relating to business activities are deductible (e.g. capital losses, extraordinary losses, labour expenses, royalties), with some limitations for interest paid, income taxes, car expenses and charitable contributions.

The tax reform system also does not allow deduction of the debit interests relating to the loans raised for participations purchase. In such way, the new legislation plans to discourage the purchase of participations, that benefits of the participation exemption treatment, only through the debit capital. The no-deduction pro-rata does not apply to the participations in companies, which are in a financial groups or which have chosen the “transparency taxation”.
Interest expense net of interest income are deductible within the limit of 30% of the Gross Operating Income (EBITDA) without considering the lease and capitalized interest.

Tax losses of the first three years of activity can be offset against the taxable income and tax losses incurred in the fourth year of operation can be cleared in the limit of 80% of earnings each year.

Three consecutive years of tax losses determine the status of non-operating company with the consequence of an increased taxation of 10.5% and the inability to use the tax credit to pay direct taxes.

DEPRECIATION AND AMORTIZATION

Italian tax law allows companies to deduct portions of fixed costs from the taxable base according to specific depreciation rates regardless of their allocation to the profit and loss account.

The starting point to determine the deductible amounts is the asset’s historical cost, the sum of the amounts deductible year by year can not exceed the asset’s historical value.

Italian tax system mainly allows two kind of depreciation:

• Ordinary: the maximum amount deductible every fiscal year can be determined by applying specific coefficients that should reflect the effective obsolescence of the asset, introduced by the Ministry. It is important to highlight that with regards to the year of first utilization of the asset the depreciation rate must be reduced by a half.
• Accelerated: for tangible fixed assets, the ordinary depreciation rate is increasable up to twice (“ammortamento anticipato”) during the year of first utilization and the subsequent two years. For second-hand tangible assets, the benefit is claimable only in the first year of utilization of the assets.

One may claim the benefit regardless of its prior imputation to the profit and loss account if the accelerated depreciation does not reflect the actual depreciation of the assets, according to the ordinary accounting rules.

IRAP (Imposta Regionale sulle Attività Produttive)

IRAP is a tax that was introduced in the Italian tax system as of year 1998.

Its main characteristic is the non deductibility of some costs sustained by a company, for example the financial expenses and the personnel costs. The IRAP tax rate is fixed equal to 3,9%. The percentage is incremented of 1% for holding companies, financial institutions and insurance companies.
Since 2008, the tax base is derived directly from the income statement items that are deposited in the Business Register.

Personnel costs for the recruitment of young people under 35 years, unemployed, young women and in regions of southern Italy are partially deductible for IRAP purposes.

WORLDWIDE TAXATION

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 recognized 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.

TRANSPARENCY ON LLC

The regime of transparency requires, in a nutshell, it is subject totaxation on income earned by the company to shareholders rather than head to the company.

In the case of shareholders not resident in Italy the tax law allows the application of transparency for tax purposes only in absence of the application of withholding tax on any dividends distributed.

In other words, the rule is that the transparent taxation is feasible only in the presence of foreign shareholders in respect of which the scheme applies the EU Parent-Subsidiary Directive.

TAX TREATIES TO AVOID DOUBLE TAXATION

Italy has concluded a number of income tax treaties in order to avoid double taxation. These treaties may alter the rules regarding such items as residence, tax credits and the taxation of non-residents.
The treaties generally provide for more favourable taxation of Italian non-residents than the treatment provided under local Italian law. The provisions of each applicable treaty should be consulted for the manner in which tax relief is granted.

Reduced rates are possible under the tax treaties.

Witholding Tax

Withholding taxes on profits received by Italian residents corporations consist of the advanced payment of income tax due by the recipients. One must include profits subject to withholding taxes in the recipient’s taxable base, and deduct the withholding taxes from gross income tax.

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

1) Dividend Witholding Tax

In principle, dividends paid to Italian residents individuals from non-substantial participations in Italian corporations (less than 25%) are subject to a 26 % final withholding tax. On the other hand dividends from substantial participations in Italian corporations are not subject to withholding tax.

Dividends paid to Italian resident corporations, or to Italian permanent establishment of non-resident corporations, are not subject to withholding tax.

Dividends paid to non-resident corporations without, or not through, an Italian permanent establishment, from substantial and non-substantial participations in Italian corporations are subject to a 26 % final withholding tax.

Reduced rates are possible under the tax treaties.

The withholding tax is not due, in line with the EU Parent-Subsidiary Directive, for dividends paid by Italian resident corporations to its parent company. The benefit is subject the parent’s current ownership dating back at least one year, of no less than 25 % of the Italian subsidiary’s share capital.

2) Witholding Tax on Interests

Interest from bank accounts, deposits and bonds are subject to withholding tax at rates of 27% or 20%. The withholding tax on this interest is final for individuals while interest received by Italian corporations consist of an advanced payment of income tax due by the recipients. As such, gross interest must be included in the recipient’s tax base and the withholding tax deducted from the aggregate taxable income.

If non-Italian residents receive interest from bank accounts and deposits through an Italian permanent establishment, no withholding tax is due.

If non-residents receive interest from loans, not through an Italian permanent establishment, the withholding tax at 26% is a final payment of the tax. The withholding tax rate is set at 26% for recipients, i.e., countries granting privileged tax regimes.

The withholding tax rate may be reduced under any tax treaties Italy has concluded with various foreign countries.

Italy has fully implemented the provisions of the EU Directive on Interest and Royalty payments. This abolished withholding taxes on payments of certain interest between corporations resident in different EU member states starting from 2006.

3) Witholding Tax on Royalties

Royalties paid to Italian resident corporations or to Italian permanent establishments of non-resident corporations are not subject to withholding tax.

Royalty payments to non-Italian residents are subject to a 30% final withholding tax. Under certain conditions, the tax base may receive a 25% flat deduction.

As said before the withholding tax rate, if due, can be reduced under any tax treaties Italy has concluded with various foreign countries.

And again Italy has fully implemented the provisions of the EU Directive on Interest and Royalty payments. This abolished withholding taxes on payments of certain interest between corporations resident in different EU member states starting from 2006.