Italian tax reform: facilitating inbound foreign investments
Following the approval by Parliament of Law No.23 of 11 March 2014 (hereinafter “Delega Fiscale”), the Italian Government is now taking action and adopting the Legislative Decrees necessary to enforce this innovative tax reform. In fact, on 21 April 2015 the Council of Ministers has approved the drafts of three Legislative Decrees that are currently under the examination of the relevant parliamentary commissions.
The preliminary drafts cover the following topics: (i) new rules for facilitating foreign investments, (ii) electronic VAT invoices, and (iii) abuse of law and co-operative tax compliance.
For the purpose of the present Client Alert, we will focus on the new rules set forth by the preliminary draft for facilitating foreign investments (hereinafter the “Draft”), which implement Articles 1 and 12 of the Legge Delega. The Draft addresses several issues important both for foreign entities willing to invest in Italy and for resident companies that are part of multinational groups. The aim is to introduce new procedures able to create a transparent framework for cross-border transactions, in an effort to avoid tax audits/litigation in Italy. In particular, below we examine:
the new regulations governing the international ruling procedure and the implementation of a full transparency in the preliminary debates of foreign investors with the Italian Tax Authorities; and
the new tax rulings (the so-called “interpello”) for large investments in Italy (i.e. minimum €30 million).
II. New International Ruling
Article 1 of the Draft will abolish the former rules governing the current international ruling and introduce a new procedure that can be requested for a wider range of circumstances.
A. Current Framework: The International Standard Tax Ruling
According to Article 8 of Legislative Decree N. 269 of 30 September 2003 (hereinafter “Legislative Decree N. 269/2003”), the international standard ruling may be requested by entities engaged in international business willing to agree in advance with the Italian Tax Authorities:
the correctness of the transfer pricing methodology applicable to transactions carried out between related parties;
the tax treatment provided for by domestic law and by tax treaties of interest, dividends, royalties, and other proceeds paid to or received by non-resident entities; and
the preemptive evaluation of the existence of the relevant requirements in order to set up permanent establishments in Italy of non-resident entities as well as permanent establishments abroad of resident entities.
As clarified by the regulation of the Director of the Italian Tax Agency issued on 23 July 2004 (hereinafter the “Regulation”), entities engaged in international business that may apply for the international standard ruling procedure are:
resident companies that are part of an international group or that are directly or indirectly controlled by a foreign entity which is part of an intragroup transaction;
resident companies that have paid or received interest, dividends, royalties, or other proceeds from a foreign company; and
foreign companies carrying out their business activity in Italy through a permanent establishment.
In accordance with the Regulation, the relevant application must be submitted to the competent office of the Italian Inland Revenue and the procedure is concluded with the signing of an agreement between the taxpayer and the Italian Tax Authorities. Such agreement is binding for both parties for the tax period in which it is signed and for the following four tax years, unless changes occur to the facts and circumstances on which the agreement is based.
Despite the fact that Article 8 of Legislative Decree N. 269/2003 does not specifically provide for bilateral and multilateral agreements reached with foreign Tax Authorities, according to the “report on international standard ruling procedures” issued by the Italian Inland Revenue on 19 March 2013, a resident taxpayer can file a request for an agreement also involving a foreign Tax Authority (i.e. bilateral agreement) or more than one foreign Tax Authorities (i.e. multilateral agreements).
B. The Proposed New International Tax Ruling
The Legislative Decree draft clarifies and improves the current framework by revising the current provisions, with the aim to encourage and facilitate foreign investments in Italy.
The new Article 31-ter of Presidential Decree N.600 of 29 September 1973 (hereinafter “Presidential Decree N600/1973”), which will substitute Article 8 of Legislative Decree N. 269 of 30 September 2003) while confirming and detailing the above-described topics for which the new international ruling (hereinafter the “New Ruling”) may be requested, also provides for the following new areas:
the correctness of the tax value to be attributed to the company’s assets as a consequence of the transfer of its tax residence abroad (i.e. the so called “Exit Tax”);
the attribution of profits or losses to permanent establishments in Italy of non-resident entities as well as to permanent establishments abroad of resident entities.
Please consider that the list of topics provided by Article 31-ter of Presidential Decree N.600/1973 is not intended to be exhaustive.
As for the entities that may apply for the New Ruling procedure, the wording of the new regulations recalls the current framework (i.e. entities engaged in international business). The issuance of a new regulation by the Director of the Inland Revenue detailing the technical aspects of the procedure is expected once the proposed draft is approved and enters into force.
Another significant proposed change pertains to the effects of the agreement stipulated between the taxpayer and the Italian Tax Authorities. In fact, while confirming the current framework, according to which the agreement is binding for both parties for the tax period in which is signed and for the following four tax years, the proposed regulation allows the effects of the agreement to be retroactive in the following specific cases:
the effects of the agreement can be anticipated to the moment of the filing of the request for the New Ruling procedure in the event that a bilateral or multilateral agreementhas been previously reached in accordance with the mutual agreement procedure under double taxation treaties.
in the event that the facts and circumstances on which the agreement is based also occurs in the tax years during which such agreement is being negotiated, once the agreement is reached, the taxpayer can also apply its effects to the prior tax years. Should the conditions set forth by the reached agreement differ from the conduct of the taxpayer adopted during the tax years previous to the signing, the taxpayer can provide a late voluntary payment (the so-called “ravvedimento operoso”) without incurring sanctions.
III. New Tax Rulings (Interpello) for Large Investments in Italy (Article 2)
With the view of implementing more certainty on the tax aspects of large investment structures and the related transactions, the Draft containing the new rules for facilitating foreign investments introduces a new form of tax ruling for Italian and foreign entities wishing to carry out their business in Italy.
According to paragraph 1, Article 1 of the proposed draft, entities willing to carry out in Italy an investment:
§of an amount at least equal to €30 million; and
able to generate significant and lasting effects on the Italian employment system
may submit to the competent Tax Authority a request for the tax ruling procedure in order to evaluate the tax aspects of their business plan. The request must contain: the amount of the investment, the related timing and implementation procedures and the impact of such investment on the Italian tax system. The request may also include aspects such as the preemptive evaluation of the existence of abusive implications of the relevant transactions, the evaluation of the conditions for the tax consolidation regime as long as any other issue pertaining to the interpretation and/or application of Italian tax rules.
Once the taxpayer has filed the request, the Italian Inland Revenue may provide a reply (in writing and duly grounded) within 120 days. Should the Italian Inland Revenue need additional information to the ones provided in the request, such term can be extended 90 days. The absence of a reply within the above-described terms automatically implies the approval of the request by the Italian Inland Revenue (the so-called “silenzio assenso”).
The contents of the reply (provided either in writing or by tacit approval) are binding for the Italian Inland Revenue in respect of the entity that submitted the request, insofar as no changes occur in the facts and circumstances on which the request is based. In order to verify the existence of the facts and circumstances indicated in the request and upon which the approval has been granted, the Italian Inland Revenue may exercise its ordinary investigating powers.
Taxpayers that comply with the indications of the Inland Revenue can also adopt the co-operative compliance procedure, regardless of the amount of the investments and subject to the relevant conditions, provided by the Legislative Decree draft on the abuse of law and co-operative tax compliance.
No official guidance has been provided yet, although we believe that the tax ruling set forth by Article 2 mainly differs from the proposed new international tax ruling as the latter is concluded with the signing of an agreement reached following a negotiation phase between the taxpayer and the Italian Inland Revenue. Moreover, the new tax ruling for large investments does not seem to require foreign entities to carry out their business activity in Italy through a permanent establishment in order to submit the request.
According to the explanatory report of the Draft, the proposed legislation represents another significant step towards the building of an innovative tax system aimed at avoiding as much as possible a direct control on the taxpayers conducts, with the view of encouraging new forms of communication and co-operation with the Tax Authorities.
The Italian Tax Agency will have to provide guidance and operating instructions after the final approval of the legislation provisions.
This new system should start to be operative by year end.