Italy's tax authorities have issued updated guidance on a voluntary flat-rate substitute tax that allows controlling entities to pay 15% on the net accounting profits of qualifying foreign subsidiaries, offering a simplified compliance alternative to standard calculations for entities with significant passive income and certified financial statements.
Italy’s tax authorities have issued updated guidance, under Protocol No. 106520 of 31 March 2026, which details the voluntary tax option that allows Italian controlling entities to pay a flat 15% substitute tax on the net accounting profits of their foreign subsidiaries instead of undergoing complex standard tax calculations, introduced at the end of 2023.
The option, which allows a controlling entity to pay a 15% substitute tax on a foreign subsidiary’s net accounting profit, simplifies compliance by avoiding the need to assess the entity’s effective tax rate.
To exercise this option, the controlled foreign entity must meet two main conditions:
- Passive income: More than one-third of the subsidiary’s total income must be classified as “passive income” (e.g., dividends, interest, royalties).
- Certified audits: The subsidiary’s financial statements must be audited and certified by authorised professional operators in the country where the subsidiary is located. These audit results must then be used by the parent company’s auditor for the annual or consolidated financial statements.
Calculation and payment
The 15% payment is calculated on the net accounting profit as shown in the financial statements, excluding consolidation adjustments, asset devaluations, and provisions for risks and charges. The amount paid is indeducible for income tax (IRES) and regional tax (IRAP). The payment must be made within the same deadlines and methods used for regular income tax.
Duration and renewal
Once chosen, the option is irrevocable and lasts for three fiscal years. After the initial three years, the option is automatically renewed for another three years unless the parent company explicitly revokes it in its tax return. The option automatically applies to any new foreign subsidiaries acquired during the three years, provided they meet the necessary passive income and audit requirements
