On 19 December 2023, Italy’s Council of Ministers passed a legislative decree to enforce the tax reforms related to international taxation. This includes implementing the Pillar 2 global minimum tax under Council Directive (EU) 2022/2523 of 14 December 2022. This legislative decree also amends Italy’s controlled foreign company (CFC) regime, which was enacted on 1 January 2024.
As per the existing CFC regime, a requirement for the imputation of CFC income is that the CFC is subject to low taxation. This refers to a scenario where the effective tax rate on the CFC is less than 50% of the effective Italian tax rate that would apply if the CFC were a resident of Italy. To eliminate complexity in determining a CFC’s taxable income and streamline the process, the legislative decree proposes a 15% effective minimum tax rate, which aligns with the Pillar 2 global minimum tax rate.
If the effective tax rate falls below 15%, the Italian CFC can still avoid imputing CFC income by demonstrating that the CFC is subject to a tax burden of at least 50% of what the effective Italian tax would have been if the CFC were a resident of Italy.
The legislative decree also proposed an alternative system of paying a substitute tax instead of a corporate tax rate of 24% on the imputed CFC income in Italy. Under the decree, taxpayers can pay a substitute tax of 15% of their net income before taxes for the fiscal year. This option can be used for three years and applies to all CFCs.
