Italy’s Revenue Agency has published provisions for Controlled Foreign Company (CFC) substitute tax option, released as part of Legislative Decree No. 209 of 27 December 2023.
Legislative Decree No. 209 outlines measures for adopting the Pillar 2 global minimum tax under Council Directive (EU) 2022/2523 of 14 December 2022.
Effective from 1 January, 2024, the decree also included changes to the country’s CFC regime which includes a streamlined alternative for tax payments, offering a substitute tax in place of the standard 24% corporate tax rate on imputed CFC income in Italy.
This alternative allows for a 15% substitute tax on the net income before taxes for the fiscal year.
Some key aspects of the provisions are as follows:
- The option is available for a resident parent company (controlling entity) if all CFCs meet the following conditions:
- More than one-third of the income realised by the CFCs can be classified as passive income, and;
- The CFCs’ financial statements are audited and certified by professionals authorised to do so in the foreign country where they are located.
- The controlling entity exercises the option as part of the tax return and applies it from the tax period covered by the return.
- In cases of indirect control, the ultimate controlling entity exercises the option.
- The option is effective for three years and is automatically renewed at the end of this period.
- For CFCs acquired during the option effective period, the option is automatically extended without needing a new election, if the financial statements are presented.
- After the end of the three-year term, the option can be revoked by indicating it in the tax return for the fourth tax term.
- The option can be abolished before the three-year term ends in certain circumstances, such as when the control conditions are not being fulfilled or the financial statement requirements are not met.
