On 28 December 2018, the Italian Government published, in the Official Gazette, the Legislative Decree (Decree) transposing the European Union (EU) Anti-Tax Avoidance Directive (ATAD) in the Italian legislation.

The Government had previously approved the final version of the Decree on 28 November with limited changes to the draft of 8 August 2018. The limited differences between the draft version and the final version of the Decree mainly relate to the interest expense deduction rules for real estate companies and other specific cases, migration into Italy of individual businesses, and a few amendments to the Controlled Foreign Corporation (CFC) provision.

No changes were introduced with reference to the General Anti-Avoidance Rule (GAAR), as Italy’s current legislation was considered in line with the ATAD. The new set of provisions should enter into force for calendar year companies as of 1 January 2019, with the exception of the hybrid mismatch rules that should apply from 1 January 2020, and with specific reference to reverse hybrids from 1 January 2022.

Restriction on interest deduction

The Decree replaces Article 96 of the Italian Tax Code (ITC) regarding interest expense deduction rules. The new language rephrases the existing 30% earnings before interest, taxes, depreciation and amortization (EBITDA) limitation rule with some changes, one of the main changes being the reference to a tax adjusted EBITDA (and no longer to an accounting EBITDA).

The final version of the Decree abolishes a number of minor exceptions by making the ordinary 30% EBITDA rule fully applicable to real estate companies and, more in general, in the case of expenses associated with the issuance of certain debt securities.

CFCs

The new rule mainly restates the existing one (Article 167 ITC). The final version of the Decree clarifies the concept of “passive income” by including the income derived from the sale of goods to related parties and by clarifying the concept of “low-value services” by reference to Italian transfer pricing regulations.

Dividends and capital gains

The Decree also introduces some changes to the existing rules applicable to Italian companies deriving foreign dividends and capital gains from the disposal of foreign subsidiaries.

New rules on hybrid mismatches

The Decree introduces a new set of anti-hybrid mismatch rules aimed at contrasting the phenomena of “double deduction” and “deduction without inclusion” derived from conflicts in the qualification of certain arrangements or transactions between one or more tax jurisdictions.