Italy: Revised transfer pricing rules

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Decree No. 50 published on 24 April 2017 was implemented on 15 June 2017. According to Article 59 of Decree Law No 50/2017, a corresponding downward adjustment leading to a lower taxable income will no longer be subject to a mutual agreement procedure (MAP), but will also be available after international audits, the results of which are shared by the cooperating countries (in accordance with rules to be defined by the Italian tax authorities) for a definitive arm’s length transfer pricing adjustment in a country with which Italy has a tax treaty enabling an appropriate exchange of information.

Italy: Tax ruling on withholding tax exemption for foreign investments in real estate

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The Tax Authority of Italy (Agenzia delle Entrate) has issued a tax ruling -Risoluzione n. 78/2017- on 27 June 2017. The ruling is related to certain foreign investment funds which wish to benefit from an exemption from withholding tax.

The tax ruling clarifies that to benefit from the withholding tax exemption measures, the foreign investment fund must satisfy the following conditions:

  • The foreign investment fund must satisfy the same substantial requirements and have the same investment purpose as an Italian investment fund
  • The foreign investment fund or its management company must be subject to supervision and for this purpose, a copy of the letter of authorization on establishing the fund, stating the law that requires such supervision will be deemed as sufficient.

Italy: Increase in percentage of taxable capital gains

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On 26 May 2017, the Italian Ministry of Economic Affairs and Finance adopted a Decree which establishes a new percentage of capital gains and losses achieved by non-resident taxpayers from the transfer of ‘qualifying’ shares in Italian companies and included in taxable income of the seller for the purposes of the Italian corporate income tax (IRES).

According to the Decree, the previous percentage of 49.72 will be increased to 58.14 and will be applicable to capital gains and share since 1 January 2018. This increase in the taxation of the shareholder is designed for the purpose of offsetting the decrease in the IRES rate (from 27.5% to 24% since fiscal year 2017) for the “investee” company.

However, for capital gains from the transfer of ‘non-qualifying’ shares, the current rate of 26% substitute tax will apply and if the seller is a resident of a white-list country, exemption will apply.

Also, if an income tax treaty applies, capital gains are usually taxable only in the seller’s country of residence and, therefore, are not subject to tax in Italy.

Italy: Multilateral Convention on BEPS signed

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Italy has signed the multilateral instrument on 7 June 2017, aiming to facilitate the implementation of tax related measures to Prevent Base Erosion and Profit Shifting (MLI).

At the signing ceremony, Italy introduced its 84 tax treaties with other jurisdictions that would be modified by the MLI. In addition to the list of treaties, Italy has also submitted a provisional list of reservations and notifications (MLI items) relating to the various provisions of the MLI. Italy has made partial or complete reservations about a number of MLI articles. The most important change, which will affect all Italian tax treaties, relates to the introduction of a principal purpose test (PPT).

Italy: Draft law ratifying DTA with Romania approved

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The Senate of Italy approved the draft law ratifying the Double Taxation Agreement (DTA) with Romania on 4 May 2017. Once in force and effective, the treaty will replace the existing DTA of 1977.

Italy: Tax guidance clarifying patent box, R&D tax credit, business assets credit issued

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The Italian Revenue on 9 March 2017 issued tax guidance, clarifying the Italian patent fund regime, the tax credit for research and development activities (R & D) and the tax credit for new operating assets.

According to resolution n. 28/E, implementation, updating, personalization, and customization of software protected by copyright will be qualified as R&D activity for purposes of Italy’s patent box. However, ancillary and supportive activities will be kept outside the definition.

On the other hand, Resolution No. 32 / E published on the same day, clarifies that R & D expenditure on research projects commissioned by third parties would be considered as eligible for the tax credit for R & D activities , if the project satisfies the requirements of Article 3, Law Decree 145/2013.

Finally according to Resolution n. 29/E,  the tax credit should be repaid within 4 years from the filing year of the tax return related to the tax year in which the investment is made.

Italy: Decree issued on urgent measures on tax matters

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The Council of Ministers of Italy enacted a Law Decree No.50 with an effort to meet the European Union (EU) demands of extra budget deficit cuts. The Decree was published in the Official Gazette on 24 April 2017 and provides urgent measures on tax matters.

The Decree excluded trademarks from the definition of intellectual property to comply with OECD Base Erosion and Profit Shifting (BEPS) Action 5 recommendations. Taxpayers wishing to take advantage of the patent box regime need to make an election by the end of the first financial year for which the regime is to apply. The election remains in force for five years-the year in which the application is filed and the following four financial years.

According to Decree the definition of normal value with the concept of arm’s length will be modified to be more aligned with Organisation for Economic Co-operation and Development (OECD) principles. The new definition formally endorses the OECD standard by providing that intercompany transactions are determined based on the conditions and prices that would have been agreed in comparable circumstances between independent parties acting at arm’s length.

Also, corresponding adjustments are now allowed for the conclusion of tax audits performed under international cooperation procedures, where the results are agreed by the tax authorities involved. Now it is also possible to obtain a corresponding adjustment through a specific application filed by an Italian taxpayer where a final adjustment has been made based on the arm’s-length principle in a country which has a double tax treaty in place with Italy that allows an acceptable level of information exchange.