Purchase of shares in Italian resident company
Transfers of (or agreements to transfer) shares in an Italian company are typically subject to Italian stamp duty at a fixed rate of EUR 200.
Under certain conditions, transfers of stocks may be subject to the Italian Financial Transaction Tax (“Tobin tax”) at rate of 0.2% of the consideration (0.1% if the transfer takes place in the regulated market).
Italian tax residence
A company is treated as tax resident in Italy if, for most of the tax year, it has in Italy either:
- its registered office;
- its effective place of management; or
- its ordinary management.
Under the Italy-China double tax treaty (DTT), if a company is a resident of both Italy and China, then it is deemed to be a resident of the state in which its head office or its place of effective management is situated.
Corporate income tax rate
The current rate of corporation tax in the Italy is 24% (IRES).
In addition, Regional Tax (IRAP) applies with a main rate of 3.9%.
Equity financing from Chinese resident parent company to Italian resident subsidiary
Equity financing from the Chinese resident parent company to the Italian resident subsidiary as share capital is subject to Italian stamp duty at a fixed rate of EUR 200. No stamp duty is due in the case of a cash injection into the net equity as a reserve.
Withholding tax on dividend payments to Chinese parent company
A 26% withholding tax (WHT) is generally applied on dividend payments made by an Italian company to a foreign parent company.
However, under the Italy-China DTT, dividends paid by an Italian company to a Chinese resident company may be taxed in Italy, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed 10% of their gross amount.
Debt financing from Chinese resident parent company to Italian resident subsidiary – tax deductibility of interest payments
On the basis of the interest deduction limitation rule, the Italian resident subsidiary may be entitled to Italian corporation tax deductions for interest due in respect of the loan from the Chinese resident parent company; the deduction is allowed up to the limit of the interest income recorded in the P&L, the excess being deductible up to 30% of the adjusted EBITDA.
Interest that is considered non-deductible according to the above rules may be carried forward to subsequent years without time limitation. However, the following Italian rules may result in tax relief for the interest expense being denied or limited, depending on the circumstances:
- the transfer pricing rules; and or
- the hybrid tax mismatch rules.
Debt financing from Chinese resident parent company to Italian resident subsidiary – withholding tax on interest payments
A 26% withholding tax is generally applied on interest payments made by an Italian company to a foreign parent company.
However, under the Italy-China DTT, interest paid by an Italian company to a Chinese resident company may be taxed in Italy, but if the recipient is the beneficial owner of interest the tax so charged shall not exceed 10% of their gross amount.
Intellectual property – withholding tax on royalties paid to Chinese parent company
Italian WHT of 30% applies to payments relating to royalties for the use of intellectual works, industrial patents and trademarks as well as processes, formulas and information relating to industrial, commercial or scientific experience, on the taxable amount which is equal to 75% of the royalties (30% applied on 75% of the royalties).
However, under the Italy-China DTT, royalties paid by an Italian company to a Chinese resident company may be taxed in Italy, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 10% of their gross amount.
Intellectual property – tax treatment of licence granted by Chinese parent company to Italian resident company
Italian Value Added Tax (VAT) may apply to an intellectual property licence granted to an Italian licensee, through the “reverse charge mechanism”.
Intellectual property – tax incentives
Italian tax credits may be available for research and development (R&D) activities (ranging from 5% to 10% depending on the circumstances).
Italy’s patent box regime offers an optional increased deductibility of R&D costs, for both corporate income tax and IRAP purposes.
Intra-group transactions – anti-avoidance rules including transfer pricing
Various Italian anti-avoidance rules may be relevant to intra-group transactions. These include:
- the general anti-abuse rule (GAAR); and
- the transfer pricing rules. (A penalty protection regime applies if the appropriate transfer pricing documentation is prepared).
Sales tax/VAT
Italian VAT may apply to goods and services provided and received by a business established in Italy, depending on the type of supply.
Typically, a business can offset the VAT it pays on received supplies (input tax) against the VAT it charges on its own supplies (output tax), paying or reclaiming the difference.
Certain supplies, such as some financial services and some supplies of real property under certain conditions, are exempt from VAT. Input tax is not deductible if the relevant supplies are used by the business to make exempt supplies.
The current standard rate of VAT in Italy is 22%. Depending on the nature of the supply, reduced rates of 10%, 5% and 4% may apply.
Pillar Two
The Pillar Two rules generally are effective as from 1 January 2024 (except for the Under Taxed Profits Rule (UTPR), which generally is effective as from 1 January 2025).
The Italian rules for calculating the Qualified Domestic Minimum Top-up Tax (QDMTT) are substantially in line with the OECD guidance (the Effective Tax Rate (ETR) relevant for the Italian QDMTT is calculated on a jurisdictional basis, i.e. by aggregating the relevant information for all Italian constituent entities, with some exceptions).
Use of trading losses
An Italian resident company which has incurred trading losses may use such losses to offset its income during subsequent tax years, up to an amount equal to 80% of the taxable income in each of those tax years, with no time limitation (except for the losses generated in the first three tax periods from incorporation, which can be used in their entirety with no time limitation).
Surrendering losses within group
Italian resident companies which belong to the same group and which opt for the consolidation regime may, under certain conditions, transfer tax losses incurred after joining the regime within the group, in order to offset the taxable income of the group as a fiscal unit.
Payroll taxes relating to employing staff in Italy
In general, employees of an Italian resident company who work in Italy are subject to Italian personal income tax and social security contributions on their employment income and benefits.
The Italian resident company is responsible for deducting these amounts from employees’ pay and remitting them to the Italian Tax Agency.
The Italian resident company is also liable to pay social security contributions in respect of its employees. The total social security cost is around 36% / 40% of the gross salary paid to the employee, of which roughly 30% of the relevant value is borne by the employer and the difference (approximately 10%) is withheld by the employer and is treated as a deduction from salary and shown on the employee’s payslip.
Tax issues relating to secondees sent from China to Italian resident company
In general, remuneration paid to a Chinese resident individual in respect of an employment exercised in Italy, is always taxable in Italy.
However, under the Italy-China DTT, the remuneration is instead generally taxable only in China if:
- the secondee is not present in Italy for more than half a year (183 days or more days or 184 or more days in the case of leap years);
- the secondee's remuneration is paid by, or on behalf of, a non-Italian resident employer; and
- the remuneration is not borne by a permanent establishment or a fixed base which the employer has in Italy.
In general, social security contributions are typically paid in the country in which working activity is carried out. Italy has entered into specific agreements with some non-EU countries in order to avoid the payment of social security contributions both in Italy and in the home country of the concerned employee. Therefore, a case-by-case evaluation is required, which also considers the duration of the employee’s secondment.
In the absence of such an agreement, it will be necessary to pay social security contributions in both countries.
So far, Italy has not entered into any social security agreement with China. Therefore, in the case of the secondment of Chinese employees to an Italian resident company, social security contributions will be paid both in China and in Italy. The Chinese employer will also be required to be registered at the Italian Social Security Authority (“INPS”) and the Italian Authority for Injuries at the Workplace (“INAIL”).
Tax on disposal of shares in an Italian resident company
Any capital gain which may arise from the disposal by an Italian resident company of the shares in an Italian resident company is 95% exempt for corporate income tax purposes under the participation exemption (PEX) regime, if the following conditions are all met:
- the participating interests are continuously held for at least 12 months prior to the disposal;
- the participating interests are classified as financial fixed assets in the first financial statements of the Italian resident seller following the acquisition/incorporation;
- the company which is sold carried out commercial activity from the first day of the third fiscal year before the sale, or since incorporation in the case of a newly incorporated company; and
- the company which is sold is tax resident in Italy.
When the PEX requirements are met, the capital gain realized by the Italian company which sells the shares would be taxed at 1.2% (5% x 24% corporation tax).
Under the same conditions, any capital loss is entirely non-deductible for corporate income tax purposes.
If any of the above conditions is not met, a capital gain is entirely taxable (therefore 24% corporation tax applies on 100% of the capital gain) and a capital loss is entirely deductible.
The PEX regime does not apply in the case of a disposal by a Chinese company of the shares of an Italian non-listed company. In such a case, the Italian domestic regime provides for:
- a substitutive taxation of 26% for a participating interest at least equal to 25% of the share capital (with no relief under the Italy-China DDT); and
- a full exemption for a participating interest lower than 25% of the share capital.
Contact
Sebastiano Sciliberto Executive Partner T: +39 06 893 2701 E: sebastianosciliberto@eversheds-sutherland.it
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