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Italian Government Approves Draft Legislation Including Several Measures Concerning Cross Border and other Tax Issues

On 21 April 2015, the Italian government approved draft tax reform legislation, which will be sent to parliament. The legislation includes a number measures in regard to permanent establishments (PE), foreign tax credits, deduction limits, tax rulings, and others. Key measures are summarized as follows.

Italian PEs of Foreign Entities

The legislation includes an approach to the attribution of income to PEs in Italy in line with the Authorized OECD Approach. Italian PEs and foreign headquarters will be subject to Italian transfer pricing rules and the limited PE force of attraction provisions will be abolished.

Income Exemption for Foreign PEs of Italian Companies

An election will be introduced where an Italian company may have income of foreign PEs exempted instead of applying the standard foreign tax credit rules. Once made, the election is irrevocable and must be applied for the income of all qualifying PEs of the Italian company. PEs located in black-listed jurisdictions will not qualify.

Beneficial Foreign Tax Credit Rules

The beneficial foreign tax credit rules that currently apply for income derived through a foreign PE, or a foreign subsidiary included in the international tax consolidation regime will be extended to cover any foreign income. The beneficial rules include:

  • An immediate recognition of the credit in the tax return related to the year in which the foreign income is subject to tax in Italy even if the foreign tax is not yet paid, provided it will be paid by the deadline to file the tax return for the subsequent tax period; and
  • The possibility to carry back and carry forward any excess tax credit

Foreign Tax Credits for Dividends and Capital Gains from Black-Listed Companies

Italian companies subject to full taxation on dividends or capital gains related to direct or indirect participations in a non-resident black-listed company will be eligible for a foreign tax credit for taxes paid by the black-listed company.

Relaxed Deduction Restriction for Payment to Black-Listed Companies

The requirement that proof be provided on the business substance of black listed companies in order to deduct payments for the purchase of goods and services from such companies will be abolished and a safe harbor limit will be implemented equal to the fair market value of the transaction. Amounts exceeding the safe harbor will not be deductible unless proof is provided that the transaction relates to an actual business interest and that the transaction has been carried out.

Net Interest Deduction Limit Determination Change

Italian companies will be able to include dividends received from foreign controlled subsidiaries in their EBITDA when determining the net interest deduction limit (30% of EBITDA). However, the use of foreign controlled subsidiaries' EBITDA for the determination will no longer be allowed.

Advance Tax Rulings for Companies with International Operations

The scope of advanced tax rulings for international operations will be expanded to cover the determination of asset tax bases in the case of inbound and outbound migrations. The ruling is valid for 5 years.

Advance Tax Ruling for New Investments

A new type of advanced tax ruling will be introduced that covers investments of at least EUR 30 million that will have a long-term positive impact on employment. Such rulings will cover the entire investment plan.

Cooperative Compliance Program

A new cooperative compliance program will be implemented for qualifying large taxpayers. The program will provide certain benefits such as the ability to agree on tax positions with the tax authorities before filing a return and obtain quicker tax rulings. In order to take part, taxpayers must have an adequate internal audit model in place to manage and control their tax risks.

Although the program initially only be available for large taxpayers, it will later be expanded for smaller taxpayers as well.

Horizontal Consolidation

Horizontal consolidation will be allowed for Italian resident companies with a common parent resident in a qualifying EU or EEA Member State, including PEs in Italy of companies resident in qualifying Member States

CFC Rules Exemption

The filing of an advance-ruling request for an exemption from the CFC rules will no longer be required, as the conditions for exemption may instead be proven during a tax audit.

The Statute of Limitations for Criminal Offenses

The doubling of the statute of limitations for criminal offences will not be allowed if the criminal notice is sent after the standard statute of limitations has expired (4 years following the year a return is filed or 5 years if no return filed)

Subject to approval by the Italian parliament, it is expected that the measures included in the draft legislation will generally apply from 2016.

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