Italian Business Structures and Tax

Italy applies the restrictive measures on doing business determined by the European Union (EU). Foreign investors who intend to conduct commercial activities in Italy can choose from a wide range of legal entities. There are in fact different business forms, the most common ones are described below:

(a) Personal companies without limited liability status:

  • S.n.c (Società in nome collettivo) or general partnership – this is a partnership where all partners are jointly liable for all of the firm’s debts and obligations
  • S.a.s (Società in accomandita semplice) or limited partnership – this is a partnership with two different categories of partners:
  • Silent partners (soci accomandanti) where the liability is limited to the extent of their per capita contribution; or
  • General partners (soci accomandatari) where the partners are jointly liable for all debts and obligations of the partnership.

(b) Companies with legal personality and limited liability status:

  • S.a.p.a (Società in accomandita per azioni) or limited partnership by shares – this combines some of the features of both a limited partnership and a limited liability company. It is a company in which at least one member has unlimited liability, while the liability of remaining members is limited to the extent of their share capital subscriptions;
  • S.p.a (Società per azioni) or corporation – in which the participants’ equity is represented by shares;
  • S.r.l (Società a responsabilità limitata) or limited liability company – in which the capital stock is represented by quotas and not by shares.

Generally, a foreign investor intending to conduct business in Italy incorporates a local subsidiary in the form of either a S.p.a or a S.r.l . Both these entities have legal personality and can set up a branch or a representative office.

1. Joint Stock Company – S.p.A.

The S.p.A. is the most common corporate form for medium and large corporations with significant investments. Similar to the PLC in UK, with this form of company it is possible to operate in regulated markets.

The company’s capital in an S.p.A. is divided into shares, granting, unless provided otherwise, the same rights and obligations.

The minimum statutory corporate capital required is EUR50,000, subject to higher capital requirements for “regulated” companies (for example, banks, insurance companies, among others). The corporate capital is divided into shares, which are commonly embodied in share certificates and are assignable through endorsement.

S.p.A. can be listed and issue bonds and/or hybrid financial instruments. Different rules apply depending on whether the shares are listed, widely held by the public or held by few shareholders.

For an S.p.A. with a single shareholder, the capital must be fully paid in and specific publicity requirements must be met.

A board meeting is duly constituted if the majority of directors are present, unless the articles of association provide for a larger quorum. Resolutions are passed when approved by the simple majority of those present, unless provided otherwise. Directors may not vote by proxy.

The board of statutory auditors (collegio sindacale) is compulsory for a S.p.A. it comprises three or five effective members (sindaci) and two alternates. The board of statutory auditors is duly constituted if the majority of statutory auditors are present, and resolutions are passed when approved by the absolute majority of those present.

The audit body is appointed by the shareholders’ meeting after the board of statutory auditors has prepared its report. The shareholders’ meeting sets the remuneration to be paid for the entire term of office. The term of office is three years and can be renewed no more than twice.

Shareholders’ meetings can be ordinary or extraordinary. In any case, an annual general meeting must be held within 120days of the company’s financial year-end. The business of an ordinary meeting is:

(a) Approval of the financial statements;

(b) Election of directors, members and chairman of the board of statutory auditors;

(c) Discussion of all matters relating to the performance of the company.

Resolutions of the extraordinary shareholders’ meeting are passed with a positive vote of shareholders representing more than half of the share capital.

There are three different models of governance for this type of company:

(a) The ‘ordinary’ structure is based on the shareholders’ meeting, which appoints the administrative body (board of directors or sole director) and the supervisory body (board of auditors)

(b) The ‘dual structure’ has a management board that administers the company, plus a supervisory board appointed by the shareholders’ meeting. The supervisory board may be composed of three or more members who may or may not be shareholders; one of the members must be listed on the auditors’ register. The supervisory board is responsible for appointing and removing members of the management board, and approving the financial statements.

(c) The ‘monistic’ structure involves a board of directors with administrative tasks appointed by the shareholders’ meeting, plus a supervisory management board elected internally within the board of directors.

2. Limited Liability Company – S.r.L.

This is the more common company type in Italy. The model described above generally applies also to a S.r.L, with a number of simplifications in respect of an S.p.A and a large degree of flexibility. The S.r.L.’s minimum statutory capital required is EUR10,000. It is not divided into shares but into quotas, each quota representing a certain percentage of the capital of the company. However, there are limitations which are peculiar to the S.r.L.

The S.r.L. cannot issue bonds, although it can issue debentures, under certain limitations.

For an S.r.L. with a single quota-holders, the capital must be fully paid in and specific publicity requirements must be met.

In establishing an S.r.L., any asset that can be subject to an economic evaluation may be contributed, including obligations deriving from work or services rendered.

The law expressly states that quota-holders are entitled to vote on the following:

(a) Approval of the financial statements;

(b) Appointment of directors;

(c) Appointment of statutory auditors or an auditor;

(d) Changes to the articles of association;

(e) Material change in the company’s purpose.

Quota-holders’ meetings are duly constituted if quota-holders representing at least half of the capital are present. Resolutions are passed when approved by an absolute majority. In the event of changes to the articles of association and resolutions involving a material change in the company’s purpose, resolutions are passed when approved by a numbers of quota-holders representing at least half of the capital.

Other particular features regarding S.r.Ls are listed below:

(a) Board of directors’ and quota-holders’ resolutions can be taken by consent expressed in writing, without a formal meeting being held;

(b) Directors can be appointed for an undefined period;

(c) The appointment of a controlling body or a registered auditor is mandatory when one or more of the following conditions are met:

For two subsequent financial years, the company has passed of the following three limits:

  • Total assets in the balance sheets: EUR4,400,000;
  • Earnings from sales and provisions of services: EUR8,800,000;
  • Staff employed as an average during the financial year: 50 units;

(d) The company has to draw up consolidated financial statements;

(e) The company controls another company that is subject to the accounting audit;

(f) No distinction exists between an ordinary and extraordinary shareholders’ meeting.

Recently, in addition to the ordinary model, another new type of S.r.L. has been introduced. Starting from 2013 a simplified limited liability company may be established by public act (without notarial fees). Its capital may not be lower than EUR1.00 nor higher than 9,999.99. The article of Association of this new type of S.r.L must be prepared according to a standard model and company’s quota-holders can only be individuals. Furthermore, capital contributions can be carried out only in cash, to be paid-in directly to the managing body.

3. Branch of a foreign corporation

A foreign company may set up a branch in Italy. However, since a branch is not considered an entity separate from its head office, the head office is responsible for the obligations of the branch.

A branch must be registered in Italy and a head office wishing to register a branch must supply certified copies of its resolution to establish the branch, the certificate of incorporation and bylaws as well as having the documents ‘apostilled’.

There is no minimum statutory capital requirement for a branch and procedures on establishment do not vary by type of branch.

A branch is subject to Italian bookkeeping rules in the same way as a limited liability company, i.e. it will need its own accounting books (separate from the books of the foreign head office), it will have to draw up its own annual balance sheet for tax purposes and file an income tax return. A branch must also provide a translation of the financial statements of the head office.

Although branches and subsidiaries are taxed at the same rate in Italy, most foreign companies prefer to set up a subsidiary. The branch form may be preferable; however, if losses are expected during the first years of operation and the foreign head office could use the losses to offset its own profits.

4. Representative Office

A foreign company may set up a representative office in Italy. It is required to submit a request to the local chamber of commerce and to enrol the local office in the economic and administrative register (REA).

A representative office which carries out only preparatory or auxiliary activities is not considered a ‘permanent establishment’ of the foreign company for direct tax purposes.

5. Accounting Requirements

Italian companies must prepare annual profit and loss accounts and balance sheets and should generally adopt Italian accounting principles. However, listed companies and banks are generally required to adopt International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS). A simplified form of accounts based on the same principles is available for smaller companies. The directors must prepare an annual report on all aspects of the company’s activities.

Annual reports are not required for smaller companies, which prepare short-form balance sheets if financial and economic parameters are met for two consecutive financial years. Such companies cannot adopt IAS/IFRS accounting principles.

The note to the financial statements must include details of controlled and associated companies, defined as a minimum 20.01% capital holding (10.01% if quoted on the stock exchange), with their nominal and book value.

The balance sheet must be approved by an ordinary shareholders’ meeting called within 120 days (or in special cases, 180 days) of the end of the company’s financial year. The balance sheet must detail with the Chamber of Commerce in the jurisdiction in which the company’s registered office has been established.

6. Business Taxation

Companies doing business in Italy are subject to a number of taxes, including the corporate income tax (IRES), the regional tax on productive activities (IRAP), withholding tax, VAT, registration tax, social security taxes, transaction tax and stamp duty. A surcharge on the corporate income tax is levied on certain companies and ‘non-operating’ companies are subject to a higher corporate tax rate. Italian branches of foreign companies are subject to corporate income tax and IRAP in the same way as a domestic company. There is no branch profit tax.

Italy has transfer pricing and controlled foreign company rules and rules that restrict the deduction of interest expense in certain circumstances. Italy has an extensive network of tax treaties that aim to eliminate double taxation.

Corporate Tax – IRES

Italian resident companies or Italian branches of foreign companies are subject to Italian Corporate Income Tax (Imposta sul Reddito delle Società – IRES), levied at the rate of 27.5%. The tax year for corporate income tax purposes is the financial year of the company, as determined by the law or its bye-laws or, if it is not specified, the calendar year.

IRES is usually paid as two advance payments for the current tax year, based on the tax paid for the preceding tax year. The balance payment must be paid at the time the tax return is filed. Any excess tax paid can either be carried forward or refunded.

Business expenses generally may be deducted in calculating taxable income provided they relate to activities necessary for the production of income.

Regional Tax – IRAP

Italian resident companies are also subject to a regional tax on productive activities (Imposta Regionale sulle Attività Produttive – IRAP) that is levied on the net valued of the production derived in each Italian region which varies from 4-6%. The filling of the tax return and the payment of IRAP follow the rules applicable for corporate income tax.

IRAP is not levied on foreign income.

Capital gains

Capital gains generally are treated as ordinary income and taxed at the 27.5% corporate income tax rate. If the assets have been held for at least three years, the gain may be spread in equal instalments over a period of up to five years.

Taxes on employment

Employment income earned by a non-resident employee is subject to tax in Italy only if the relevant activity is performed in Italy.

Unless excluded by a tax treaty provision, employment income paid by an Italian company, including Italian-source employment income, is subject to withholding tax, with the amount determined in accordance with the Italian progressive tax rates on personal income.

The Italian withholding agent must provide the employee with an annual salary statement by 28 February following the year to which the income relates, which certifies the amount of income tax withheld during the relevant fiscal year.

From 2015, the information included in the statement must also be submitted to the Italian tax authorities. The withholding agent is also required to submit an annual withholding agent tax return reporting the total amount of tax withheld in respect of all employees, as well as the income certified in the annual salary statement.

Unless a social security agreement applies, Italian-source employment income is subject to social security contributions. Social security must be paid by both the employer and the employee (28-30% for the employer and about 9% for the employee).

The amount due by the employee is withheld by the employer and paid on his/her behalf. The social security payment must be made by the 16th of the following month. A social security representative must be appointed if the employer is not an Italian company.

Tax resident employees

The rate of personal income tax (Imposta sul reddito delle persone fisiche – IRPEF) depends on the amount of the employee’s worldwide income.

Personal income tax is levied at rates ranging from 23% for taxable incomes up to EUR15,000 to a maximum of 43% for those over EUR75,000.

The amounts of social security contributions vary according to the employment category and the employee’s gross salary, but are approximately 40% of the employee’s gross salary.

The tax year is the calendar year (1 January – 31 December).

Resident employees who derive taxable income in excess of certain limits must file an annual tax return between 1 May and 30 June of the year following the tax year in which the income is derived.

These all are regulated by law. Other ways of establishing a business will not be dealt with here.

It is also possible to do business via a SE company (European Company) and a SCE (European Cooperative Society) in Italy but these entities are not widely used.

Non-resident employees are subject to personal income taxes only on Italian source income, subject to any applicable double tax treaty.

Non-resident employees must file an annual tax return in respect of any income arising from Italian sources, other than income subject to a final withholding tax or to a substitute tax. The procedure is the same as for resident employees.

Tax resident business

Companies are deemed to be resident in Italy if, for the greater part of the tax year, they have their legal seat, place of management or main business purpose in Italy (at least 183 days a year, 184 in a leap year). Further, according to certain residency presumptions provided by the Italian Tax Code, a foreign company is considered resident in Italy if it controls an Italian resident company and is either:

(a) Controlled by an Italian resident person (company or individual);

(b) Managed by a board of directors or other governing body composed of a majority of Italian resident persons.

Corporate income tax is levied on the worldwide income of resident companies.

Tax non-resident business

Non-resident companies are subject to tax in Italy if they realise Italian-source income.

The following types of income are deemed to be Italian-source income:

(a) Income derived from immovable property located in Italy;

(b) Capital income (among others, dividends and interest) paid by the state, by Italian residents or by Italian permanent establishment of non-resident persons;

(c) Business income realised in Italy through a permanent establishment;#

(d) Capital gains on the transfer of participations in Italian companies, except for participations in listed companies not exceeding 5% of the capital or 2% of the voting rights;

(e) Income attributed to a foreign shareholder of a company whose shareholders have opted for the consortium relief.

All income realised by companies deemed to be resident in Italy for fiscal purposes is taxed in Italy as business income, regardless of the source.

Registration tax

Registration tax is levied on deeds and contracts subject to registration in public registers or which are voluntarily registered in public registers. Rates vary, depending on the nature of the deed or contract.

Generally, written contracts executed in Italy for the transfer of property of any kind are subject to registration. The amount of tax is limited if the transaction is also subject to VAT.

7. Value Added Tax

VAT is levied at each stage of the production and distribution chain. In general, taxable supplies of goods or service within Italy that are carried out by a VAT entrepreneur, as well as intra-community acquisitions and imports of goods, fall within the scope of Italian VAT. The assessment basis is the price of the goods or services (or the cost attributable to their consumption) or the value declared as the customs value of the goods, increased by custom duties.

VAT is chargeable at the standard rate unless goods and services are zero rated, subject to a reduced rate, exempt or outside the scope of Italian VAT. The standard VAT rate is 22%. A reduced IVA rate of 4% is applied to basic food products, some social services, dailies, periodicals, books, some seeds and fertilisers. A 10% rate is charged on tourist services and some other food products. Some services are exempt from VAT (e.g. banking and financial and insurance services, gaming and gambling, the sale and lease or real estate, with some exceptions).

Other items benefit from zero-rated treatment (e.g. exports, intra-community supplies, sales of vessels and services relating to vessels if they are destined to be used on the high seas, etc.). The distinction between goods and services that are exempt from VAT and those that are subject to 0% VAT is that a seller of exempt goods is not entitled to reclaim VAT on business purchases, whereas a seller of goods and services rated at 0% is entitled to do so.

Certain transactions are specifically excluded from the scope of VAT (e.g. the sale and the contribution in kind of a going concern, the sale of land that cannot be developed, certain sales of samples, the transfer of goods as a consequence of a merger/demerger and similar transactions, etc.).

An annual VAT declaration must be submitted electronically to the Italian tax authorities by the end of February and a VAT return must be submitted electronically by the end of September, summarizing the transactions carried out during the previous year. Where the VAT return itself is submitted by the end of February, the VAT declaration is not required. Annual reporting obligations apply where an Italian taxpayer engages in transactions with an entity in a ‘black list’ country. Monthly or quarterly intra-EU listings are required in respect of transactions undertaken with EU counterparts.

VAT grouping for consolidated payments is permitted in Italy.

8. Italian income subject to withholding tax

Dividends

Dividends paid to a non-resident corporation generally are subject to a 26% withholding tax (with a potential refund to the foreign taxpayer of up to 11/26ths of the Italian withholding tax) unless the rate is reduced under a tax treaty or the dividends qualify for exemption under the EU parent-subsidiary directive.

Under the directive, the domestic withholding tax is reduced to zero if dividends are distributed to a qualifying EU corporate shareholder that has held directly at least 10% of the subsidiary for at least 12 months.

A domestic final withholding tax of 1.375% applies to dividends paid from generated since 2008, distributed to shareholders resident in the EU and qualified shareholders resident in EEA countries that allow an exchange of information. This regime actually applies (in an EU/EEA context) to corporate shareholders that do not meet the minimum participation requirement or holding for the parent-subsidiary directive to apply.

Interests

Italian-source interest paid to a non-resident generally is subject to a 26% final withholding tax, unless the rate is reduced under a tax treaty. Under Italy’s implementation of the EU interest and royalties directive, qualifying interest payments to an associated entity resident in another EU member state are exempt from withholding tax.

Interest derived from a direct/indirect investment in government bonds and similar securities is subject to a 12.5% substitute tax (domestic exemptions apply).

Under the EU savings directive, paying agents must provide information to the Italian tax authorities about the payment of savings income to individual beneficiaries resident in another EU member state. The information received is forwarded to the tax authorities of the relevant member state.

Royalties

Royalties paid to a non-resident company are subject to a 30% withholding tax, which generally is applied to 75% of the gross amount of the payment, resulting in an effective tax rate of 22.5%. The withholding tax rate may be reduced under a tax treaty or the payment may qualify for exemption under the EU interest and royalties directive.

9. Tax Losses

Losses may be carried forward and offset against corporate taxable income. However, 20% of taxable income in any year cannot be offset by tax losses brought forward and will be subject to corporate tax.

Losses incurred by a company during its first three taxable periods may be carried forward and used to fully offset taxable income but only if they relate to a new business activity; the losses may not have been incurred in the course of a merger or business contribution. The carry-back of losses is not permitted.

10. Controlled Foreign Companies

The CFC rules apply when an Italian taxpayer holds more than 50% of an entity that is tax resident in a non-white list country. In addition, the CFC rules apply to ‘related entities’ i.e. entities in which the Italian resident holds, directly or indirectly, a profit entitlement exceeding 20% (10% in the case of listed companies).

All income of the CFC is attributable in proportion to the Italian residents’ participation in the foreign entity. Where an Italian resident directly or indirectly controls a CFC, the income is subject to separate taxation at the Italian resident’s average income tax rate. The CFC income is determined by applying the Italian tax rules on the statutory result. If the Italian resident holds more than 20%, without controlling the foreign company, the income is the higher of the local foreign country statutory pre- tax income or the presumptive income based on the following asset categories: 1% of financial instruments and receivables, 4% of real estate and 15% of other fixed assets.

The regional tax on productive activities (IRAP) is not levied on foreign income. The attributed income is included in the taxable income of the Italian taxpayer for the tax year during which the foreign entity’s tax year ends.

The Italian CFC rules apply to both corporate and non-corporate entities.

A foreign tax credit is available for income tax paid by the CFC. The credit is limited to the amount of Italian tax corresponding to the foreign income.

11. Taxes administration

A company must file annual corporate income tax returns electronically within nine months following the end of the financial year for both IRES and IRAP purposes. Two advance payments of corporate income tax also are required. The first instalment is 40% of the amount, the second 60%.

An annual withholding agent return must be submitted by July of the year after the payments subject to withholding tax are made.

Penalties and interest can be imposed for tax evasion. Evasion can be considered a criminal offense.

Domestic consolidation is available to a parent company and its resident subsidiaries that are under its direct or indirect control. The control requirement is met when the participating company holds more than 50% of the share capital of another company and is entitled to more than 50% of the profits of that company.

Tax authorities in Italy are:

(a) The Ministry of Finance, the country’s highest financial authority

(b) The tax income agency (Agenzia delle entrate), responsible for ensuring compliance with the tax law. The agency is supervised by the Ministry of Finance.

Italian companies may opt to be taxed under the fiscally transparent regime. Under this regime, the Italian company is not taxed on its own income but instead the income (loss) is attributed to its corporate shareholders in proportion to their percentage participation, regardless of whether the profits of the company have been distributed.

12. Taxation of individuals

For income tax purposes, an individual is deemed to be a resident if she/he is registered at the Italian Civil Registry or is resident or domiciled in Italy under the Italian Civil Code for more than 183 days in a year (184 in a leap year). Residents are taxed on their worldwide income and are subject to taxation on income from employment, business income, income from capital and land, and other income.

Generally, they are taxed on their worldwide income at a flat rate of 26% on interest. This flat rate also applies to dividends and capital gains related to nonqualified participations.

For dividends and capital gains related to qualified participations, such as for the ordinary income, the tax rate is 49.72%.

Non-resident individuals are taxed only on Italian-source income at the 26% flat rate on capital gains related to nonqualified participations and on dividends as well as on other income from capital paid from an Italian resident company, except for interest and other income from capital derived from bank or postal accounts and from saving accounts.

Non-resident individuals are taxed at the ordinary income tax on 49.72% of capital gains related to qualified participations.

Italy has fully implemented the EU savings directive, under which EU member states have agreed to automatically exchange information about individuals who earns savings income in one member state but reside in another. The directive does not apply to person who are resident outside the EU, although the EU has concluded similar agreements with ‘key third states’.

A tax year is the calendar year. Spouses are taxed separately on their earned income. A joint tax return can be filed under certain conditions.

An individual who receives Italian-source income is required to file an annual tax return between 1 May and 30 September of the year following the tax year. Excess tax is refundable, although the taxpayer may instead opt for a tax credit that may be carried forward to offset future taxes.

Inheritance and gift tax

The rates of inheritance tax are 4%, 6% or 8%, depending on the relationship between the deceased and the beneficiaries, with exemptions up to EUR 1 million applying to bequests to close relatives.

Net Wealth Tax

Italian residents are subject to a wealth tax on financial assets located abroad at a rate of 0.2% of the assets’ market value as at the end of the year.

Real Property Tax

Property owners, whether or not resident in Italy, are liable for property tax (IMU) on buildings and land owned in Italy for their own use or as investments. The basic tax rate is 0.76% of the taxable value of the property but the competent municipality can provide for an increase or reduction of up to 0.3% on the basic rate. There is a flat rate deduction on the property tax payable on an individual’s main residence. The property tax on buildings and land also applies to buildings and land located abroad if owned by an Italian tax resident.

Since 2014, the IMU has been the primary element of the Imposta Unica Comunale (IUC), which also includes two other municipal service taxes known as TASI (tax for the services) and TARI (tax on refuse).

The material contained in this note is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

© Miller Rosenfalck LLP, January 2017

 

Please contact:

Elena Kadelburger

DD +44 (0(20 7553 6007

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