Italy: Highlights on the 2020 Italian Budget Law

1. Tax incentives to attract human capital 

In order to encourage human capital to Italy, the Italian Government has amended the special tax regime, in respect of foreign workers who transfer their tax residence in Italy, starting from 2020. 

The new regime increases the exemption for Italian personal income tax from 50% to 70%, only 30% of income is liable to income tax. The exemption is 90% if inbound workers move their residency to one of the southern Italian regions. 

The new incentives is effective for five years. It can be extended for another five years with a 50% income exemption on conditions that a residential property is purchased in Italy during the year of the transfer or the previous year, or there is a minor or dependent child. 

Starting from 2020, the enhanced provisions will apply to anyone who:

• has not been tax resident in Italy for the previous two years, 

• maintains an Italian residence at least for the following two years, 

• works more than 183 days each tax period in Italy. 

2. The New Web Tax- Digital Services Tax (DST) 

With the Budget Law 2020, the new Italian web tax has been given the definite green-light to enter into force on 1 January 2020. The DST would apply at 3% rate to companies meeting contemporarily two revenue thresholds: worldwide revenue at least Euro 750 million, of which at least Euro 5.5 million from Italian-sourced qualifying digital services. 

The DST shall apply to revenues derived from the provision of qualified digital services which are divided into three categories: 

a) advertisement placed on a digital interface targeted at users of the interface; 

b) digital platforms for users to interact and possibly facilitate the direct supply of goods and services; 

c) transmission of data collected from users and generated from the use of digital interfaces. 

It’s important to note that the DST would be repealed or amended when, and if, the internationally agreed provisions on digital economy taxation became applicable in the future. 

3. Revamping of a special regime to step up Italian participations

The Budget Law 2020 opens a new window, for resident individuals and nonresident entities, to step up the tax basis of participations in unlisted Italian companies held as of 1 January 2020. 

The basis of substitute tax is calculated on the fair market value of the participation as of 1 January 2020, which needs to obtain a sworn appraisal, no later than June 30, 2020. Eligible taxpayers shall pay a 11% substitute tax on such appraised value. The substitute tax can either be paid entirely by 30 June 2020,or through three annual installments, due on June 2020, 2021 and 2022, the second and third installment are subject to an annual 3% interest charge. 

4. Tax credit for the purchase of new assets 

The law replaces the “super depreciation” and “hyper depreciation” incentives with a new tax credit for investments in new capital assets acquired and used in business activities, purchase from 1 January to 31 December 2020, or up to 30 June 2021 if the order is accepted by the seller on or before 31 December 2020 and the buyer has paid at least 20% of total price. 

As from 1 January 2020, the tax credit is calculated as follows: 

- For new industry 4.0 tangible assets (e.g. new hightech assets), 40% tax credit for investments up to Euro 2.5 million and 20% tax credit for investments between Euro 2.5 million and 10 million. 

- For new Industry 4.0 intangible assets (e.g. new software, information technology systems, platforms, etc.), the tax credit is equal to 15% of the purchase cost for investments up to Euro 700,000. 

- For general capital expenditure, the tax credit amounts to 6% of the purchase cost of new assets with a maximum investment amount of Euro 2 million. 

The new legislation excludes some assets for the tax credit, including real estate, vehicles and assets with an annual depreciation rate lower than 6.5%, buildings or construction, etc. 

5. Tax credit for Research and Development (R&D) 

The R&D tax credit has been modified and extended to apply to the expenses in certain innovation and design activities. Unlike the previous version of the tax credit which was based on the incremental expenditure compared to the average R&D expenditure incurred during 2012-2014, the extended R& D tax credit directly applies to the qualifying expenditure incurred in the relevant FY. Moreover, the minimum cost threshold (which previously set at Euro 30,000) is no longer required. 

The new R&D credit is computed as follows: 

- For R&D activities in fundamental research, Industrial research and experimental development, the tax credit is equal to 12% of the eligible expenses with a maximum annual amount of Euro 3 million.

- For activities related to the development of technological innovation, the tax credit amounts to 6% of the eligible expenses, increased to 10% for development activities related to ecological transition or Industry 4.0 digital innovation, up to an annual amount of Euro 1.5 million. 

- For design activities related to new products and samples, carried out by companies in specific sectors, the tax credit amounts to 6% eligible expenses. 

6. New VAT rules applicable in 2020 

Some changes and simplifications regarding letters of intent (LOIs) issued by habitual exporters are introduced, came into force as from 1 January 2020. 

Habitual exporters are no longer required to provide their supplier or the Customs Authorities with the LOI and the Revenue Agency receipt, nor special ledger for the LOI. 

Suppliers must check the reference number of LOI issued by Revenue Agency to verify the effective electronic filing still remains in force. However, suppliers no longer have to include in their annual VAT return details of the LOIs received. 

The suppliers have to check the correct filing of the LOI, failure to do so will be liable to a penalty ranging from 100% to 200% instead of the fixed penalty ranging from Euro 250 to Euro 2,000.

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