Italy: Italian 2023 Budget Law

- Limited deduction of costs incurred with black-listed jurisdictions

The Budget Law contains a provision that limits the deduction of expenses and other negative components arising from transactions carried out with enterprises resident or located in non-cooperative jurisdictions for tax purposes. Such limit is represented by the so-called "normal value" of the relevant goods and services traded. It states that any cost in excess of the "normal value" should be disallowed.

The conditions for cost deductibility – Full deduction should, in any case, be recognized for Italian companies providing evidence that the relevant transactions respond to a real economic interest and that they have been concretely executed.

CFC regulation remains outside the novelty - Such limitation should not apply to transactions with subsidiaries qualifying under the Italian provision on Controlled Foreign Corporations.

- Transition tax on undistributed profits from low-tax subsidiaries

The Law contains a provision allowing for a voluntary one-off reduced tax on undistributed earnings of foreign subsidiaries subject to low-tax regimes.

The new rule provides for a 9% transition tax (30% for individual entrepreneurs) computed on qualifying undistributed earnings. The payment of such tax makes the relevant earnings be treated as if they had been repatriated (i.e., they will not be taxed upon actual collection). Once a distribution occurs, an ordering rule applies according to which earnings that were subject to the transition tax are deemed to be received first.

The 9% transition tax (and the 30% for individuals) also allows taxpayers to step-up their basis in the relevant participation up to the limit of any sales price by an amount equal to the earnings on which the transition tax was paid. Accordingly, the basis will be reduced to the extent the proceeds are distributed.

As an alternative to the mentioned 9% tax, companies with control shareholdings may avail of a further reduced 6% transition tax under several conditions. Either the 9% (or 30% for qualifying individuals) and the 6% transition tax elections should be available only with reference to qualifying earnings.

- Step-up of Italian participations held by nonresident entities

The Law revamps a special one-off opportunity for nonresident entities to elect a tax step up of participations in Italian companies held at least from 1 January 2023 through the payment of a 16% substitute tax. The step-up may also be achieved with reference to qualifying Italian land and is now extended to Italian shares traded on regulated markets or multilateral trading systems.

The basis of the 16% substitute tax is represented by the value of the participations (or land) as of 1 January 2023. The relevant basis needs to be certified by a sworn appraisal prepared not later than 15 November 2023, an exception is made for shares traded on regulated markets or multilateral trading systems for which the relevant basis is equal to the average value of the last month before the sale.

- Permanent establishment exemption for investment management activities

The 2023 Budget contains the investment management exemption, a provision according to which the activities of the managers do not give rise to a permanent establishment provided certain conditions are met.

The asset manager is defined as the person who, in the name and/or on behalf of a foreign investment vehicle (or of its direct or indirect subsidiaries), habitually concludes contracts and /or negotiations, or in any case assists, also through preliminary activities, for the purchase and/or sale of financial instruments, even if availing of a discretionary power. The asset manager, either an Italian resident or a nonresident entity operating through an Italian PE, is not considered a "dependent agent" provided certain conditions are met.

- One-off energy windfall tax

The Law contains an extraordinary new levy, only for the year 2023 applying to entities that derived at least 75% of the fiscal year 2022 revenues from any of the following activities: production, import, sale of electricity, natural gas, and oil products.

The levy applies at a rate of 50% on the portion of the corporate income computed for fiscal year 2022 that exceeds by at least 10% the average income for the four years prior to 2022. The special contribution cannot in any case exceed 25% of the value of the shareholders' equity on 31 December 2021 (in the case of calendar-year entities).

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Reference/ Citation

Il Sole 24 Ore

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