Italy: Italy - Draft legislative framework for reforming the tax system

Introduction of Dual Corporate Income Tax (IRES) System

The Draft Framework proposes a dual corporate income tax system to attract investments in Italy. It includes a reduced tax rate on profits if conditions are met within two years: using profits for qualifying investments and new hires, and not distributing profits for nonbusiness purposes. The reduced tax rate is expected to align with the OECD BEPS Pillar Two minimum tax (15%). The reform may slightly lower the current 24% standard corporate income tax rate. The beneficial tax treatment precedes investment execution, applying to companies’ annual income.

Reshaping the Tax Incentives System

The Draft Framework aims to revise and simplify all Italian tax incentive regimes in line with the proposed dual income tax system and the EU Directive 2022/2523 on Pillar Two. This suggests a potential replacement of current tax credits and incentives, such as those for research and development or high technology investments, with the application of the reduced corporate income tax rate to reinvested income in qualifying activities. The reform anticipates a shift from a credit-based incentive system to a new model that rewards companies following qualifying behaviors through a reduced corporate income tax rate.

Tax Residence Rules Review

The Draft Framework emphasizes the need to review tax residence rules applicable to both individuals and companies. The objective is to align domestic regulations with internationally recognized best practices and the double-tax treaties that Italy has entered into. This comprehensive review aims to ensure consistency and compliance with global standards, promoting fairness and clarity in determining tax residency status for individuals and companies operating within Italy’s jurisdiction.

Individual Income Tax (IRPEF) - Revision and Gradual Reduction

The Draft Framework outlines principles for a comprehensive review and gradual reduction of personal income tax. The reform aims to introduce an incremental flat rate system that adheres to progressive taxation principles by restructuring tax expenditures and revisiting income brackets.

Enhancement of Value Added Tax (VAT) Regulations

In the Draft Framework, there is a specific focus on improving and aligning the domestic Value Added Tax (VAT) regulations with relevant provisions of EU law and judgments from the European Court of Justice (EUCJ). This comprehensive guidance covers various aspects of VAT, including transactions exempt from VAT, VAT recovery, VAT rates, and the concept of VAT grouping. The aim is to ensure greater consistency and harmonization with EU standards, enhancing the effectiveness and efficiency of the VAT system while promoting compliance and clarity for businesses operating within Italy.

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Reference/ Citation

“Il Sole 24 Ore ”, an Italian economic-political-financial newspaper