On 28 December 2018, the Italian government published Legislative Decree No. 142, transposing the European Union's Anti-Tax Avoidance Directive (2016/1164) into Italian legislation. The new set of provisions will be effective from the fiscal year following December 31 2018. The decree will aim to tackle tax avoidance practices related to interest deduction, exit tax, rules on foreign controlled companies, a definition of financial intermediaries, and hybrid mismatches, all of which are explored below.
Firstly, a new definition of interest is provided. More specifically, interest payments and interest income now include:
- Interest as defined under the accounting principles and confirmed as such under current tax provisions; and
- Interest deriving from a transaction, financial relationship, or relationship with a significant financing component.
The limitations under Article 96 of the Italian Tax Code (TUIR) are also extended to:
- Interest payments included in the cost of assets under Article 110 (1b) of the TUIR; and
- Interest payments for mortgage-backed loans on proper-ties rented out.
Moreover, interest payments that exceed interest income and 30% of earnings before interest and taxes (EBIT), regardless of whether they belong to the current year or are carried forward, may be deducted in subsequent tax periods, up to an amount equal to the difference between:
- Interest income of the tax period and 30% of EBIT; and
- Interest payments of the tax period.
The new decree sets out in detail the individual scope of the so-called exit tax. The exit tax applies whenever taxpayers in Italy (be they a resident for tax purposes or a permanent establishment) transfer abroad either their (i) fiscal residence, or (ii) a permanent establishment, or (iii) assets. In such cases, the capital gain generated from the difference between the market value and fiscally recognised cost of the asset/liability transferred abroad is subject to taxation.
Losses incurred in previous years may be deducted from the capital gain. It will be determined in compliance with the criteria set forth under the new Article 166-bis.
Under certain circumstances, the taxes calculated on the capital gain (net of losses) can be paid in five annual instalments.
Controlled foreign companies (CFC)
In order for the CFC provisions to be applicable, non-resident companies are deemed controlled if the Italian taxpayer:
- Holds direct or indirect control under Article 2359 of the Italian Civil Code; or
- Owns directly or indirectly more than 50% of the profits distributed.
Furthermore, foreign-based, permanent establishments of non-resident controlled taxpayers and resident taxpayers that opted for the branch exemption scheme are deemed controlled taxpayers.
The new provisions no longer distinguish between black list and white list countries. The CFC provisions apply if the non-resident controlled taxpayers jointly meet the following pre-requisites:
- They are subject to actual taxation that is less than half of the taxes applicable in Italy (simplification criteria for comparison are still to be defined by decree); and
- More than one-third of their income qualifies as interest or other income (e.g. interest or royalties).
Newly introduced Article 162-bis of the TUIR provides a definition of:
- Financial intermediaries;
- Financial holding companies; and
- Non-financial holding companies and similar companies.
The provisions apply starting from fiscal year 2018. The changes will have an impact also on the Italian regional production tax (IRAP).
The ATAD Decree introduces a package of measures on hybrid mismatches with the aim of tackling double deduction or "deduction without income inclusion" (deduction of a negative income component in one country without any taxation in the other country) due to a different characterisation of financial instruments, payments, entities, and permanent establishments in various countries.
Such mismatches are those registered at international level. Any domestic mismatches will continue to be tackled through general anti-abuse rules.