Legislative Decree 29 November 2018, no. 142 – Implementation of the ATAD Directive
1. Deductibility of interest expenses (art. 1)
2. Exit tax (art. 2)
3. Entry tax (art. 3)
4. Controlled foreign company rules – “CFC” (art. 4)
5. Dividends and capital gains related to non-resident holdings (art. 5)
6. Hybrid mismatches (art. 6-11)
7. Definition of financial intermediaries (art. 12)
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Legislative Decree 29 November 2018, no. 142 (hereinafter the “Decree”) transposed into Italian law the content of Council Directive 2016/1164/EU (the so-called “ATAD 1” Directive), as amended by Council Directive 2017/952/EU (the so-called “ATAD 2” Directive), laying down rules against international tax avoidance practices with a direct impact on the functioning of the internal market, with effect starting from the tax period following the one in progress as of 31 December 2018, with the exception of the new definition of financial intermediaries, that is already in force for the tax period in progress as of 31 December 2018, and the rule aimed at counteracting hybrid mismatches, which will come into force starting from the tax period following the one in progress as of 31 December 2019 with the exceptions of the reverse hybrid mismatches, whose discipline will come into force starting from the tax period following the one in progress as of 31 December 2021.
- Deductibility of interest expenses (art. 1).
Art. 1 of the Decree rewrites art. 96 of the Presidential Decree 22 December 1986, n. 917, (hereinafter “ITC”) in relation to the deductibility of interest expenses, although it maintains the basic mechanism, which limits the deduction of net interest expenses (rectius: of interest expenses net of interest income) to 30% of EBITDA, art. 1 of the Decree introduces significant changes.
In more detail, the main changes made to art. 96, ITC concern:
A. the objective requirement. In particular,
- included among interest expenses there are those capitalized on the value of tangible and intangible assets in accordance with art. 110, paragraph 1, letter b), ITC;
- the interest expenses and income subject to Art. 96 interest deductibility rule must meet the following requirements:
- they qualify as such for accounting purposes;
- they qualify as such under the tax law;
- they derive from (a) a financial transaction, (b) a contractual relationship of a financial nature, or (c) a contractual relationship with a significant financial component;
- the interest income must have fiscal relevance;
- interest expenses and income also include income and charges which, although deriving from financial instruments which, on the basis of the correct application of the accounting principles adopted, are classified as instruments representing equity, are taxable or deductible in the hands of the recipient and the lender, respectively;
B. the possibility to carry forward excesses. In particular, while maintaining the possibility to carry forward excess non-deductible interest expenses without any time limit, the Decree:
- introduces the possibility to carry forward, also without any time limit, the excess interest income;
- limits the option to carry forward the excess EBITDA to five fiscal years (instead of the previous unlimited option to carry it forward) in accordance with the FIFO criteria;
C. the quantification of EBITDA, which must be determined on the basis of the tax values of the relevant cost and revenue (so-called Tax EBITDA) and no longer on the basis of the accounting values.
With regard to the transitional provisions of the Decree, which came into force on 1 January 2019 for entities filing a fiscal year coinciding with the solar year, art. 12 of the Decree provides for:
- the option to carry forward without any time limit the excess of interest expenses outstanding as of 31 December 2018;
- the quantification of tax EBITDA by (i) excluding income and expenses that have not assumed fiscal relevance in the past and which have fiscal relevance starting from 1 January 2019 and (ii) considering the accounting value of the income and expenses representing opposite adjustments to income and expenses posted in the profit and loss statement until 31 December 2018;
- the excess of EBITDA outstanding as of 31 December 2018, in any case, is to be offset, exclusively against interest expenses relating to loans issued prior to 17 June 2016.
- Exit tax (art. 2).
Art. 2 of the Decree rewords article 166 of the ITC concerning the outbound transfer of residence of a taxpayer carrying on business activities in Italy. In brief, Italy exercises its power of taxation on the unrealized capital gains – as well as the untaxed reserves – when a taxpayer moves assets or its tax residence out of the tax jurisdiction of the State.
More specifically, the main changes introduced by the Decree relate to the following issues:
A. objective precondition. First of all, the new paragraph 1 of art. 166 of the ITC identifies five cases to which the exit tax rules apply. In particular, the exit tax applies to entities that carry on a business activity where any one of the following hypotheses occurs: (i) a business entity is tax resident in the territory of the State and transfers its tax residence abroad; (ii) a business entity is tax resident in the territory of the State and transfers assets to a permanent establishment located abroad and to which the exemption of profits and losses pursuant to article 168-ter, the so-called “Branch Exemption”, applies; (iii) a business entity is tax resident abroad, has a permanent establishment located in the territory of the State and transfers the entire permanent establishment to its headquarters or to another permanent establishment located abroad; (iv) a business entity is tax resident abroad, has a permanent establishment located in the territory of the State and transfers assets belonging to such permanent establishment to its headquarters or to another permanent establishment located abroad; (v) a permanent establishment is tax resident in the territory of the State and has been merged into a non-tax resident company or has carried out a demerger in favour of one or more non-resident beneficiaries or has contributed a permanent establishment or a business of the latter located abroad in favour of an entity that is tax resident abroad.
B. the introduction of “market value”. For the purposes of determining the taxable capital gain, the Decree, substitutes the concept of “normal value” by introducing the one of “market value” as used in the transfer pricing regulations. In more detail, the fourth paragraph of the new art. 166 ITC provides that the market value is determined with reference to the conditions and prices that would have been agreed between independent parties operating in conditions of free competition and in comparable circumstances taking into account, if the value refers to a company branch or a going-concern, the goodwill value calculated having regard to the functions and risks transferred.
C. tax losses regulation. The Decree provides specific clarifications regarding the treatment of tax losses incurred up to the end of the last period of tax residence in Italy. In particular, it is expressly provided that if, following the transfer of residence abroad, a permanent establishment does not remain in the territory of the State, the losses of the fiscal years prior to the one in which the transfer takes place are primarily offset against the income of the latest period of tax residence in Italy, without applying the limit established by art. 84 of the ITC. Any excess is calculated as a reduction in the capital gain generated.
D. payment of the tax. The main changes introduced by the Decree concern the regime for the payment of the tax. In more detail, Article 166 as amended by the Decree provides, for entities that transfer their residence, for income tax purposes, to EU or EEA countries, with which Italy has entered into an agreement for mutual assistance in the recovery of tax, the possibility to opt for the payment of the tax in annual instalments over a maximum of five years. The new text of the law, therefore, eliminates the suspension of payment of the tax until the actual realization of the capital gain related to the transferred components (although always within a maximum period of 10 years), and reduces the number of instalments from six to five.
- Entry tax (art. 3)
In line with the changes introduced with respect to the exit taxation, art. 3 of the Decree introduces some changes to art. 166-bis of the ITC, with regard to the determination of the tax values of the assets and liabilities introduced into the Italian territory by foreign entities (so-called “entry tax“).
The main changes concern:
- the delimitation of the scope of the provision, by identifying a precise list of cases, and
- the definition of the concept of “market value”, adopted as the main reference value.
In particular, the “entry-tax” regulation is applied in the presence of one of the cases identified in the new paragraph 1 of art. 166-bis of the ITC, that is to say, when:
a. foreign commercial businesses transfer their residence to Italy;
b. entities that are tax resident abroad transfer assets to their own permanent establishment located in Italy;
c. entities that are tax resident abroad transfer a going concern to Italy;
d. entities that are tax resident in Italy, that own a foreign permanent establishment in relation to which the “branch exemption” regime applies as provided for by art. 168-ter of the ITC, transfer assets from such permanent establishment to the Italian “headquarters”;
e. commercial businesses that are tax resident abroad 1. are merged into entities that are tax resident in Italy; e.2. carry out a demerger of their assets for the benefit of one or more entities that are tax resident in Italy; or e.3. contribute a permanent establishment located abroad in favour of an entity that is tax resident in Italy.
If the assets and liabilities thus introduced into the Italian territory come from European Union countries, or from countries that allow an adequate exchange of information (pursuant to the Ministerial Decree of 4 September 1996), the tax value will be assumed to be equal to their “market value”.
In this regard, the new paragraph 4 of art. 166-bis of the ITC defines the “market value” in similar terms to that envisaged for transfer pricing, expressly referring to the guidelines on the subject provided in the Ministerial Decree of 14 May 2018. Paragraph 4 also clarifies that, in the event that it is necessary to attribute the “normal value” to a “going-concern”, the value of the goodwill is (also) taken into consideration, and is determined having regard to the functions and risks involved in the transfer.
In case the assets and liabilities introduced into the Italian territory following one of the operations indicated above come from countries other than those of the European Union, or from countries that do not guarantee an adequate exchange of information, the tax value of the assets and liabilities is determined:
- if an “advance agreement” has been reached with the Italian tax authorities, in accordance with art. 31-ter, of Presidential Decree 29 September 1973, no. 600 (so-called “advanced pricing agreement”), for an amount equal to the “market value” determined pursuant to such “advance agreement”, or,
- in the absence of such an agreement, by comparing (i) the acquisition cost, (ii) the book value, and (iii) the “market value” determined according to the general rule described above, and indicating, for the assets, the lowest of the above values, while for the liabilities, the highest.
- Controlled foreign company rules – “CFC” (art. 4)
Art. 4 of the Decree modifies the regime regarding controlled foreign companies (“CFC”) pursuant to art. 167 of the ITC regarding the conditions necessary for the application of the regime.
In detail, the main changes concern:
A. the subjective requirement. The application of the CFC regime has also been extended to the Italian permanent establishments of non-resident entities that control foreign entities that may be qualified as CFCs.
B. determination of the control requirement. In addition to the importance of the “legal” control provided for by art. 2359 of the Italian Civil Code, it is set forth that non-resident entities are considered “controlled” even where an Italian entity holds, directly or indirectly, a stake in their profits of more than 50 percent.
C. conditions for applicability of the scheme.
The Decree eliminates the distinction between EU/EEA and non-EU/EEA foreign entities for the purposes of the rule in question. In greater detail, foreign controlled entities (regardless of their residence) will be considered CFCs provided that:
i) they are subject to an effective tax rate (no reference is made to the nominal tax rate) of less than 50 per cent of the amount to which they would have been subject if resident in Italy; and
ii) they earn over a third of their income from passive income sources.
D. Safe harbour. The new wording of art. 167 of the ITC repeals the two circumstances under which, in general, the CFC regime did not apply. In fact, in order to disregard tax transparency, the resident controlling entity can now only demonstrate, by filing a specific request for ruling, that the controlled foreign entity “carries out an effective economic activity, through the use of personnel, equipment, assets and premises”.
Last but not least, art. 13 of the Decree clarifies that, where compatible with the new wording of art. 167 of the ITC, the provisions of Ministerial Decree 21 November 2001, no. 429 on the implementation of the CFC regime remain applicable.
- Dividends and capital gains related to non-resident holdings (art. 5)
Article. 5 of the Decree reconsidered the tax regime that governs the taxation of dividends and capital gains related to stakes held in entities that are resident in foreign Countries with a privileged tax regime.
In particular, the new art. 47-bis, ITC is introduced, which defines the criteria for identification of Countries with privileged tax regimes, and changes are made to requirements to be met for the full tax exemption of dividends from (and capital gains realized from the sale of) companies resident in Countries with privileged tax regimes.
A. The new art. 47-bis.
The “new” art. 47-bis of the ITC defines the criteria for the identification of foreign Countries, other than those belonging to the European Union or those belonging to the European Economic Area, with privileged tax regimes, making distinction depending on whether or not the Italian entity exercises control (even indirect) over the foreign company, that is to say:
a) in the case of controlling stakes, those countries whose effective tax rate is less than 50% of the Italian rate;
b) in the case of stakes that do not meet the control requirement, those countries whose nominal tax rate is less than 50% of the Italian rate. In this case, the comparison between the nominal tax rates must be performed having regard also to the so-called “special regimes”, i.e. the particular tax treatment that foreign authorities can only allow when certain requirements are met (not applicable, therefore, to the majority of entities), such as those related to a specific subjective status or to a particular territorial location of the taxpayer, or the temporary nature of the privileged tax regime.
Therefore, upon fulfillment of the aforementioned requirements, full taxation is applied to the related dividends (articles 47 and 89 of the ITC) and capital gains, for the purposes of both personal income tax (hereinafter, “IRPEF”) (article 68 of the ITC) and corporate income tax (hereinafter, “IRES”) (art. 87 of the ITC).
B. Tax exemption of dividends.
Full exemption is applied to dividends when the taxpayer demonstrates, also by means of a specific request for ruling, that from the start of the period of ownership (“monitoring period”) the taxpayer did not obtain the result of transferring income to low tax jurisdictions (art. 47-bis, paragraph 2, letter b)).
Where instead the taxpayer demonstrates that an effective commercial activity is performed (art. 47-bis, paragraph 2, letter a)), the dividends received by entities subject to IRES referred to in article 73, paragraph 1, letter a) and b) – and not entities subject to IRPEF – will be exempt from taxation in an amount equal to 50%.
In the latter case, where the taxpayer also exercises control, he will be entitled to an indirect tax credit.
C. Tax exemption of capital gains.
In this regard, art. 5 of the Decree makes the following main changes:
1) to art. 68 of the ITC: (i) the full taxation of capital gains deriving from the sale of stakes in companies located in countries with preferential tax regimes is not applied where the stake (both qualified and unqualified) relates to companies whose shares are traded on regulated markets and (ii) for the purpose of demonstrating the conditions required in order to prevent the full taxation, pursuant to art. 47-bis, paragraph 2, letter b), of the capital gain realized from the disposal of holdings made to independent counterparties, the “monitoring period” is reduced to five years;
2) to art. 87 of the ITC: the abovementioned reduced 5-year monitoring period applies also to the disposal of holdings made by corporate entities to independent counterparties.
- Hybrid mismatches (art. 6-11).
Articles 6 to 11 of the Decree introduce into the Italian tax system an “ad hoc” regime aimed at combatting the phenomenon of transnational hybrid mismatches. These are, in particular, the (concretely verified) phenomena of double deduction(), or deduction without inclusion(), deriving from legal mismatches (and not from tax benefits granted, for example, in terms of exemption of income by the State of residence) in financial instruments, payments, entities, permanent establishments or payment allocation.
Following the definition of the main terms applicable to this regime, contained in articles 6 and 7, the Decree deals with delineating the different ways of combatting the aforementioned mismatches.
A. Double deduction. In relation to the aforesaid phenomena, which see the deduction of the same cost in two different jurisdictions, the Italian company is required to renounce the cost deduction when Italy:
- qualifies as the investor’s State;
- qualifies as the payer’s State, where the investor’s State has not denied the deductibility of the cost.
B. Deduction without inclusion. Instead, with regard to the phenomena of deduction without inclusion, which see the deduction of a cost and the non-taxation of the related income, it is provided that the Italian company is required to:
- renounce the cost deduction when it qualifies as the payer’s State (unless this mismatch has already been eliminated in another State); and
- tax the income when it qualifies as the beneficiary’s State and the payer’s State does not deny the cost deduction (unless this mismatch has already been eliminated in another State).
C. Imported hybrid mismatches. In this context the deductibility of the cost is denied whenever it finances, directly or indirectly, a deductible charge that generates a hybrid mismatch.
D. Disregarded permanent establishments. The fourth paragraph of art. 8 of the Decree deals with defining methods to combat disregarded foreign permanent establishments, i.e. the permanent establishments – which are subject to a “branch exemption” regime – located in states that do not recognize their existence. In this case, it is the duty of the State of residence to tax the income of the foreign permanent establishment. The only exception to this rule is the case in which a double taxation treaty imposes the obligation to exempt the foreign income.
E. Reverse hybrids. The following art. 9 deals with identifying the methods of combatting so-called “reverse hybrids”, i.e. cases of deduction without inclusion that occur when an income component is attributed to a company that is considered “transparent” by its State of residence and opaque by the State of residence of its stakeholder. In this case, in fact, the income component would not be subject to taxation; neither in the hands of the company whose Country considers it transparent, nor in the hands of the company whose Country considers it opaque. This phenomenon is combatted by taxing the income of the “reverse hybrid” company in the country where the stakeholder is resident.
F. Mismatches in tax residence. Art. 10 of the Decree deals with the settling of cases involving companies resident in two Member States (so-called “dual resident company”). In this context, it is provided that the deduction of a cost, which does not have a corresponding income taxed in both States, is denied in the country where the company is not considered resident for the purposes of the double taxation treaty in force between the two States. Where the tax residence mismatch involves a non-EU state, the deduction must be denied by the European Member State.
Finally, with regard to inspections, art. 11 of the Decree specifies that the assessment of any violations in the matter of hybrids must be preceded, under penalty of nullity, by serving the taxpayer with a request for clarification to be provided within the term of sixty days, which indicates the reasons why a violation is considered to have arisen. This article therefore introduces a form of preliminary rebuttal between taxpayer and tax administration with respect to the issuance of the notice of assessment regarding an extremely slippery matter.
- Definition of financial intermediaries (art. 12).
Art. 12 of the Decree introduces a common definition of financial intermediary for tax purposes.
First of all, the reference to banks and/or credit/ financial institutions/intermediaries contained respectively in articles 96, paragraph 5, 106, paragraphs 3 and 4, 113, paragraphs 1, 2 letter b), 5 and 6 of the ITC, in art. 6, paragraphs 1 and 2, Legislative Decree 15 December 1997, no. 446 (so-called regional tax – hereinafter, IRAP Decree) and, also, art. 1, paragraph 65, Law 28 December 2015, no. 208 (additional IRES), is replaced by the term “financial intermediaries”.
Furthermore, art. 12, paragraph 1, letter d) of the Decree adds art. 162-bis to the ITC, entitled “Financial intermediaries and holding companies”, paragraph 1 of which defines, both for IRES and IRAP purposes,
a) financial intermediaries:
1) the entities referred to in art. 2, paragraph 1, letter c), Legislative Decree 28 February 2005, no. 38 and entities with a permanent establishment in the territory of the State having the same characteristics;
2) the credit consortia (confidi) registered on the list referred to in art. 112-bis, Legislative Decree 1 September 1993, no. 385;
3) the microcredit operators registered on the list referred to in art. 111, Legislative Decree no. 385, cited above;
4) the entities that exclusively or prevalently carry out the acquisition of shareholdings in financial intermediaries, other than those referred to in number 1);
b) financial holding companies: the entities that exclusively or prevalently carry out the acquisition of shareholdings in financial intermediaries;
c) non-financial holding companies and similar:
1) the entities that exclusively or prevalently carry out the acquisition of shareholdings in entities other than financial intermediaries;
2) the entities that perform activities that are not directed towards the public, pursuant to art. 3, paragraph 2, of the regulation issued on the subject of financial intermediaries to implement articles 106, paragraph 3, 112, paragraph 3 and 114 of Legislative Decree no. 385, cited above, as well as art. 7-ter, paragraph 1-bis, Law 30 April 1999, no. 130.
In the following paragraph 2 of art. 162-bis, it is provided that the prevalent carrying out of the acquisition of shareholdings in financial intermediaries exists when, based on the approved financial statements for the last financial year closed, the total amount of the investments in such financial intermediaries and other assets relating thereto, considered together, including commitments to disburse funds and the guarantees issued, is greater than 50 per cent of the total assets, including the commitments to disburse funds and the guarantees issued.
Likewise, in paragraph 3 it is stated that the prevalent carrying out of the acquisition of shareholdings in entities other than financial intermediaries exists when, based on the approved financial statements for the last financial year closed, the total amount of investments in such entities is more than 50 per cent of the total assets.
With regard to IRAP, the Decree modifies paragraph 9 of art. 6, Legislative Decree no. 446, cited above, establishing that the rule contained therein applies to non-financial holding companies and similar.
Finally, the Decree intervenes concerning the obligations of communication to the tax registry, establishing in the new art. 10, paragraph 10 of Legislative Decree 13 August 2010, no. 141 that these obligations remain with regard to non-financial holding companies and similar, even if they are exempted from the obligations pursuant to art. 106, Legislative Decree no. 385, cited above.
As regards the date of entry into force of the aforementioned new rule, art. 13 of the Decree provides that:
- such rule is effective starting from the tax period in progress as of 31 December 2018;
- with reference to the tax periods prior to the one in progress as of 31 December 2018 which are subject to the provisions of Legislative Decree 18 August 2015, no. 136 or, in the case of non-financial holding companies, those pursuant to Legislative Decree 13 August 2010, no. 141, and for which the deadlines for payment of income tax have expired before the same date, are subject to the effects for the purposes of IRES and IRAP, relating to the same tax periods, resulting from the application of the provisions in force in these periods, even if they are not consistent with the provisions of paragraphs 2 and 3 of art. 162-bis, ITC. These effects are valid provided that they are the result of consistent behaviour adopted by 8 August 2018.
 Passive incomes mean, inter alia, interest, royalties, dividends, capital gains, financial lease income, income from insurance, banking and other financial activities and income from purchase and sale of goods, and provision of intra-group services with little or no added economic value.
 This occurs, for example, when the cost is deductible both by the parent company and by its foreign permanent establishment (rectius: a double deduction occurs), without the income against which this cost is offset in the country of the permanent establishment (as, for example, this income is attributable to a company included in the fiscal unit of the permanent establishment) being taxed also in the State of the parent company (rectius: there is no double inclusion).
 This occurs, for example, when a financial instrument is considered a (deductible) debt security in the State of the payer and a (exempt) capital instrument in the State of the recipient.