On December 29, 2018, the Italian Parliament enacted the Budget Law 2019 (Law n. 145 of 2018) (the “Law”). This article illustrates the most significant tax measures of the Law that may be of interest to U.S. multinationals or investors with operations in Italy.
1. Corporate income tax at 15%
Starting from the 2019 fiscal year (the “FY 2019”), companies that meet certain requisites will benefit from a reduction of the standard 24% corporate tax income (the so-called “IRES”) by nine percentage points on a portion of their income. Specifically, the reduced corporate tax income rate at 15% will apply to the lower of an amount of income corresponding to: (i) the previous FY’s profits set aside for balance sheet reserves (other than non-distributable reserves); or (ii) the total of investments into new fixed assets and costs to hire new personnel (“investments” include the construction of new plants in Italy, the completion of suspended works, the expansion, reactivation and modernization of existing plants as well as the purchase of new tangible assets to be allocated to facilities located in Italy. Note that investments in real estate, intangibles and vehicles attributed to employees as a fringe benefit are excluded).
2. A new extra-amortization regime
With regard to the extra-amortization related to the purchase cost of new high-tech tangible assets which are allowed to benefit from digital and technological transformation processes pursuant to the so-called Industry 4.0 Plan (a plan promoted by the Italian Government for industrial growth), the Law amends the current extra-amortization regime. The new regime provides (1) that the above mentioned high-tech investments shall be made by 31 December 2019, or by 31 December 2020, provided that purchase orders are accepted by the seller by 31 December 2019 and at least 20% of their price is paid by the same date; (2) new additional amortization amounts (170% for investments up to €2.5 million; 100% for investments from €2.5 to €10 million; 50% for investments from €10 to €20 million). The additional 40% extra-amortization for certain intangible assets introduced by the Italian 2017 Budget Law is also extended under the same conditions above.
3. Italian Digital Services Tax
The Law introduces a new tax applicable to digital services (the so-called “Italian Digital Services Tax”) by repealing the old measure introduced by the 2018 Budget Law but never entered into force. The Italian Digital Services Tax (IDGT) shall now be due by both individuals and enterprises (both resident or nonresident in Italy) performing business activities that, individually or at the group level, jointly meet the following thresholds during the FY: (a) total amount of revenues not lower than Euro 750,000,000; and (b) an amount of revenue arising out of digital services performed in Italy not lower than €5,500,000. Moreover, the IDGT shall apply to the following digital services: (a) advertising on a digital interface targeted to users of the same interface; (b) digital multilateral interface aimed at allowing users to interact and facilitate the direct exchange of good and services; and (c) transmission of data collected from users and generated by the use of a digital interface.
The IDGT is not applicable yet but it should enter into force starting from the 60th day following the publication of an implementing decree that will be issued within four months following the Law (i.e., by 30 April 2019).
4. Full deductibility of interest on mortgages of real estate companies. Municipal property tax’s deductibility increase
The Law provides the full deductibility of interest on real estate companies’ mortgages that was previously canceled by the Legislative Decree no. 142/2018. For the purpose of the deductibility, “real estate companies” are defined as companies meeting the following criteria: (a) the value of the assets reported in the balance sheet mainly refers to the normal value of the buildings to be leased (b) at least two-thirds of their revenues arise from the rentals of the buildings owned. The Law provides for the increase from 20% to 40% of the deductibility from business income and self-employment income of the municipal property tax (the so-called “IMU”) relating to immovable properties qualifying as capital assets.
5. Repeal of the Notional Interest Deduction (NID) benefit
The Law repeals the NID, currently set at 1.5% of qualifying capital increase. However, taxpayers are still allowed to carry forward and use the excess NID as of 31 December 2018.
6. Tax credit for R&D
The Law reduces the Research & Experimentation (“R&D”) tax credit rate from 50% to 25%. Starting from 2019, the 50% rate is kept to: (i) expenses incurred with respect to R&D contracts signed with universities, and research organizations as well as with independent innovative start-ups and Small and Medium Enterprises (“SMEs”); and (ii) expenses for employees directly hired to carry out R&D activities. The maximum annual amount of the tax credit granted to each company will be Euro 10 million (instead of the previous Euro 20 million). However, with regard to this tax credit rate, the Law mandates the certification of expenses reported for such purposes and the submission of a technical report illustrating the R&D projects as well as their progress and all the relevant information for identifying the projects eligible for such tax credit.
7. Revamping of a special regime to step-up Italian participations and business assets
Under the Law, resident individuals and nonresident entities can step-up the tax regime of participations held in unlisted Italian companies as of 1 January 2019 through the payment of a substitute tax. The provision may be of specific interest to foreign entities which could have certain capital gains subject to Italian taxes and not be eligible for exemption under an applicable treaty. The substitute tax amounts to 10% for minority interests and to 11% for majority interests i.e., shareholding exceeding 20% of the voting rights (2% for listed companies) or 25% of the share capital (5% for listed companies). The substitute tax may be either paid in full by 30 June 2019 or through three annual installments as of 30 June 2019.
Under the Law, Italian companies adopting ITA GAAP accounting principles (Italian companies reporting under International Financial Reporting Standards (IFRS)) are eligible to step up business assets for accounting and tax purposes. The election may apply to tangible and intangible assets (except for trade goods and immovable properties held by real estate trading companies) as well as to qualifying shareholdings (i.e., controlling shareholding), provided that the assets are included in the FY2018. Under the new regime, eligible entities can choose a category to be stepped up through the payment of a substitute tax amounting to 16% for amortizable/depreciable assets and 12% for non-amortizable/non-depreciable assets.
By AEM Carnelutti, a member of the EACCNY