Tax Incentives Case Study

The Challenge

As an enterprise, You want to invest in Italy and profit from the available tax incentives and allowances.

The Solution

Our CPA & Tax Expert Dr. Hannes Kofler has written this article so that you can get a rough idea of the options available. Feel free to contact us or Dr. Hannes Kofler directly for more information about tax incentives in Italy.

Investing in Italy: Taking advantage of tax incentives and allowances

If you are a company or an individual enterprise, wishing to invest in Italy, you are eligible for several tax allowances, such as the allowances for corporate equity (ACE) , the tax credit on research & development activities and the patent box regime. Furthermore, running from fiscal year 2017, you will benefit of the reduction of Italian corporate tax rate from 27.5% to 24%.

Allowance for Corporate Equity

Aim: promote the recapitalization of undertakings and mitigate the different tax treatment between companies funded with debt and others funded with equity

Qualifying equity increases: equity contributions and retained earnings

Benefits: deduction from corporate income taxable base, corresponding to the net increase in the “new equity” multiplied by a fixed rate (2.3% for FY 2017 and 2.7% for FY 2018 and thereafter)

What is it

The Allowance for Corporate Equity (ACE, also known as Notional Interest Deduction – NID) is a tax incentive introduced to promote the recapitalization of undertakings and to mitigate the different tax treatment applied to companies funded with debt and others funded with equity. The qualifying equity increases may be inclusive of equity contributions, retained earnings (with the exception of profits allocated to a non-disposable reserve), shareholders credits’ waiver.

Who can use it

  • Resident companies
  • Individual resident entrepreneurs
  • Resident partnerships
  • Other commercial resident entities
  • Permanent establishments in Italy of non-resident companies

Benefits

The Ace benefit entails a notional deduction from corporate income taxable base; the deduction corresponds to the net increase in the “new equity” employed in the entity (meaning the equity generated after 2010), multiplied by a rate yearly determined annually (which is 4.75% for FY 2016, 2.3% for FY 2017 and 2.7% for FY 2018 and thereafter).

Under Italian legislation, unused ACE basis may be:

  • carried forward in future fiscal years;
  • transferred to the fiscal unit, wherever the company is part of a tax group;
  • transformed into a tax credit to be offset against Regional Tax on Production Activities payments, made in five installments of the same amount.
Allowance for Corporate Equity (ACE)
R&D Tax Credit
Patent Box Regime
Advance Tax Ruling

R&D Tax Credit

Aim: encourage investments realized in R&D activities amounting at least to 30,000 euros per year.

Qualifying R&D activities: fundamental research, industrial research and experimental development.

Benefits: tax credit up to 50% of the increase of annual R&D expenses which can be used in order to reduce the amount of income tax or Regional Tax on Productive Activities, as well as of social security contributions.

What is it

The Research & Development tax credit aims to encourage investments in R&D activities. The right to benefit is granted to those entities once they prove that they have invested in the qualifying R&D activities an amount of at least 30,000 euros per year. The maximum annual credit for each beneficiary is 20 million euros. Taxpayers have to sustain R&D qualifying costs between 2015 and 2020.

Who is eligible

This benefit is available to any enterprise, irrespective of its legal form, business sector, accounting standards and size, including Italian undertakings or permanent establishments in Italy of non-resident taxpayers, performing R&D activities on the basis of agreements with non-Italian companies resident in EU member States, or in a European Economic Area (EEA) countries or other Country partners with which an exchange of information instrument is in force.

Which expenses are eligible

Taxpayers have to incur costs for one (or more) of the R&D qualifying activities, consisting in fundamental research, industrial research and experimental development.

In particular, the eligible expenses are those incurred for:

  • workers involved in the above-mentioned R&D activities;
  • depreciation charges related to the assets employed to carry out the activities/projects;
  • R&D “extra-muros”, i.e. activities carried out jointly with universities, research institutes and equivalent bodies and other enterprises;
  • technical expertise, industrial and biotechnological patents.

Benefit

The Italian Revenue Agency recognises a tax credit up to 50% of the increase of annual R&D expenses, which is neither included in the income tax base nor in the Regional Tax on Productive Activities base. This increase has to be calculated by comparing the average of expenses in R&D which the taxpayer incurred in the period 2012/2014.

Taxpayers are entitled to use tax credit as a form of payment for income or regional taxes as well as social security contributions.

Patent Box Regime

Aim: promote investments in research and development of intangible assets

Eligible intangible assets: software protected by copyright; patents, trademarks including collective brands; business ad technical industrial know how; other legally protected IP, such as designs and models.

Benefits: partial tax deduction (50%) form Income Corporate Tax for incomes arising from direct use or licensing of qualified intangible assets.

What is it

The Patent box regime is a tax bonus introduced in order to improve the development of intellectual property, granting tax benefits to resident and non-resident taxpayers carrying out research and development activities.

Who can use it

  • Companies
  • Individual entrepreneurs
  • Other bodies, different from companies, carrying out business activities
  • Non-resident taxpayers with a permanent establishment in Italy if they are resident in a country with which Italy has an effective tax information exchange agreement

Which intangible assets are eligible

  • Software protected by copyright
  • Patents (which can be granted or in process of being granted)
  • Trademarks including collective brands (either registered or in process of being registered)
  • Business and technical-industrial know how
  • Other legally protected IP, such as designs and models

Benefits

Optional partial tax exemption from Corporate Tax for those incomes arising from direct use or licensing of qualified intangible assets. Under this regime, taxpayers can partially exclude from their tax income, for purposes of the Income Tax and of Regional Tax on Productive Activities, those qualified incomes deriving from the direct exploitation of intangibles or from licensing of the IP, such as royalties earned by the taxpayer, net of all IP-relating costs. The Patent Box businesses shall be entitled to exclude up to 50% of their income derived from such assets.

How to obtain the tax bonus

In order to determine the benefit, there must be a direct nexus between R&D activities and qualified IP, as well as a direct nexus between qualified IP and qualified income. The election shall be exercised annually by holders of the right to use the qualifying IP (owners o licensees) and it is deemed as irrevocable for 5 years.

The Patent Box regime requires taxpayers to obtain an ad hoc advance tax ruling from the Italian Revenue Agency, whose submission is mandatory for determining the amount of benefited income arising from the direct exploitation of the qualified intangible assets.

The ruling procedure is instead optional in order to determine the capital gain where the qualifying IP is licensed to related parties against the payment of royalties or if it is transferred between related parties.

Advance Tax Ruling

Aim: provide an opinion to resident and non-resident investors concerning any kind of tax issues with respect to a specific investment plan (at least €30 million) and its implementation.

Eligible investors: In the scope of business activities

  • Companies
  • Individual entrepreneurs
  • Other bodies carrying out business activities

Outside any business activities

  • Individuals
  • Non-commercial bodies (Collective Investment Undertakings – CIUs) making investment in an Italian target company

Benefits: the reply is binding for the Italian Revenue Agency (no space for amendment) with respect to the specific business plan as described by the investors and it is valid in so far as the legal and factual circumstances remain unchanged. Eventual assessment activities directed to the investors must be coordinated by the same Department providing the reply to the query.

What is it

The advance tax ruling on new investments enables resident and non-resident investors, going to realize long-lasting and relevant investments within the Italian territory, to obtain the preventive opinion from the Italian Revenue Agency about the tax treatment applicable to business plans and related extraordinary operations. The main aim is to give more certainty to the economic operators in the determination of fiscal burdens connected to relevant investments in Italy.

Who can submit a query

The advance tax ruling on new investments can be submitted by persons carrying out business activities and promoting the realization of a relevant investment in the exercise of these activities.

Persons eligible to file the ruling are, for example:

corporations and other resident entities, even if controlled by non-resident entities;

non-resident companies and institutions of all kinds, regardless of whether they have a permanent establishment in the State or not;

individuals entrepreneurs and non-commercial bodies to the limited extent of any commercial activities carried out;

individuals and non-commercial bodies intending to promote an investment on a “target” Italian company (by means of either asset deal or share deal operations), although they act outside any business activity at the moment of query;

banking foundations, as well as collective investment undertakings (CIUs). CIUs are allowed to file the request for ruling even if they are not resident in Italy, provided that they are subject to oversight in the Country of residence;

Company groups or groupings of enterprises.

Which investments are involved

The investment project must necessarily present the following characteristics:

  • it must be realized within the Italian State
  • it must have a significant and long-lasting impact on employment levels
  • it must be worth at least 30 million euros

Moreover, the definition of investment includes either projects involving the realization of a new economic initiative, having a lasting nature (such as those involving the introduction of new liquidity), and all operations involving the re-use of already available undertaking’s financial resources, aimed at restructuring, optimizing and streamlining an existing business. The investment must have as its target a company located in the State and may also entail share deal transactions.

Benefits

The reply is binding for the Italian Revenue Agency with respect to the specific business plan as described by the investors and it is valid in so far as the legal and factual circumstances remain unchanged. The Italian Revenue Agency cannot amend the reply to the application for advance ruling on the new investments.

Regarding issues covered by the reply, any administrative act (even if containing impositions or penalties) emitted by Tax Authorities in violation of the same reply provided by the Italian Revenue Agency (including the interpretation on which the tacit assent was formed) shall be null and void. Moreover, eventual assessment activities directed to the investors must be coordinated by the same Department providing the reply to the query.

How to present a query

Resident and non-resident investors can present a query to Italian Revenue Agency ̶ Central Directorate for Tax Regulations – Office for Rulings on New Investments Via Cristoforo Colombo, 426 c/d 00145 Roma by:

  • hand delivery
  • registered mail with return receipt
  • certified electronic mail [email protected].it

In case a non-resident applicant has not appointed a domiciliary in Italy, the query could be sent by email to [email protected]

Investors who have had access to the regime of cooperative compliance have to submit the query to Italian Revenue Agency ̶ Central Directorate for Tax Assessment Cooperative Compliance Office Via Cristoforo Colombo, 426 c/d 00145 Roma by:

  • hand delivery
  • registered mail with return receipt
  • certified electronic mail [email protected]

The Italian Revenue Agency has to provide a reply (express or inferred under the tacit consent) to the investors’ queries within 120 days.

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