Italy

In February 2023, the Council of Ministers gave the green light for the creation of a new 'incentives code' in order to block the extreme fragmentation of current incentive policies and achieve full efficiency of measures for businesses. The Ministry of Enterprise and Made in Italy (MIMIT) will have to adopt the delegated decrees within 24 months (December 2024).

The Reform is connected to the 2023-2025 Budget Law in line with the indications of the Economic and Financial Document and with the Recovery and Resilience Plan (RRP) and also includes among the objectives the simplification of the rules on investment and measures to facilitate the development of South Italy. In fact, the revision of incentives is a necessary step also for the promotion of Italian industrial policy, which requires at national level a greater efficiency of the measures available for companies as well as an orientation towards global challenges such as the green and digital transition.

Foreign tax credit

Where foreign-source income definitively is taxed abroad, a tax credit can be claimed for use against a company’s IRES liability. The amount of the tax credit that can be claimed is the lower of the foreign tax incurred and the proportion of the IRES liability related to the foreign-source income. For partially exempt income (e.g. dividends), the foreign tax credit is reduced in proportion to the amount of the income taxable in Italy.

If an Italian company receives foreign income from more than one country, this limitation is applied separately to each country.

Foreign taxes borne by the foreign PE of an Italian resident company are allowed to be offset against the overall consolidated tax liability (IRES).

Any excess of foreign tax credit over the maximum amount allowed for recovery in the same tax period can be carried back or carried forward for eight years and recovered if specific conditions are met (e.g. same source country of the income, occurring because of an excess of the IRES liability related to the foreign-source income).

Introduction of the reshoring exemption

As part of the policies aimed at so-called ‘reshoring’, art. 6 of Legislative Decree 209/2023 introduces into national law a tax relief aimed at encouraging the repatriation, within the territory of the Italian state, of business carried out in foreign countries not belonging to the European Union and/or the Economic Area European, including artistic and professional activities carried out in an associated form.

In detail, in the tax period in which the reshoring takes place and in the five subsequent tax periods, a 50% exemption for IRES and IRAP purposes is granted for income deriving from the repatriated assets and activities. For the determination of eligible income, the taxpayer is required to maintain separate evidence, from an accounting point of view, to allow verification of the correct determination of the income and the value of net production taxable for IRAP purposes.

To prevent any undue exploitation of the tax relief, activities carried out in the territory of the state in the 24 months preceding their reshoring are excluded from access to the relief. Furthermore, a monitoring period of five tax periods following that of reshoring of the assets and activities is envisaged (ten periods in case of large companies) in the event that the beneficiary will transfer outside the territory of the state, even if only partially, the activities subject to the tax exemption. In this case, the recapture mechanism is applied by the tax administration, including both unpaid taxes and the related interests.

Tax credit for investments in new capital assets

All enterprises can benefit from the tax credit for investments in new capital assets, regardless of the legal form, the economic sector in which they operate, the size, and the regime applied for income determination. As for 2020, the following assets are not eligible to access the tax credit: vehicles indicated in art. 164 CIT, assets for which the Ministerial Decree dated 31 December 1988 provides depreciation rates lower than 6.5%, buildings, constructions, pipelines, and infrastructural networks, and freely transferable assets of enterprises operating under public concession.

'Ordinary' tangible assets

For enterprises and taxpayers operating arts and professions who make investments in tangible assets different from the ones included in Annex A of the Law 11th December 2016 n. 232, with a purchase cost not exceeding EUR 2 million and/or make an investment in intangible assets different from the ones included in Annex B of the Law n. 232 of 2016, with a purchase cost not exceeding EUR 1 million, a tax credit is recognised equal to:

• 10% of the purchase cost if the investments are made between 16 November 2020 and 31 December 2021, or by 30 June 2022, provided that by 31 December 2021 the purchasing order is accepted by the seller and the buyer has paid an instalment of at least 20% of the whole purchasing price.
• 6% of the purchase cost if the investments are made between 1 January 2022 and 31 December 2022, or by 30 June 2023, provided that the 'reservation' requirements are met (i.e. by 31 December 2022 the purchasing order is accepted by the seller and the buyer has paid an instalment of at least 20% of the whole purchasing price).

Unless there was a reservation of the investments within December 2022, from January 2023 these investments are not yet eligible for the tax credit.

Tangible assets '4.0'

For enterprises that invest in new tangible assets included in Annex A of Law n. 232/2016 (so called 'assets 4.0') different benefit rates are provided based on the tax period in which the investment is realised and based on the acquisition cost. Specifically, if investments are made between 16 November 2020 and 31 December 2021, or by 31 December 2022, provided that by 31 December 2021 the purchasing order is accepted by the seller and the buyer has paid an instalment of at least 20% of the cost, the tax credit is recognised in the following measures:

• 50% of the cost for investments up to EUR 2.5 million.
• 30% of the cost for investments between EUR 2.5 million and EUR 20 million.

• 10% of the cost for investments between EUR 10 million and EUR 20 million.

If such investments are made between 1 January 2022 and 31 December 2022, or by 30 September 2023, provided that by 31 December 2022 the purchasing order is accepted by the seller and the buyer paid an instalment of at least 20% of the purchasing cost, the tax credit is recognised in the following measures:

• 40% of the cost for investments up to EUR 2.5 million.
• 20% of the cost for investments between EUR 2.5 million and EUR 10 million.
• 10% of the cost for investments between EUR 10 million and EUR 20 million.

If such investments are made between 1 January 2023 and 31 December 2025, or by 30 June 2026, provided that by 31 December 2025 the purchasing order is accepted by the seller and the buyer paid an instalment of at least 20% of the purchasing cost, the tax credit is recognised in the following measures:

• 20% of the cost for investments up to EUR 2.5 million.
• 10% of the cost for investments between EUR 2.5 million and EUR 10 million.
• 5% of the cost for investments between EUR 10 million and EUR 20 million.

The above-mentioned threshold applies for each fiscal year in the period 2023 through 2025.

Intangible assets '4.0'

With regard to intangible assets included in Annex B of Law 232/2016 (including expenses for services incurred in connection with the use of cloud computing solutions), Law No. 234/2021 introduced different rates depending on the year of investment. Specifically, for investments made:

• From 16 November 2020 and until 31 December 2023, the tax credit is granted at 20% of the cost, up to a maximum annual limit of eligible costs of EUR 1 million; the benefit rate is increased to 50% for purchases made during FY 2022.
• For FY 2023, the tax credit is granted at 20% of the cost, again up to an annual maximum of EUR 1 million. The tax credit rate decreases to15% for investments made in FY 2024 and 10% for investments made in FY 2025.

In all cases, there is a six-month window (until 30 June of the following year) if the conditions for the reservation are met by 31 December of each year.

New tax credit Transition 5.0

A new tax credit is applicable to investments in tangible and intangible assets interconnected with the company’s Enterprise Resource Planning (ERP) that enables the company to achieve its goals of optimising processes, reducing energy consumption (positively impacting the decarbonisation process), and improving production efficiency. Eligible investments must be made in FYs 2024/25 and they must be aimed at Transaction 5.0, allowing for energy savings compared with the level of consumption before the investments.

A minimum energy consumption reduction of at least 3% of the entire production structure or 5% of the specific production process is requested to access the tax credit. The tax credit is recognised to the extent of 35% of the cost for investments up to EUR 2.5 million, 15% of the cost for investments between EUR 2.5 million and EUR 10 million, and 5% of the cost for investments between EUR 10 million and EUR 50 million.

In case of higher reduction of the energy consumption, the tax credit rates are increased by 5 or 10 percentage points. The energy consumption reduction must be certified by an independent energy expert, and the communication must be filed with the energy sector authority (GSE).

Tax credit on investments in research and development (R&D), technological innovation, and design and aesthetic ideation: Common rules

The following tax credits are available to all enterprises that invest in eligible activities, regardless of the legal form and the economic sector in which they operate.

R&D tax credit

For the R&D tax credit, in line with the legislation in force until 31 December 2019, the eligible activities consist of fundamental research, industrial research, and experimental development as defined, respectively, by the letters (m), (q), and (j) of point 15, par. 1.3 of the Communication no. 198/2014 of the European Commission. 

For eligible R&D activities, the tax credit is equal to 20% (12% in FY 2020) of the eligible costs incurred, with a maximum annual amount of EUR 4 million (EUR 3 million for FY 2020). The 2021 Budget Law extended for two years the increased benefit rates provided for if the R&D activities are carried out in the South Italy regions.

The 2022 Budget Law extended the measure up to the tax period including 31 December 2031; however, the tax credit rate was decreased to 10% of the eligible expenses, and the annual ceiling of the credit increased to EUR 5 million.

To determine the cost basis of the benefit, the following expenses are eligible:

1. Personnel costs.
2. Depreciation charges, costs of the financial or simple lease, and other expenses related to movable tangible assets and software used in R&D projects.
3. Expenses for extra-muros research contracts concerning the direct execution of eligible R&D activities by the provider.
4. Depreciation charges related to industrial privatives.
5. Expenses for consultancy services and equivalent services related to R&D eligible activities.
6. Expenses for materials, supplies, and other similar products used in the R&D projects.

Tax credit for technological and digital innovation and ecological transition

A tax credit for enterprises that invest in technological and digital innovation activities '4.0' and in projects aimed at the ecological transition is also applicable. 

Until FY 2023, this tax credit is equal to 10% (6% in FY 2020) of the eligible costs incurred, with a maximum annual amount of EUR 2 million (EUR 1.5 million in FY 2020). The applicable rate is increased to 15% (10% in FY 2020) in case the eligible activities consist of technological innovation aimed to reach an ecological transition goal or a digital innovation goal compliant with the so-called '4.0' model, without prejudge of the maximum annual amount of EUR 2 million (EUR 1.5 million in FY 2020).

Based on changes introduced by the 2022 Budget Law, for the tax periods 2024 and 2025, the tax credit rate is reduced to 5% while the annual maximum limit of EUR 2 million remains unchanged.

On the other hand, as regard the tax credit for investments in 4.0 digital innovation projects or for projects aimed at achieving ecological transition objectives, for the tax period 2022, the measure of 15% is confirmed within the annual maximum limit of EUR 2 million, and then it is progressively reduced to 10% for the tax period following the one in course on 31 December 2022, within the annual maximum limit of EUR 4 million, and to 5% for the tax period following the ones in course from 31 December 2023 to 31 December 2025, again within the annual maximum limit of EUR 4 million.

To determine the tax credit, taxpayers shall consider the same eligible expenses as for R&D credit, under the same conditions, except for those relating to industrial property rights as indicated in (iv) of the paragraph above.

Tax credit for design and aesthetic ideation activities

This measure is addressed mainly to enterprises operating in the textile and fashion, footwear, eyewear, gold, furniture, and ceramic sectors that have carried out design and aesthetic ideation activities for the conception and realisation of new products and samples. 

The tax credit rate is equal to the one for technological innovation. To determine the tax credit, taxpayers shall consider the same eligible expenses as for the R&D credit, under the same conditions, except for those relating to industrial property rights indicated in (iv) above.

Tax credit for investments in the Southern Italy Special Economic Zone (SEZ)

In relation to the tax credit 2024 for investments in the SEZ area, art. 1 par. 249 of Law 213/2023 replaces art. 16 co. 6 of Legislative Decree 124/2023 bringing some changes to the national budget available to finance this measure. In particular, the tax credit at hand is recognised within the maximum limit of EUR 1.8 billion for the year 2024 (investments made in the period 1 January through 15 November), based on the definitions and the criteria provided for by the Ministerial Decree issued.

As already provided for by Legislative Decree 124/2023, the tax credit will be recognised in a variable amount depending on the size of the company and the location of the investments made in the regions of Southern Italy, which become a single special economic zone, relating to the purchase of new capital goods (plants, equipment, and machinery) and the purchase of land and the construction of buildings.

The nominal rate of the tax credit for large companies is 15% of the eligible investments in the Region Abruzzo, 30% in the Regions Molise, Basilicata, and Sardinia, and 40% in the Regions Campania, Puglia, Calabria, and Sicily. Increased rates of 10% and 20%, respectively, are applicable for medium and small companies, as defined based on the EU applicable regulation.

Advertising campaign tax credit

There is a facilitative measure intended for businesses, self-employed workers, and non-commercial entities in relation to investments made in advertising campaigns in the daily and periodical press, including online (article 57-bis, Legislative Decree 50/2017).

From 2023, to benefit from the tax credit, it is necessary that the overall amount of advertising investments made exceeds the amount of similar investments made in the previous year by at least 1%.

The incentive consists of a tax credit equal to 75% of the incremental value of the investments made. It is granted within the maximum limit of the annual allocation and in compliance with the European Union regulations on 'de minimis' aid. Therefore, if the overall amount of credits requested exceeds the amount of available resources at a national level, these are divided percentage-wise among all those who are entitled to the bonus.

Old Patent Box regime

According to Article 1, paragraphs 37-45, of Law no. 190 dated 23 December 2014, Italian resident companies and PEs of non-resident entities that carry out R&D activity, either directly or by outsourcing it to universities or other research institutes or equivalent institutes, may elect to apply the Italian Patent Box regime. The regime exempts a portion of the income derived from the exploitation, either directly or by licensing, of 'qualifying intangible assets'.

The general exemption is 50%, the percentage was limited to 30% for 2015 and 40% for 2016.

The regime can be applicable to PEs only if the non-resident entity resides in a country with which Italy has concluded a tax treaty and that allows adequate exchange of information.

The election is effective for five years and cannot be revoked during that period. Qualifying intangible assets initially included software protected by copyright; patents; know-how, such as processes, formulas, industrial, commercial, or scientific information; trademarks; designs; and models that are potentially capable of legal protection. Although the rules are based on the OECD BEPS nexus approach, the range of assets for which the exemption has been made available was greater than those in the report issued in October 2015 of the BEPS project. From 2017, trademarks have been excluded by the Patent Box regime. The income that can benefit from the tax exemption is in proportion to the ratio of qualifying expenditure to total expenditure incurred to develop the assets.

Taxpayers must request a specific ruling from the Italian tax authorities to benefit from the regime when the qualifying intangible is used directly by the company. The ruling is optional where the qualifying intangible is licensed to a related party.

Furthermore, Law Decree no. 34 dated 30 April 2019 introduced an alternative procedure to get the Patent Box relief without undertaking an APA. This procedure requires preparing a proper documentation set and declaring its possession in the annual tax return. In this case, each early deduction is split over 3 years and no penalty should apply in case of challenges during tax audits. All relevant instructions are included in Regulation no. 658445 dated 30 July 2019 of the Commissioner of Italian Revenue Agency, and clarification is provided in Circular Letter no. 28 dated 29 October 2020 of the Italian Revenue Agency.    

New Patent Box regime

Law Decree no. 146 issued on 21 October 2021, as amended by the 2022 Budget Law, has revised the previous Patent Box regime with effect from 2021 by shifting from a profit-based incentive to a cost-based incentive. In particular, the costs for the R&D activities (incurred either directly by the Italian resident companies and PEs of non-resident entities or by outsourcing the R&D activities to universities or other research institutes or equivalent institutes) in relation to copyrighted software, patents, designs, and models can be recognised for tax purposes for an amount equal to 110% of the relevant expenditure for both IRES and IRAP. R&D costs incurred with related parties are not eligible. The election for the new Patent Box procedure lasts for five fiscal years, is irrevocable, and is renewable.

In order to benefit from this new procedure, each year taxpayers have to opt for it in the annual CIT return and prepare a proper documentation set, whose possession has to be declared in the annual CIT return. This documentation, which has to be prepared in Italian language, electronically signed with time-stamp by the legal representative of the company (or its delegate), and provided to the tax authority upon request, within 20 days, in the electronic format, will allow taxpayers to benefit from the penalty protection relief in case of tax audit and related challenge.

All relevant instructions for implementing the new Patent Box regime are included in Regulation no. 48243/2022 and no. 52642/2023 of the Director of the Italian Revenue Agency and clarifications provided in Circular Letter no. 5/2023.

Therefore, starting from FY 2021 (assuming a calendar year, i.e. the fiscal year in place when the Law Decree No. 146/2021 has been issued), Italian resident companies and PEs of non-resident entities can no longer apply for the old Patent Box regime. The previous procedures are valid only for taxpayers who filed a ruling request or a renewal of the signed APA before 2021.

Super deduction for new hires

For the only fiscal year following the one in progress on 31 December 2023 (i.e. FY 2024 for entities with calendar fiscal year), companies hiring permanent employees will benefit, under certain conditions, from a 20% increase in the personnel cost deduction.