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).
Patent box regime
Italian resident companies and PEs of non-resident entities that carry out research and development (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%, but it is limited to 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 include patents; know-how, such as industrial, commercial, or scientific information, formulas, and processes that are eligible for legal protection; and trademarks.
Taxpayers must request a specific ruling from the Italian tax authorities to benefit from the regime when the qualifying intangible is either used directly by the company or licensed to a related party.
Inward investment, capital investment, and R&D investment incentives
A number of incentives have been established to attract new industry to southern Italy and certain depressed mountain areas in central and northern Italy.
The possibility of taking advantage of these rules, however, depends on the taxpayer fulfilling specific conditions and on the actual availability of financial resources by the Italian state. These financial resources generally are set in the annual state budget.
In particular, from FY 2015 through FY 2019, Italian companies that carry out qualifying R&D activities can benefit from a tax credit computed as a percentage of the R&D expenditures in excess of the company’s average R&D expenditures in FY 2012, FY 2013, and FY 2014.
The credit percentage is 25% for depreciation of laboratory equipment and for technical expertise related to industrial or biotech IP. The percentage increases to 50% for costs related to ‘highly qualified’ personnel and R&D activities outsourced to universities or other similar research institutions.
The tax credit cannot exceed EUR 5 million per year per taxpayer, and requires qualifying R&D costs of at least EUR 30,000 per year.