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).
Tax credit for reorganisations
The 2021 Budget Law introduced an incentive for reorganisations, providing that in case of mergers, de-mergers, and contributions in kind, resolved during the period 1 January 2021 and 31 December 2021, the receiving company is allowed to convert the deferred tax assets, also not accrued in the Financial Statements, related to the net operating losses (NOLs) and notional interest deduction (NID) in a tax credit. Specific conditions are provided to take advantage of such conversions.
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.
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:
- Personnel costs.
- Depreciation charges, costs of the financial or simple lease, and other expenses related to movable tangible assets and software used in R&D projects.
- Expenses for extra-muros research contracts concerning the direct execution of eligible R&D activities by the provider.
- Depreciation charges related to industrial privatives.
- Expenses for consultancy services and equivalent services related to R&D eligible activities.
- 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 on training expenses for Industry 4.0 plan
The 2021 Budget Law amended also the regulation of the tax credit for training 4.0. From the tax period following the one in course on 31 December 2019, the tax credit for training 4.0 is calculated on the whole amount of the following costs:
- Trainers' personnel costs, for the hours during which the trainers participate in the training activities.
- Trainers' and trainees' operating costs directly relating to the training project.
- Costs of advisory services linked to the training project.
- Trainees' personnel costs and general indirect costs (administrative costs, rent, overheads) for the hours during which the trainees participate in the training.
The tax credit is available to:
- small enterprises, for an amount equal to 50% of eligible expenses, up to a maximum of EUR 300,000, and
- medium-sized enterprises and large enterprises, for an amount respectively equal to 40% and 30% of eligible expenses, up to a maximum of EUR 250,000.
The 2023 Budget Law did not extend this tax credit for FY 2023 onwards.
Advertising campaign tax credit
There is a tax credit available for taxpayers who invest in analog and digital daily press and magazines. For FY 2020 and 2021, the tax credit was equal to 50% of the eligible expenses incurred, subject to re-proportioning of the national budget available for this measure. From 2023, the tax credit amounts to 75% of the incremental investments compared with the previous year, provided that the increment exceeds 1%.
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.
Other tax incentives
In addition, further incentives are introduced or extended, aimed to support or facilitate:
- the listing of small and medium-sized enterprises (SMEs) (i.e. admission to trading in regulated markets or European Multilateral Trading Systems)
- access to financial credit for purchasing of new machinery, plants, and equipment, as well as digital technologies and software (i.e. Nuova Sabatini)
- purchase of recycled plastic products
- energy requalification of buildings
- donations to finance interventions on public buildings and lands, and
- investments in innovative start-ups.
Due to their specificity, such incentives are not treated in detail.