Italian corporate entities are subject to a corporate income tax, known as imposta sul reddito sulle società or IRES, and to a regional production tax, known as imposta regionale sulle attività produttive or IRAP.
The standard rates are as follows:
- 24% for IRES.
- 3.9% for IRAP.
Up to FY 2016, the IRES rate was 27.5%. Specific rules apply for bank and financial entities.
Different IRAP rates are applicable for certain entities (i.e. banks and financial entities, insurance corporations, entities with a determined governmental exclusive right to provide services).
Regions have the power to slightly increase or decrease IRAP rates.
The IRES taxable base is determined according to the worldwide taxation principle, which states that, regardless of the location/jurisdiction where the income is produced, to the extent that the income is legally attributable to an Italian resident entity, the income is taxed in Italy. IRES is charged on the total net income reported in the financial statements of the company as adjusted for specific tax rules. Non-resident companies are taxed only on Italian-source income.
There are different methods of computation for the IRAP taxable base, depending on the nature of the business carried out by the taxpayer. Provisions for liabilities and risks, as well as extraordinary items, cannot be taken into account when determining the IRAP taxable base.
For sales and manufacturing companies, the IRAP taxable base is broadly represented by the company’s gross margin in its financial statements. In addition to the non-deductible items mentioned above, interest income and expense and provisions for bad debts are excluded for the purposes of the IRAP taxable base.
For banks, the IRAP taxable base is broadly defined as follows:
- Intermediation margin reduced by 50% of dividends.
- 90% of amortisation costs relating to fixed tangible and intangible assets.
- 90% of other administrative expenses.
- Net value of adjustments and reassessments for bad debts.
Special rules apply to financial institutions, other than banks, and holding companies.
IRAP is levied on a regional basis, and regions are allowed to increase or decrease the standard IRAP rate up to 0.92%. Companies with facilities in different regions must allocate their overall taxable base to the different regions on the basis of the employment costs of personnel located at the various sites. Facilities become relevant to the calculation of IRAP if they have been established for more than three months. Italian companies with permanent establishments (PEs) abroad, as well as shipping companies qualifying for the tonnage tax regime (see Tonnage tax below), are not subject to IRAP on the income earned through these PEs.
The deduction of labour costs for IRAP purposes depends on the type of hiring contract. In particular:
- Full deduction for costs related to employees hired with an open-ended contract.
- Deduction limited to contributions for compulsory insurance against accidents (i.e. Istituto Nazionale Infortuni sul Lavoro or INAIL) for temporary employees.
Substitutive tax on reorganisations (mergers, de-mergers, contributions in kind)
Corporate restructurings, such as mergers, de-mergers, and contributions in kind, are, in principle, tax neutral even if, for financial accounting purposes, the transaction results in the recognition of higher values of the assets or of goodwill. Companies may elect to obtain partial or full recognition for tax purposes of the step-up in the financial accounting values of assets or of the goodwill arising from the corporate restructurings, provided they pay a substitutive tax.
The substitutive tax is calculated on the step-up in tax basis and is based on progressive rates of 12% to 16% (i.e. 12% up to EUR 5 million, 14% from EUR 5 million to EUR 10 million, and 16% over EUR 10 million) to be paid by the deadline of the tax payment of the fiscal year in which the reorganisation took place or the following fiscal year. The substitutive tax may also be paid in three annual instalments of 30% in the year of election, 40% in year two, and 30% in year three plus interest at the rate of 2.5% per year on the deferred amounts. The substitutive tax is not deductible for the purposes of IRES or IRAP.
In addition, stepped-up values of goodwill and trademarks acquired from the reorganisation transactions carried out since 1 January 2016 may be depreciated for tax purposes over five tax years, instead of 18 years, by paying a substitutive tax of 16%. Substitutive tax needs to be paid by the deadline of the tax payment of the fiscal year in which the reorganisation took place. Payment in instalments is not allowed. The higher tax depreciation arising from this election is effective from the tax period subsequent to the one in which the substitutive tax is paid. For example, if a merger transaction occurred in year one and the substitutive tax was paid in year two, the increased tax depreciation would begin in year three.
Free step-up on reorganisations (mergers, de-mergers, contributions in kind)
Under certain conditions, a free step-up of the tax basis of capital assets in case of mergers, de-mergers, and contributions in kind is granted up to EUR 5 million. The law provides for a free tax step-up regime for both corporate and regional tax purposes for companies receiving assets upon mergers, de-mergers, or contributions in kind which take place between 1 May 2019 and 31 December 2022. That means that the increased accounting value of goodwill, tangible assets, and intangible assets accounted for by the receiving entity will be recognised for tax purposes. The benefit applies to mergers, de-mergers, and contributions in kind that occur between companies not belonging to the same group and under the condition that such entities carried out their business activity for at least two years.
Italian tax resident shipping companies, as well as non-resident shipping companies operating in Italy through a PE, can qualify for and then elect to be subject to the Italian tonnage tax regime. The regime basically allows for the determination of presumptive income based on the net tonnage of the qualifying ships apportioned to the effective shipping days (tonnage income). The tonnage income is subject to IRES only.
To qualify for the tonnage tax, ships must: (i) have a net tonnage of more than 100 net tons (NT); (ii) be used for goods transportation, passenger transportation, salvage, towing, and other services; and (iii) operate in international shipping as defined by the rules disciplining Italian International Registry. Ships chartered out on a bare boat charter are excluded. Chartered ships with crew are included in the tonnage tax regime if their global net tonnage is less than 50% of the total net tonnage.
Tonnage income is calculated on the basis of the ship’s net tonnage. The daily income is determined according to the following rate system:
|Ship's net tonnage (NT)||Daily income in EUR per NT|
|0 to 1,000||0.0090|
|1,001 to 10,000||0.0070|
|10,001 to 25,000||0.0040|
Days in which the ships are not in use due to maintenance operation or are temporarily out of commission are not to be taken into consideration.
No deductions are allowed from tonnage tax income.
Income and expenses from the following activities are all deemed to be covered by the tonnage income determined as previously discussed:
- Transport of goods.
- Transport of passengers.
- Salvage and towing.
- Other services that need to be performed on the high seas.
- Charges related to the above-mentioned activities (e.g. administrative and commercial expenses, insurances fees).
- Other operations performed in close connection with the transportation operations (e.g. loading and unloading).
- Other minor activities.
Capital gains or losses arising from the transfer of ships that have been acquired by a company while under the tonnage tax regime are also deemed to be included in tonnage tax income. In the event of options exercised from FY 2016, if the taxpayer sells a ship already owned before the tonnage tax application, a capital gain determined according to the rules of Article 158 of the Italian Income Tax Code (TUIR) is added to the taxable income. In such case, the capital gain is equal to the lower of (i) the difference in the market value of the vessel and the non-amortised cost of the same, recorded on the last day of the year preceding the one in which the option is exercised, and (ii) the difference between the consideration received and the cost not amortised at the time of the sale. In any case, the taxable amount cannot be lower than the 'net latent capital gain' calculated as the difference between the market value of the vessel and the non-amortised cost of the same both before the tax period in which the option is exercised decreased by the tonnage income determined until the time of transfer.
In the event of an option exercised before FY 2016, the sale of a vessel purchased before tonnage tax can generate a capital gain or a loss to be added to the tonnage tax; this amount is equal to the difference between the consideration received and the non-amortised cost of the last antecedent fiscal year to that of the first application of the tonnage tax.
An election for the tonnage tax regime should be made for all of a company’s or group’s qualifying vessels. So called ‘cherry picking’ is not allowed. Election for the tonnage tax regime is on a voluntary basis, but, once elected, it remains in effect for ten years. The election is silently renewed at the end of the ten-year period.