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ITALY: An Introduction to Tax

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Over the past two years, the economic landscape has been sorely tested by the COVID-19 pandemic. The Italian Government has responded by allocating large resources to support business activities and employment, strengthen public health and ensure a constant flow of liquidity to the economy.

In terms of economic policies, the European Council approved an extraordinary financial plan (the “Next Generation EU”) in July 2020. Italy is one of the first beneficiaries, in absolute value, of the main instrument of the Next Generation EU: the “Recovery and Resilience Facility (RRF)”, that grants resources for 191.5 billion euros to be used between 2021-2026.

To this end, on 30 April 2021 Italy submitted a package of investments and reforms (the “National Recovery and Resilience Plan”) to the European Commission, built around six fields of intervention (called “Missions”) which include: 1) ‘Digitalisation, innovation, competitiveness, culture and tourism’; 2) ‘Green revolution and ecological transition’; 3) ‘Infrastructures for sustainable mobility’; 4) ‘Education and research’; 5) ‘Inclusion and cohesion’; 6) ‘Health’.

Amongst the key elements for the implementation of the Plan, the introduction of reforms and incentives in the tax field are pivotal.

Firstly, in order to encourage the requalification of Italian real estate heritage, several tax credits for energy efficiency, renovation of buildings and anti-seismic interventions have been introduced. Inter alia, the so-called “Superbonus” grants a tax credit equal to 110% of the costs incurred for specific building interventions.

To further facilitate the use of such tax credits, the relevant law provisions allow taxpayers to benefit by virtue of a discount granted by the suppliers, instead of being necessarily required to utilise the credit directly as a deduction from income tax. As an alternative, taxpayers can transfer the tax credit to third parties (including banks and other financial institutions). These incentives have had a remarkable impact on the real estate industry and have been recently extended up to 2025.

Fostering the digital transition and the innovation in production systems is also a key pillar of the Italian government's agenda. To such end, a tax incentive policy has been introduced for investments in capital goods functional to technological transformation and in relation to intangible assets, as well as in research and development activities (so-called R&D tax credits).

In parallel, the Italian government introduced specific measures to heal industries particularly affected by the COVID-19 pandemic, including tourism and hospitality.

Indeed, companies operating in such industries have been allowed to opt into a tax-free step-up of the values - for both accounting and tax purposes - of their real estate assets and other fixed assets in 2020 and/or 2021 financial statements. The step-up leads to the reduction of the effective tax rate for direct tax purposes (through higher tax depreciations), and to strengthen the net equity of such companies together with increasing the opportunity to dispose or reorganise their assets. Moreover, other specific tax-friendly measures have been enacted to support the travel and leisure industry, such as the "tax credit for leases” which is equal to 60% of rental fees paid for properties used by companies operating in that industry (introduced in 2020 and extended up to March 2022). Furthermore, the “Superbonus Hotel” is equal to 80% of certain costs for renovation works on hotel properties.

Such tax incentives, specifically implemented to relaunch the economy after COVID-19, are added to tax measures aimed at supporting investments in Italian companies. Inter alia, the government confirmed the possibility to deduct, for corporate income tax purposes, an amount corresponding to a notional return on equity increases, calculated at a rate of 1.3% in 2022 (“Allowance for Corporate Equity”). Such provision is aimed at supporting capital injections into Italian companies.

Favourable tax provisions for EU undertakings for collective investment (UCIs) that invest in Italian companies were introduced to attract inbound investment from abroad. In essence, Italian-sourced dividends and capital gains realized by EU UCIs, established in compliance with EU Directives (UCITS and AIFMD) and subject to regulatory supervision abroad, have been exempted from withholding tax/substitute tax, insofar as certain conditions are met.

Personal income taxes have not been left behind by the legislator. Indeed, Italy offers special tax benefits to individuals relocating to Italy from abroad (“High Net Worth Individuals”) who are allowed to opt for an annual flat tax of €100,000 on their foreign sourced income, an exception being capital gains deriving the disposal of qualifying shareholdings realised during the first five years of validity of this regime. This tax regime provides, inter alia, for the exemption from gift and inheritance taxes for assets located abroad, as well as for the exemption from tax monitoring obligations and from the payment of “wealth” taxes of foreign assets (i.e. IVAFE and IVIE).

Furthermore, to support the economic, scientific and cultural development in Italy, the Italian tax system has introduced the so-called “Italian inpatriate tax regime”. Under certain conditions, non-Italian tax resident individuals who transfer their tax residence to Italy shall be subject to personal income tax, for five tax periods, on a portion equal to 30% of their employment income, quasi-employment income, self-employment income and business income.

Finally, from the end of 2021 the Italian Government has proposed the introduction of a set of measures for reforming the Italian tax system. These are mainly aimed at economic growth, the rationalization and simplification of the tax system and the reduction of tax evasion and avoidance. Such measures have modified the taxation of individuals through the gradual reduction of the average effective tax rates on the income of individuals (Irpef). In addition, further provisions will be implemented for the simplification of corporate income tax (Ires), for the modernization of property mapping tools and the revision of the cadaster of buildings, that will take place over a period of 5 years.

In the scenario outlined above, the measures financed by the national budget and by European funds, especially those envisaged in the “National Recovery and Resilience Plan”, shall considerably support the growth of Italian companies and create favourable conditions and a welcoming environment for foreign investors.