ITALY: An Introduction to Tax

Overview and Impact of Italian Tax Reform on the International Taxation Landscape

Recent years have seen significant changes in global taxation driven by evolving economic, legal and political trends. Italy’s tax system is adapting to these changes via comprehensive legislative reforms encapsulated in Law No 111 of 2023 and the subsequent implementing decrees. This reform addresses new tax residence rules, the introduction of a global minimum tax, and enhancement of the cooperative compliance regime. Our overview examines the implications of these changes for clients, highlighting current economic conditions, trends, new legislation and potential challenges.

Economic Conditions and Trends

The global economy has faced substantial turbulence, marked by post-pandemic recovery efforts, geopolitical uncertainty, and a push for more transparent and equitable taxation. Italy’s economy, with its robust industrial sector and hefty public debt, is especially influenced by these dynamics, which directly impact tax legislation and enforcement as the Italian government strives to stabilise public finances while fostering a climate of growth and competitiveness. The OECD’s Base Erosion and Profit Shifting (BEPS) initiative, aimed at combating tax avoidance and ensuring that multinational enterprises (MNEs) pay their fair share of taxes where economic activities take place, has had a major effect on Italian tax policy. The country’s commitment to implementing BEPS-related measures has led to some notable legislative changes. Its tax reform aims to modernise and optimse the tax system by: ·

• stimulating economic growth: by reducing the tax burden and simplifying the tax system, reform aims to create a more business-friendly environment that encourages investment and economic activity; ·
• preventing and reducing incidences of  tax evasion: reform introduces measures to increase the efficiency of the tax structure, to prevent and reduce tax evasion and avoidance through enhanced compliance and monitoring mechanisms; ·
•  rationalisation and simplification: legislation seeks to streamline the tax system, making it easier for taxpayers to understand and comply with their obligations, thereby reducing the country's administrative burden;
• reviewing tax returns and payment obligations: the reform aims to simplify processes for declaring and paying taxes, ensuring that taxpayers can fulfil their obligations more efficiently and accurately; and·
• alignment with international standards: the reform brings Italy’s tax system into line with international standards, particularly those of the EU and the OECD, to ensure compliance with global best practices and to avoid double taxation.

Changes to Tax Residency Rules

Legislative Decree No 209 of 27 December 2023 introduces significant modifications to the Italy’s tax residency criteria, aligning them with international standards and improving clarity and enforceability. The primary goal is to prevent tax avoidance by both individuals and entities, exploiting ambiguities in residency status definitions in order to minimise tax liabilities. This decree implements the delegation regarding international taxation, defining tax residence for natural and legal persons, and simplifying the taxation of controlled foreign companies.

Key modifications are as follows.

• Enhanced definition of tax residence status for individuals: reforms refine the criteria for determining tax residency, placing a focus on physical presence, the centre of vital interests, and habitual abode. This adjustment aims to close loopholes that allowed taxpayers to claim non-resident status while maintaining significant ties to Italy. The legislation thus defines a precise hierarchy between the connection criteria supporting personal and family relationships over economic and work-related interests.

·

• Better-defined corporate tax residency rules: tax residency is determined according to any one of three alternative criteria: legal seat, place of effective management, and main business. The new element is the introduction of the concept of “place of effective management” (or PoEM), with this being where company directors meet and conduct their business. In determining a place of management, Italy is willing to follow the OECD guide in Article 4 of its Model Tax Convention on Income and on Capital 2017.

Introduction of a Global Minimum Tax

The adoption of a global minimum tax represents a significant shift in international tax policy, aiming to curb profit shifting and tax-base erosion by multinational enterprises. This initiative, spearheaded by the OECD and G20, seeks to ensure that MNEs pay a minimum level of tax regardless of where they operate, thereby promoting a fairer and more stable global tax environment. Legislative Decree No 209/2023, implementing Directive (EU) 2022/2523, introduces regulations on Global Minimum Tax aimed at guaranteeing a minimum tax level of 15% for multinational or domestic groups exceeding a revenue threshold of EUR750 million. In particular, Italy has opted for the introduction of a minimum domestic tax for all companies resident in the country (the Qualified Domestic Minimum Top-up Tax, or  QDMTT). If group companies located in Italy do not reach a level of effective taxation equal to 15%, the group will have to pay an additional tax to meet this threshold. Specifically, the effective tax rate (ETR) consists of a comparison of the relevant taxes with the corresponding net income of all companies operating in the same country.

Cooperative Compliance Regime

The cooperative compliance regime, introduced in Italy by Legislative Decree No 128/2015 and amended by Legislative Decree No 221/2023, represents a proactive approach to tax administration, supporting a constant dialogue between taxpayers and the Italian tax authorities to prevent and resolve tax disputes.

Key Features are as follows.

• Eligibility criteria: the regime is reserved for taxpayers that achieve a turnover of no less than EUR750 million starting from 2024, EUR500 million from 2026 and EUR100 million from 2028.

• Certification requirements: taxpayers participating in the regime must have an effective integrated system (Tax Control Framework) for detecting, measuring, managing and controlling tax risk embedded within the corporate governance and internal control system. This system must be certified by independent professionals with specific expertise who are registered in the bar association or the register of certified public accountants and accounting experts. The requirements and obligations for these professionals will be regulated by a decree of the Ministry of Economy and Finance in agreement with the Ministry of Justice after consulting the respective professional associations.

Benefits for companies

Participation in the cooperative compliance regime offers several benefits, such as:  

• an expedited preliminary ruling procedure, with the tax authorities responding to queries within 45 days; ·
• procedures for regularising the taxpayer’s position if self-corrections are needed; ·
• a complete waiver of administrative penalties for timely reported tax risks; ·
• halving of penalties for non-significant tax risks included in the risk map; ·
• exemption from providing guarantees for tax refunds; ·
• grounds for non-punishment for criminal offenses.

Conclusion

Italian tax reform brings Italy into line with international tax standards, promoting fairness and transparency while addressing the complexities of modern tax administration. Looking ahead, clients and legal professionals will be required to stay abreast of further legislative developments and their practical implications. The continuous evolution of international tax standards and Italy’s commitment to aligning with these will likely bring additional changes. Proactive adaptation and strategic planning will be essential for optimising tax positions and ensuring compliance. As Italy navigates this transformative period in its tax landscape, the focus will be on fostering a robust, transparent, and fair tax system that supports economic growth and stability. Engaging with the cooperative compliance regime, understanding the new residency rules, and adhering to the global minimum tax requirements will be crucial steps for businesses and individuals in achieving these goals.