Published in the Official Journal the Italian Decree dated 26 June 2023 implementing the new tax redemption regime introduced by the 2023 Italian Budget Law
Edited by Flavia Barone, Stefano Ferraro
Last 26 June it was released by the Italian Ministry of Economy and Finance the Decree implementing the new temporary and optional regime for the tax redemption of profits and profit reserves in non-resident entities held by Italian residents introduced by the 2023 Italian Budget Law (Article 1, paragraphs 87-95, Law no 197/2022).
The subjects eligible for the regime
The option is recognized to both Italian participants and participants not resident in Italy. The Italian participants include individual enterprises and partnerships, excluding simple partnerships, joint-stock companies, cooperatives and entities carrying out a business activity. Article 2 of the Decree specifies the tax redemption is allowed only to tax payers holding participations in entities not resident in Italy as part of their business activity. Instead, the other category includes the participants not resident in Italy provided that they carry out a business in Italy by means of a permanent establishment (in this case, the tax redemption regime can be opted only with respect to the participations held in the foreign entities forming part of the assets of the permanent establishment itself). In addition, article 2 of the Decree expands the subjective requirement also to the case of participation in the foreign entity held directly or indirectly. In particular, in the specific case of indirect shareholding, the option can be exercised by the subject “closest to the border”, this means that the recipient of the profits coincide with the person exercising the option.
The computation of the amount subject to the tax redemption regime
The amount of profits/profit reserves is computed in proportion to the profit participation held in non-resident entities at the end of the operating year of the latter, relating to the fiscal year prior to the one in progress on 1st of January 2022 (i.e. 31/12/2021, for entities with a financial year equal to the calendar year) In case of indirect participation, the de-multiplier mechanism applies. Article 3 of the Decree introduces two adjustment mechanisms, in particular:
- The amount of profits to be redeemed must be reduced by the amount of foreign profits/profit reserves already received by the Italian resident entity before the 1st of January 2023 (i.e., before the entry into force of the tax redemption regime). In case profits are distributed but not received before the 1st of January 2023, no “adjustments”’ are triggered but, on the contrary, they can be redeemed.
- The percentage of profit participation must be reduced if the same is sold by the party exercising the option in the period between the day after the end of the financial year of the foreign entity relating to the tax period prior to the one in progress on 1 January 2022 and 31/12/2022. This mechanism applies only if the object of the disposal is the first-level participation held directly in the foreign company whose profits are to be redeemed; or in the intermediate foreign entity through which the participation in the entity to be redeemed is held.
The “ordinary” repatriation regime
Article 5, in accordance with the provisions of article 1, par. 91, of 2023 Italian Budget Law, rules the so-called “ordinary” repatriation regime. Basically, in case the requirements described above are met, the tax redemption regime can be opted via the payment of a substitute tax of 9% (IRES subjects) and 30% (IRPEF subjects). The above substitute tax cannot be off-set against other taxes and must be paid in one shot (no instalment plan is allowed) by the deadline for the IRES or IRPEF balance payments for 2022 fiscal year (i.e. by 30 June 2023 for entities with an operating year equal to the calendar year). Up to now, no extension to this deadline has been envisaged, although the implementing Decree was issued on 26 June 2023. The omission or the partial payment of the substitute tax does not render the option ineffective; however, the ordinary rules on assessment, collection, litigation and penalties provided for corporate income taxes apply. The Decree confirms what was already provided for in 2023 Italian Budget Law, i.e., it is allowed to the taxpayer to decide both for which non-resident entity and for which amount (totally or partially) exercise the option. In addition, the explanatory report attached to the Decree also provides that the taxpayer is subject to a documentation burden, i.e., “the taxpayer shall keep track in the accounting and non-accounting documentation referable to the foreign entity (e.g., resolutions or deed of distribution) of the choices made in relation to the profits and the related redeemed amounts”. The option must be exercised through the tax return for 2022 fiscal year (i.e. by means of the “modello Redditi 2023”, in the case of entities with an operating year equal to the calendar year) and is effective as of the 1st January 2023.
The “special” repatriantion regime
Only in case the Italian resident entity holds a controlling interest (direct or indirect) in the foreign entity at the beginning of the fiscal year following the one in progress as of 31 December 2022 (i.e., the 1st of January 2023, in the case of entities with an operating year equal to the calendar year), it is possible to benefit from the reduced substitute tax at to 27% (IRPEF entities) and 6% (IRES entities), provided that the following conditions are met:
- The profits/profit reserves to be redeemed must be received within 30 June 2024 (in the case of entities with an operating year equal to the calendar year);
- Obligation to account a specific reserve (net of substitute tax) which cannot be distributed or utilized (this profit reserve can be qualified as a positive upward for NID purposes).
The accounting of said reserve must be made in the context of the approving process of the financial statements for the year in which the profits are received (i.e. financial statements as of 31/12/2023 to be approved in 2024). This reserve must remain booked until the end of the operating year ending 31/12/2015, therefore there is a substantial prohibition on its distribution until the operating year 2025 and in case of mergers and demergers there is an obligation to replenish it. In case operating losses prevent or reduce the reserve already booked, the tax redemption option already exercised does not lapse. However, the explanatory report attached to the Decree specifies that the reserve not established or reduced due to the year’s loss must be established or replenished by utilizing profits generated in the subsequent years until the 2025 financial statements. After that date, the obligation to establish or replenish the reserve does not apply. Further flexibility is also given to this regime by providing for the possibility to combine “ordinary” and “special” repatriation regime both in relation to different foreign entities and in relation to different amounts of profits/profit reserves of the same foreign entity. In the event that one of the above conditions is not fulfilled, the tax redemption regime will not be terminated but the “ordinary” regime will be triggered instead of the “special” regime. Therefore, payment of the 3% difference plus 20% of penalties plus interest is required within 30 days of the event that caused the regime to lapse (on this point, the Explanatory report attached to the Decree provides a non-exhaustive list of cases in which the lapse is triggered).
Connections with the CFC regime
Article 8 of the Decree introduces relevant principles in terms of both coordination with the CFC (“Controlled Foreign Companies”) rules and the crediting of taxes paid abroad on such profits. It should be preliminarily noted that, following the tax redemption option, the redeemed profits received after 1/1/2023 (both in case of “ordinary” and “special” repatriation) are 100% excluded from the taxable base of the Italian resident recipient. The exclusion is only related to corporate taxes and does not apply for IRAP purposes. Having said that, as highlighted in the Explanatory report attached to the Decree, in light of the general principle of favour provided for by article 1, paragraph 92, of 2023 Budget Law (i.e. the profits distributed by the non-resident are presumed to be formed in priority with those already redeemed), article 8 of the Decree makes this principle explicit by coordinating it with the CFC regime and providing for two periods of application:
- In case of “special” repatriation regime, profits/profit reserves coming from redeemed foreign entities until 30 June 2024, are presumed to be formed (i) first of all from profits excluded from taxation in Italy because they have been redeemed, (ii) for the remaining amount, from profits coming from CFC entities already taxed for transparency.
- In case of both “special” and “ordinary” repatriation regime, profits/profit reserves from redeemed foreign entities from 1st of July 2024, are presumed to be formed (i) primarily from profits from CFC entities already taxed for transparency, (ii) for the remaining amount, from profits excluded from taxation in Italy as redeemed.
In addition, to further coordinate with the CFC regime, it is provided that:
- in case the CFC regime is applied to the foreign intermediate entity closest to the foreign “redeemed” entity, the exclusion from Italian taxation of the redeemed profits must be taken into account when determining the income of the CFC entity that is attributed by transparency to the ITA entity.
- The redeemed profits are not relevant for the purposes of calculating the virtual Italian taxation of foreign intermediaries along the participation chain.
Finally, the last paragraph of article 8 clarifies that no credit for taxes paid abroad is granted on profits subject to substitute tax. In other words, the taxpayer resident in Italy is not entitled to the deduction provided for, in the presence of an exempting circumstance, for the taxes paid by the controlled foreign entity on the profits accrued during the holding period (so-called indirect tax credit), nor is it entitled to the deduction for any foreign taxes paid by the investee entity or the shareholder thereof at the time of the distribution of the profits.
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PwC TLS Avvocati e Commercialisti
PwC TLS Avvocati e Commercialisti