Edited by Andrea Porcarelli, Mario Volpe, Raffaele Iervolino, Chiara Bardoscia
Key takeaways
Penalty protection relief in case of hybrid mismatches challenges (pursuant to Articles 6-11 of Legislative Decree no. 142/2018) if the taxpayer (part of domestic and non-Italian groups, including therefore Italian subsidiaries of foreign groups and permanent establishments):
- drafts the anti-hybrid documentation;
- the availability of the anti-hybrid documentation, that must have “certain date”, is communicated to the Italian Tax Authorities by the deadline for submitting the tax return (on an ongoing basis);
- the documentation contains a full and truthful description of the cases and the manner in which the linking rules are applied (if applicable) to remove the hybrid mismatch based on the role of the taxpayer ;
- no access, inspections, audits, or other administrative assessment activities have been started.
Although the provision introduces an additional annual compliance burden, it guarantees certainty to the documentation that the Italian taxpayer has to prepare in respect of the hybrid mismatches with the ultimate aim of:
- dealing with potential requests from the Italian Tax Authorities;
- obtaining relief from administrative penalties in case of assessment;
- obtaining potential relief from criminal penalties although no longer explicitly provided for by the final approved version of the Law Decree no. 209/2023 (“International Tax Decree”).
Anti hybrid rules
The anti-hybrid rules apply as of fiscal year 2020 (i.e. as of the financial year following the one in progress as of December 31, 2019) except for the rule to counteract the “reverse hybrids” in force as of fiscal year 2022, i.e. from the year following the one in progress as of December 31, 2021.
Clarifications on the application of the anti-hybrid rules are provided for by the Circular Letter no. 2 of 2022 (“Circular”) issued by the Italian Tax Authority.
The new rules introduced by the International Tax Decree
Article 61 of the International Tax Decree introduces the possibility for taxpayers (part of domestic and non-Italian groups), to prepare a set of documents to obtain the so-called penalty protection in case of challenges concerning hybrid mismatches, similar to what is already provided for in the area of transfer pricing.
The documentation is in continuity with the clarification provided for by the Circular, which had already identified as a “best practice” the performance of appropriate analyses to assess whether a relevant hybrid mismatches exists or not prior to the drafting of the tax return, without foreseeing at the time for reporting and/or declaration obligation or explicit benefit in terms of penalties.
Documentation requirements
Anti-hybrid documentation would be a “burden” (not an obligation) whose essential features are:
- The preparation prior to the submission of the tax return, in which the possession must be communicated to the Italian Tax Authorities;
- Date certain (potentially through digital signature with timestamp);
- Details on the content (and form) is left to a Decree of the Ministry of the Economy and Finance (“MEF”) to be issued within 60 days following the approval of the International Tax Decree.
The content of the documentation
The content of the anti-hybrid documentation is delegated to a MEF Decree.
However, the approach currently in practice implies that:
- in the context of a multinational group, all transactions between related parties, residents and/or located in at least two different jurisdictions , should be subject to the scrutiny of the anti-hybrid rules;
- the burden of proof is shared, requiring the Italian Administration to demonstrate the “constitutive elelemnts” of the violation and the taxpayer to “provide evidence that the case does not occur or of the existence of facts preventing or extinguish that claim”.
Consequently, in terms of imported hybrids mismatch, it is not unlikely to argue that the documentation requires an extensive mapping of the entire group.
Nevertheless, Italian anti-hybrid documentation could be prepared on the basis of any other analyses eventually already carried out in other jurisdictions, provided they are in line with the provisions of the Italian decree which constitutes the minimum protection standard and vice versa.
Timing for communication (and thus for the preparation)
The communication, attesting the possession of the documentation is to be made within the deadline for submitting the tax return relating to the fiscal years in progress at the date of entry into force of the Legislative Decree, i.e. Modello Redditi SC 2024, referred to 2023 tax period (or, if later, within 6 months from the date of approval of the ad-hoc Decree following the introduction of the penalty protection).
Fiscal years
Taxpayer is granted also with the opportunity to benefit from the penalty protection relief also for fiscal years from 2020 to 2022 (where the tax return was already submitted) to the extent that:
- the related anti-hybrid documentation is prepared within the terms provided above, or
- no accesses, inspections, audits, or other assessment activities have begun on those tax periods.
It will also be necessary to monitor some negative items of income “generated” in 2019 but subsequently deducted (e.g. tax losses, depreciation and interest expenses as provided for by the Circular).
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