Edited by the International Tax Services Team
In brief
On December 6, 2024, the Italian Government approved the Decree implementing the penalty protection regime for hybrid mismatch arrangements based on anti-hybrid documentation as set forth by Decree no. 209 published in December 2023.
Proper preparation of the anti-hybrid documentation is of critical importance for Italian taxpayers part of multinational groups, as the penalty-protection regime:
- protects them against the application of administrative penalties;
- ensures that they have ready-to-exhibit and adequate supporting documentation against the application of anti-hybrid rules (“AHR”) in case of a tax audit;
- proves to be beneficial in the context of a due diligence process
- demonstrate that they are properly managing internal tax risks, also in connection with the cooperative compliance regime.
Relevant hybrid cases do not always follow aggressive tax planning strategies but, instead, can be created from unintended behaviours monitored only upon a detailed analysis is carried out. Consequently, the opportunity allows to control also the tax and penalty risks connected to previous fiscal years not duly mapped.
Those impacted by the Decree should reach out to the PwC to develop an effective and efficient, although practical, approach to it, also through user-friendly technology.
In detail
The AHR in a nutshell
Anti-hybrid rules are complex both from a technical and compliance perspective as they involve cross-border scenarios that, even if they have specific and identifiable law requirements (namely a deduction/not-inclusion ‘D/NI’ or double deduction ‘DD’ effect attributable to a hybrid element like a different tax characterization of an item of income, and a certain subjective scope) can be difficult to detect, quantify, and comply with in practice.
In sum, the AHR seek to deny for tax purposes the deductibility of negative items of income (otherwise deductible in determining the taxable base) or, alternatively, to force the inclusion of positive items of income (otherwise not included or recognized in the taxable base) to the extent that:
- there is a cross-border mismatch (a D/NI or DD);
- such mismatch occurs among related parties (including entities acting together) or parties to a structured arrangement (scope); and
- the mismatch is attributable to the different tax qualification of a financial instrument or item of income due under that instrument, hybrid transfers and substitute payments, hybrid entities (direct or reverse), and permanent establishments (including incoherent profit attribution).
Additionally, Italian AHR includes an ‘imported mismatch’ provision which denies tax deductions for negative items of income made by the Italian entity if they are directly or indirectly offset with an offshore hybrid mismatch elsewhere in the group (or under a structured arrangement).
Scope
The option to prepare the anti-hybrid documentation and hence benefit from the penalty protection regime is granted to all Italian tax resident entities and permanent establishment (PEs) of foreign entities. In principle, all and each Italian taxpayers could prepare their own anti-hybrid documentation, however, they can also choose to appoint another Italian group entity to prepare the documentation on their behalf (and a separate section for each entity is required). This would be most efficient in case of multinational groups with multiple entities or PEs in Italy.
On the other hand, for Italian entities under the cooperative compliance regime, the anti-hybrid documentation is a requirement under the transparency pillar required by the Italian Tax Authorities (“ITA”).
Fiscal years in scope
Timewise, the anti-hybrid documentation can be prepared for all fiscal years in which anti-hybrid rules were applicable in Italy, namely from the fiscal year following the one in progress as of 31 December 2019.
Consider however that the mapping should also include transactions related to items of income generated before the enactment of the AHR, specifically during the tax period following the one in progress as of December 28, 2018. This extension refers specifically to depreciation, amortization and write-downs related to tangible or intangible assets acquired during this period, as well as to tax losses and interest expenses and similar financial charges accrued during this tax period. Items of income incurred previously are instead considered as grandfathered.
Timing
For calendar year taxpayers the Decree states that for fiscal year:
- closing on 31 December 2020-2022, the deadline to prepare the anti-hybrid documentation is June 2025 (6 month-window from the approval of the Decree);
- closing on 31 December 2023-2024, the deadline to prepare the anti-hybrid documentation is 31 October 2025 (deadline to file fiscal year 2024 tax return).
- 2025 onwards, the relevant documentation must be filed by the deadline for filing the tax return for the tax period under documentation.
The above mentioned deadlines might slightly vary for non-calendar year taxpayers, to be discussed case-by-case according to the date of fiscal year end.
Formal requirements
The anti-hybrid documentation must be prepared in Italian and digitally signed by the legal representative (or another proxyholder) of the Italian entity.
In addition, a timestamp needs to be applied to the documentation within the above deadlines. The possession of the anti-hybrid documentation will have to be flagged in each relevant tax return or communicated to the Italian Tax Authorities.
The taxpayer does not need to file it, it should be provided by the ITA upon request only.
Content
The anti-hybrid documentation must include a per-entity mapping, considering the whole corporate group, as well as an analysis of the relevant cross-border transactions.
According to the scheme included in the Decree for each entity in the corporate group, the documentation must include a description of:
- the % of shareholding in the corporate chain, the jurisdiction of tax residency or localization and its tax treatment in its jurisdiction and in the jurisdiction of its investors;
- the presence of foreign and Italian permanent establishments;
- adherence to local tax units.
Secondly, in order to map the potential “direct” hybrid mismatches triggered in transactions directly involving the Italian entities of the group, it is necessary to include the analysis carried out for relevant transactions that may trigger hybrid mismatches, describing:
- the counterparties and the item of income potentially generating a mismatch, as well as its tax treatment in the jurisdictions involved;
- what hybrid effect is expected to arise and which hybrid cause(s) is in play, e.g. hybrid financial instrument, a hybrid mismatch caused by the presence of a branch or hybrid entity;
- the applicability – or the reasons behind the non-activation – of the linking rules to neutralize the mismatch.
Please consider that transactions can be grouped into homogeneous classes to simplify the mapping. Only transactions outlined in the documentation will be covered by the penalty protection.
Thirdly, the anti-hybrid documentation should also encompass an analysis of imported mismatches, to be carried out also on the basis of information provided from the headquarters of the group.
Leverage of the documentation on tax assessment procedures
The anti-hybrid documentation can be prepared only for fiscal years in relation to which the ITA has not yet formally started, before 29 December 2023, inquiries, investigations or audits on the presence of anti-hybrid mismatches.
In all other cases, drafting the anti-hybrid documentation is essential for Italian taxpayers not only to shield against application of penalties but also as evidence in case of tax audit or litigation.
During the tax audit procedure, the ITA will ask the taxpayer to provide the anti-hybrid documentation within 20 business days, while additional supporting documentation may be provided (upon request) within 30 business days from the date of inquiry (that can be postponed by a maximum of another 60 days).
Let’s talk
For a deeper discussion on the possible implications of the Hybrid Rules, please contact