Major corporate tax reforms in Italy

Italy is going to change the criteria according to which a company is resident for tax purposes in Italy. As of now, a company is deemed to be resident for tax purposes in Italy, if:

  1. the place of the “registered office”;
  2. the “place of effective management”;
  3. the “place of principal ordinary management”.

The third criteria is unknown in international tax practice. In the past it has given rise to disputes and risk of double taxation. Moreover, it was not clear if, pursuant to such criteria, a foreign holding or real estate company, administered from abroad, whose only assets were held in Italy could be considered as resident for tax purposes in Italy.

The tax reform will solve most of these problems.

Corporate residence will therefore depend on three alternative tests:

  1. the place of the “registered office”;
  2. the “place of effective management”;
  3. the “place of principal ordinary management”.

The latter two tests of residence represent a move to more of a “substance over form” approach to determining a company’s tax residence. The tests are designed to look at the place where strategic decisions are taken and the management activities of the company are actually carried out. De facto, such reform is in line with the best international tax practices.

Moreover, there is a new incentive which intend to attract new capital in Italy. Such incentive will consist of a reduction in the computation of taxable profits for the purposes of income taxes of 50 percent. This will apply to entities carrying on business activities and to professional associations currently working abroad and who transfer their activities to Italy and previously carried out in a foreign country outside the European Union or the European Economic Area. The activities must have been carried out outside Italy for 24 months prior to the transfer.

The relief applies in the tax period in which the transfer takes place and for the five following Clawback of the tax benefits also applies the activity which has been transferred to Italy is subsequently transferred to a state not belonging to the European Union and the European Economic Area during the period in which the benefit applies or within ten tax periods from the end of the relief regime.