Italy: International tax amendments in the Italian Budget Law for 2023

Costs related to transactions with non-cooperative jurisdictions

The Budget Law for 2023 has reintroduced, with amendments, a provision, dating back in its initial formulation to 1992, according to which expenses and other costs arising from transactions with counterparts resident or established in jurisdictions that are deemed to be non-cooperative for tax purposes are deductible only where certain conditions are met.

More specifically, the deduction is limited to the fair market value of goods or services purchased. In essence, the provision has effects similar to those of Transfer Pricing rules, but also applies to third-party transactions.

Any excess amount is deductible only where the Italian entity can demonstrate that the underlying transaction has a sound economic rationale.

Costs incurred are in any case subject to the specific reporting obligation in the tax return.

The jurisdictions concerned are those that have been identified in Annex I to the EU List of Non-cooperative Jurisdictions for Tax Purposes. The list presently consists of 16 jurisdictions, including, among others, two of recent introduction and non-negligible importance in Italian cross-border trade, namely Costa Rica and Russia.

New rules on real estate investment structures in Italy

The Budget Law for 2023 has extended the Italian source jurisdiction with respect to capital gains deriving from real estate structures owning properties in Italy.

Under the new rule, capital gains derived by foreign investors from the sale of shareholdings in entities deriving their value (even indirectly) mainly from real estate located in Italy are considered as taxable in Italy.

The new provisions:

• do not apply with respect to capital gains realised by EU-regulated collective investment funds;
• do not take into consideration property owned by entities whose business activities consist of building or selling such properties or ones directly used for business purposes.

Few Italian treaties provide for the source taxation of capital gains deriving from the sale of Italian shareholdings, so the new domestic provisions will have a limited application in the short term, but the scenario will change significantly once Italy has ratified the MLI, which allocates source taxation on capital gains in a way similar to the new Italian rules.

Substitute tax on foreign undistributed profits

Foreign-source profits, derived from jurisdictions with preferential tax regimes (i.e. effective tax rates lower than half of the virtual tax rate applicable if the distributing entity was an Italian resident), can be exempt from Italian corporate income tax in the hands of the Italian resident recipient entity through the payment of a substitute tax.

The substitute tax is applicable at a rate of 9% and applies only to undistributed profits resulting from the financial statements for financial year 2021 of the foreign entity. The substitute tax is further reduced to 6% where the profits are repatriated within the deadline for the payment of the balance of corporate income tax due for financial year 2022 (i.e. by 30/06/2023 for calendar-year adopters) and then retained by the recipient entity for a subsequent period of not less than two financial years.

Read the WTS Global International Corporate Tax Newsletter here.