Internationalization Decree (Legislative Decree no. 209 of December 27, 2023) – Key Tax Innovations

Introduction

The Legislative Decree no. 209 of December 27, 2023 (hereinafter referred to as the “Decree”), implementing the delegated law reforming the tax system, was published in the Gazzetta Ufficiale on December 28, 2023, under no. 301, and came into force the day after its publication in the Gazzetta Ufficiale (thus from December 29, 2023). This legislative intervention implements Article 3 of Law no. 111 of 2023 (hereinafter, the “Delegated Law”), which sets out the guiding principles and criteria for delegating the reform of the tax system with regard to international aspects of the tax system. Below are the main innovations analyzed.

Article 1 – Tax Residence of Individuals

The Decree amends Article 2, paragraph 2, of the Italian Income Tax Act (TUIR) regarding the tax residence of individuals for income tax purposes. Starting from January 1, 2024, individuals are considered residents if, for the majority of the tax period, including fractions of a day, they have their residence under the Civil Code, or their domicile, or are physically present in the territory of the State. With regard to the criterion of residence, the reference to the Civil Code remains unchanged, and therefore, what matters is the place where the person has habitual residence. Domicile is instead identified by express provision of the amending law as the place where personal and family relationships of the individual are primarily developed. This definition gives precedence to personal ties over economic and patrimonial relationships. In addition to the above criteria, registration for the majority of the tax period in the registry of resident population continues to be relevant for tax residence, which however, from an absolute presumption, now becomes a relative presumption, allowing evidence to the contrary. The highlighted criteria must be verified for a total number of days exceeding the majority of the tax period, also considering fractions of a day.

Article 2 – Residence of Companies and Entities

The Decree also introduces innovations regarding the tax residence of legal entities for Corporate Income Tax (IRES) purposes (Article 73 of the TUIR). The new provisions, introduced by Article 2, apply from the tax period following that in progress on the date of entry into force of the Decree (i.e., 2024 for “solar” subjects). Following the amendments, companies and entities are considered residents in Italy if, for the majority of the tax period, they have, alternatively within the State’s territory:

• their registered office;
• the place of effective management (already referred to at the OECD level with the term “place of effective management”), understood as the place where the continuous and coordinated assumption of strategic decisions concerning the company or entity as a whole is exercised;
• ordinary management primarily, understood as the place where the continuous and coordinated performance of acts of current management concerning the company or entity as a whole is exercised.

The aim is to ensure greater legal certainty, also taking into account international practices as well as criteria for defining residence provided by Conventions to avoid double taxation. As stated in the Explanatory Report, supervision and monitoring activities by shareholders do not fall under either effective management or ordinary management primarily and are therefore not suitable, per se, for establishing tax residence in Italy. The amendments introduced by the Decree also apply to partnerships, associations, and trusts, applying to them the same connection criteria with the State’s territory provided for companies and entities.

Art. 3 – Simplification of the Rules for Foreign Controlled Companies

In the perspective of simplifying the CFC (Controlled Foreign Companies) rules provided for in Article 167 of the TUIR, the Decree has introduced – for controlled companies with certified financial statements only – a new method for calculating the effective taxation of the foreign subsidiary, exclusively based on the data from its financial statements.

Specifically, the simplification applies only if the financial statements of the foreign controlled company are subject to review and certification by professional operators authorized to do so in the foreign country of location. The prerequisite of certification of the foreign financial statements is aimed at ensuring a minimum reliability of the accounting results of the foreign company. Furthermore, the use of certified financial statements of the foreign subsidiary is done under the responsibility of the resident controlling company.

As a result of the introduced changes, in the case of a foreign subsidiary with certified financial statements, the CFC rules apply when the following two conditions occur jointly:

• Effective foreign taxation lower than 15%;
• Passive income test: at least 1/3 of the proceeds realized falls into one or more categories that include the so-called passive income (for example, interest, royalties, dividends, income from financial leasing, etc.).

For the above purposes, the effective foreign taxation is determined as the ratio between: (i) the sum of current taxes due and deferred taxes recorded in the financial statements and (ii) pre-tax profit for the year as resulting from the same financial statements.

Furthermore, in coordination with the new provisions regarding the Global Minimum Tax (as per Articles 8 et seq. of the Decree), the new text of Article 167 provides that for the purpose of verifying the requirement of effective taxation in the country of the foreign subsidiary, the equivalent national minimum tax due by the non-resident controlled entity must also be considered.

Finally, still with reference to foreign controlled companies with certified financial statements only, the Decree introduces the option to choose the application and payment of a substitute tax on income equal to 15% of the net accounting profit for the year, calculated without considering taxes, asset write-downs, and provisions for risks (the so-called “Optional Regime”).

This option, if exercised, lasts for 3 years and is irrevocable. At the end of the three-year period (and of each subsequent three-year period), the option is deemed tacitly renewed unless revoked according to the methods and terms provided for the communication of the option (to be established by the Director of the Revenue Agency with a Provision).

If exercised, the option applies to all non-resident controlled entities that exceed the 1/3 threshold of passive income without the need to calculate accounting or effective tax rates (according to an “all-in all-out” principle).

It is understood that if the financial statements of the foreign controlled company are not certified, or if the effective taxation determined according to the aforementioned simplified procedure is lower than 15% (and the parent company has not opted for the application of the Optional Regime), the determination of the effective foreign taxation must be made analytically, according to the methods to be established by a forthcoming Provision of the Director of the Revenue Agency. In such cases, the foreign subsidiary will be subject to the ordinary CFC regime (with income attribution transparently to the national parent company) if the effective taxation thus determined is less than half of the virtual taxation it would be subject to if resident in Italy.

The provision in question applies starting from the financial year following the one in progress at the date of entry into force of the decree (therefore from 2024, for companies with a financial year coinciding with the calendar year).

Art. 6 – Transfer of Economic Activities to Italy

The article in question introduces a facilitated regime for the transfer to Italy of economic activities carried out previously in a foreign State (not belonging to the EU or EEA).

The facilitation provides for (i) a 50% reduction of taxable income (for corporate income tax and regional tax  purposes) deriving from the transferred activities (ii) for the year of transfer and the following 5 years.

Activities that have been carried out in Italy, and then transferred abroad, in the 24 months preceding the new transfer to Italy, are excluded from the facilitation.

A monitoring period is provided for the possible recapture of the facilitation if the activity is retransferred (in whole or in part) abroad (i) during the period of validity of the facilitation, or (ii) in the 5 tax periods (increased to 10 in the case of large enterprises) following the expiration of the facilitated period.

In such cases, the Italian Tax Authorities will recover to taxation the entire amount of the facilitation (i.e., the lesser taxes paid) increased by the related interests.

Finally, the beneficiary taxpayer of the facilitation is obliged to maintain separate accounting records to allow for the correct verification of the facilitated taxable income.

Art. 8 et seq. – Implementation of EU Directive 2022/2523 of 15 December 2022 on Minimum Global Taxation

The Decree implements EU Directive 2022/2523 on the effective minimum taxation of large multinational enterprises globally, introducing into the domestic system, from the financial year in progress as of 31 December 2023, the so-called “Global Minimum Tax.” This tax aims to ensure that multinational groups are subject to a minimum tax level of at least 15% on income generated in each country where they operate.

Below are some aspects commented on regarding the new taxation.

Taxpayers (Art. 10)

Taxpayers are companies located in Italy that are part of a multinational or national group with total annual revenues equal to or greater than 750 million euros, resulting from the consolidated financial statements of the parent company in at least two of the four financial years immediately preceding the one considered.

Subject of the tax (Art. 9)

The Global Minimum Tax consists of three forms of minimum tax:

• a supplementary minimum tax (Iir – “Income inclusion rule”), i.e., the tax due from controlling companies located in Italy in relation to group companies that pay a tax rate lower than 15% in the country where they are located. The tax mechanism is characterized by a top-down approach as the Iir is to be applied by the company at the highest level in the participatory chain (UPE – “Ultimate Parent Entity”) in its country of residence. If the UPE is resident in a country that does not adopt the GloBE rules (Global Anti-Base Erosion Model Rules), the payment obligations fall on the lower-level parent company (IPE – “Intermediate Parent Company”);
• a supplementary minimum tax (Utpr – “Undertaxed payments rule”), due from companies located in Italy that are part of a multinational group concerning companies in the group that pay a tax rate lower than 15% in the country where they are located and which comes into play only when the supplementary tax is not collected through the supplementary minimum tax, thus serving as a safeguard for the system (backstop rule);
• a national minimum tax (Qdmtt – “Qualified domestic minimum top-up tax”), which is due if, for companies belonging to a group, multinational or national, operating in Italy, a situation is determined in which the effective tax rate falls below the permitted 15% minimum taxation. This is a discretion provided by the Directive (which has been applied by Italy) whereby States can introduce a national minimum tax. In this way, the minimum tax level at the source state is preserved, without shifting the collection to the parent company.

Functioning Mechanism of the Global Minimum Tax (Articles 13-21)

The functioning mechanism of the Global Minimum Tax is divided into three phases according to the following sequence:

1. firstly, the national minimum tax (Qdmtt) operates where one or more companies belonging to a multinational or national group, located in Italy, have an effective tax rate of less than 15% (Art. 18);
2. subsequently, the supplementary tax (Iir) is applied by the parent companies (UPE) and intermediate participants (IPE) located in Italy, taking into account what has been withdrawn, if any, by the subsidiaries through a national minimum tax (Articles 13-17);

iii. finally, the supplementary supplementary tax (Utpr) is applied by companies located in Italy in cases where the supplementary tax due in relation to low-tax group companies has not been collected or has been only partially collected by the parent company located abroad. The allocation of the supplementary supplementary tax to companies located in Italy is based on a proportion that takes into account the value of the production factors represented by tangible assets and personnel belonging to all companies in the multinational group (Articles 20-21).

Determination of Relevant Income or Loss (Articles 22-26)

The relevant net income or net loss of a company is determined by making adjustments to the net profit or net loss, determined for the purpose of preparing the consolidated financial statements of the parent company for the financial year, and in accordance with the accounting principles used for the consolidated financial statements, without considering consolidation adjustments related to intragroup transactions, specific increases, and decreases.

Determination of Adjusted Relevant Taxes (Articles 27-32)

The adjusted relevant taxes of a company correspond to current taxes to which specific increases and decreases are applied, algebraically adding: (a) anticipated and deferred taxes (which are also adjusted) and (b) increases or reductions in relevant taxes directly attributable to net assets or to the statement of other comprehensive income components (if positive or negative components included in the relevant income or loss and contributing to the taxable basis of relevant taxes according to local tax rules).

Determination of Effective Tax Rate (Art. 33)

The effective tax rate of a multinational or national group of companies, to be calculated separately for each financial year and for each country of location, is equal to the ratio between the adjusted relevant taxes of the country and the corresponding adjusted net income. The “adjusted relevant taxes of the country” are given by the algebraic sum of the adjusted relevant taxes of all companies located in that country. Similarly, the “adjusted net income of the country” (or its loss) is given by the algebraic sum of the relevant incomes (or losses) of all companies located in that country.

Determination of the Supplementary Tax (Art. 34)

If the country is found to have low taxation, as it has an effective tax rate below 15%, the supplementary tax rate (i.e., the difference between the minimum tax rate of 15% and the effective tax rate) is applied to excess profits generated in that country. In order to determine the excess profits, which constitute the taxable basis of the supplementary tax to be calculated for each country, the relevant net income of the country is reduced by an amount equal to the income that the system allows to exclude as resulting from a substantial economic activity. The percentage of the supplementary tax rate is then applied to such excess profit to calculate the supplementary tax attributable to the low-tax country. However, the amount of the supplementary tax is reduced by any national minimum tax due in the country. The supplementary tax thus determined is proportionally allocated to each company located in the low-tax country.

Reduction from Substantial Economic Activity (Art. 35)

The relevant net income for a given country is reduced, for the purpose of calculating the supplementary tax, by an amount equal to 5% (but higher and decreasing rates are provided for in the period 2023-2032) of the sum of “eligible wage expenses” related to “eligible employees” and “eligible tangible fixed assets.” The book value of “eligible tangible fixed assets” corresponds to the average of the book value at the beginning and end of the financial year, as recorded for the purpose of preparing the consolidated financial statements of the parent company, possibly reduced by write-downs, depreciations, accumulated impairment losses, and possibly increased by the amount attributable to the capitalization of wage expenses.

The Decree continues (Articles 40-60) by defining a series of special rules that apply in the case of business and holding company reorganizations as well as companies subject to neutrality or distribution taxation regimes, and concludes by providing a series of administrative and transitional provisions to facilitate the transition to the application of the new provisions.

The Firm remains available for any further clarifications and necessary insights.

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