By Davide Anghileri, University of Lausanne
The Italian government issued a law decree on urgent measures for economic growth (law decree n. 34 of 30 April 2019) including provisions amending Italy’s patent box regime and providing for an asset basis step-up on certain mergers, division, or contributions. The decree is expected to be converted into law by the Italian parliament within 60 days.
Patent box regime
The decree provides that taxpayers who choose to use the patent box regime with respect to intangible property that is used in business activity (i.e., the value of the IP is embedded in the price of the goods or services sold) may elect to determine the eligible income for income tax and regional tax purposes on their tax return. Before the amendment, an agreement with the Italian tax authority under the relevant ruling procedure was required to be eligible for Italy’s patent box tax incentive.
According to the new regime, when a taxpayer chooses not to file a ruling application, the determination of the economic contribution should be supported by appropriate documentation. Specific procedural rules will be published by the Italian tax authority within 90 days as from 1 May (the date of entry into force of the decree).
The benefit of the patent box regime is divided into three equal amounts that are taken as a downward income adjustment the year which the option is made and the two following tax years. In the event of a tax audit that adjust the patent box benefit, administrative penalties are not applied if the taxpayer timely provides the tax authorities with the required supporting documentation demonstrating the determination of the excluded portion of income, both in respect to the amount of the positive items of income and the identification of the relevant negative items of income.
Taxpayers who have already applied for a tax ruling but have not yet obtained it may waive the tax ruling procedure and elect for this new option provided that no tax audit has already started and that they indicate on the tax return that they have the appropriate supporting documentation.
Asset basis step-up on merger, division, or contribution
To foster the establishment of Italian enterprises, the decree provides a free tax basis step-up regime for both corporate and regional tax purposes for companies that receive assets upon mergers, divisions, or contributions of going concerns that take place between 1 May and 31 December 2022.
The measure applies insofar as the party resulting from the business combination is an Italian tax resident company. Moreover, the entities taking part in the business combination must have been operating for at least two years before the transaction and must not be part of the same group of companies, not related from an ownership standpoint, and not controlled, even indirectly, by the same entity.
The tax basis step-up is effective as from the tax year following the year in which the transaction takes place.
The tax basis step-up, however, is lost (without the application of any penalty) if, in the four tax years following the transaction, the company benefitting from the step-up either undergoes another business reorganization (like merger, division) or transfers the assets that have been stepped up. In these cases, taxpayers may apply for a tax ruling to prove that their behavior is not abusive and that, therefore, the tax step-up should not be forfeited.
Increased depreciation
The decree provides that the acquisition cost of new tangible assets will be increased by 30% for tax depreciation purposes if acquired between 1 April and 31 December (or 30 June 2020, if certain additional conditions are met) and if the assets are used to carry on a business.
The decree provides that the acquisition cost of new tangible assets will be increased by 30% for tax depreciation purposes if acquired between 1 April and 31 December (or 30 June 2020, if certain additional conditions are met) and if the assets are used to carry on a business.
The increased acquisition cost rule does not apply to the portion of investment exceeding the threshold of Euro 2,500,000 (i.e., the increased amount of the acquisition cost cannot exceed in any case Euro 750,000).
Certain assets, such as vehicles and other means of transportation, buildings and construction, long-term equipment, and intangible assets are excluded from the benefit.
Reduced tax rate on retained earnings
The decree provides for a reduced corporate tax rate applicable as from 2019 to retained earnings.
For calendar year companies, the reduced rates are as follows: 22.5% for 2019, 21.5% for 2020, 21% for 2021 and 20.5% starting from 2022.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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