Global Tax Alert | 11 July 2013
Italy to issue decree on tax migration of companies
On 10 July 2013, the content of a decree (Decree) implementing the new rule on the income tax treatment of the migration of Italian companies was made public by the Italian press. An official version of the Decree is expected to be issued shortly by the Italian government.
The Decree provides that, as an alternative to an immediate levy, Italian companies shifting their tax residence to EU or other qualifying countries may elect to defer exit taxation to the moment of actual realization or to pay the tax due through ten annual installments. The deferral to the moment of actual realization implies periodical information filings with the Italian tax authorities to be in the position to monitor the events related to the migrated assets. The installment election exempts a taxpayer from any filing obligations but triggers interest payments. Both elections require the release of a proportioned guarantee.
The Decree states that the moment of actual realization of the gains related to the migrated assets is identified in compliance with ordinary Italian tax principles. It also specifies that mergers and other reorganizations should not interrupt the tax deferral as long as the migrated company remains a resident of a qualifying country and the migrated assets are not transferred to a resident of non-qualifying countries.
The Decree also establishes that the Revenue Agency will issue specific guidance on the formalities concerning the execution of the elections, the payment of the installments, the type of guarantees and the periodical information filings.
The same principles should apply to Italian permanent establishments relocating to a qualifying country.
In response to the European Court of Justice (ECJ) Decision C-371/10 (National Grid Indus), Law Decree n. 1/2012 introduced the possibility for companies transferring their tax residence to EU or qualifying European Economic Area (EEA) countries,1 to defer the exit taxation until the underlying capital gain is actually realized.2
Under the previous regime, the transfer of tax residence abroad qualified as a taxable event, so that any unrealized capital gain was to be computed on the basis of fair market value principles and taxed immediately. The transfer of the residence was not considered a taxable event only to the extent that the assets related to the Italian business were attributed to an Italian permanent establishment of the migrating company. Under such circumstances, any taxation was deferred to the moment in which the assets were removed from the permanent establishment.
The new rule confirms the wording of the old one but adds the option for the migrating company to elect to defer the capital gain taxation until the related latent gain is in fact realized under the principles expressed by the above-referenced ECJ case.
The new rule also states that the Ministry of Finance should issue a decree providing for implementation details including the definition of the events that will trigger the actual payment of the deferred tax and how the tax will become due at the moment of realization under the new rules.
The main aspects addressed by the Decree relate to the:
- • Computation of the exit tax liability
- • Exit tax payment elections
- • Recapture of the deferral elections
Computation of the exit tax liability
The Decree provides that the following items are excluded from the tax deferral regime and therefore are subject to immediate taxation:
- • The value of trade goods and inventory
- • Reserves for deferred taxes, to the extent not reconstituted in the accounts of an Italian permanent establishment of the migrating company
- • Income arising from activities carried out in the year prior the one in which the migration is effective, including deferred tax assets and liabilities
The exit tax liability should be determined on the basis of the fair market value of the assets/going concern at the date of the migration. In order to determine the market value of the single assets, corporate liabilities are proportionally attributed to the assets.
Goodwill and business functions/risks related to the migrated assets should also be considered in the computation of the taxable gain in compliance with transfer pricing principles, i.e., reflecting the price that an independent party would be willing to pay for their acquisition.)
The existing tax loss carry-forwards should be used against the taxable income of the year prior the migration. Any excess would then be used to offset the exit tax due when the underlying gain is in fact realized.
Exit tax payment elections
The Decree provides that the migrating companies may comply with their exit tax liability in the following three alternative manners.
- • Settling the payment of the exit tax immediately upon migration.
- • Deferring the tax payment up to the moment of realization of the gains related to the migrated assets.
Under this election, the migrating company is required to (i) provide a guarantee proportioned to the outstanding tax liability and (ii) comply with periodical information filings with the Italian tax authorities so they can be in the position to monitor the events related to the migrated assets.
The Decree states that the moment of actual realization of the gains related to the migrated assets is identified in compliance with the rules included in the Italian income tax code (e.g., the sale of the underlying assets or going concern).
With specific reference to participations classified as fixed assets, it is provided that the moment of realization is also represented by the payment of dividends or repayment of capital by the relevant subsidiary.
- • Paying the exit tax in ten annual installments.
Under this election, the migrating company is required to (i) provide a guarantee proportioned to the outstanding tax liability and (ii) pay interest for the delayed payment. No periodical information filings are required in this case.
The above alternatives may apply at the same time with reference to different assets identified by the migrating company, so that the migrated entity may mix the different alternatives and achieve the most convenient overall result.
Recapture of the deferral elections
The Decree provides that the execution of specific transactions may interrupt the deferral benefit and trigger the immediate payment of the outstanding exit tax.
The following transactions are included:
- • Further migration of the company to a non qualifying country
- • Liquidation of the migrated company in the country of arrival
- • Mergers, divisions and contributions in exchange for a participation triggering the transfer of the migrated assets to a resident of a non qualifying country
No recapture should in principle occur under the installment payment alternative as this election should be considered as a pure financial deferral of exit tax liability.
The Decree establishes that additional details will be dealt with by specific instructions to be issued by by the Revenue Agency with specific reference to the formalities concerning the execution of the elections, the payment of the installments, the type of guarantees and the periodical information filings.
Future Alerts will cover legislative developments.
1. EEA qualifying countries are those with which Italy has entered into qualifying agreements concerning exchange of information and mutual assistance in tax collection procedures (currently Norway and Iceland).
2. For more information, see the EY International Tax Alert, Italy amends exit tax: new opportunities for multinational groups, dated 1 March 2012.
For additional information with respect to this Alert, please contact the following:
Studio Legale Tributario in association with Ernst & Young, Milan, Italy
- • Domenico Borzumato
+39 02 8514 503
- • Marco Magenta
+39 02 8514 529
Studio Legale Tributario in association with Ernst & Young, Bologna, Italy
- • Mario Ferrol
+39 335 122 9904
Ernst & Young, LLP, Italy Tax Desk, New York
- • Emiliano Zanotti
+1 212 773 6911
- • Andrea De Nigris
+1 212 773 0478
- • Aldo Bono
+1 212 773 3216
EYG no. CM3631