Investment in Italy

Investment in Italysubject to tax in a state or territory that is not on the ‘black list’).With specific regard to controlled EU entities, the CFC income can only be avoided if thetaxpayer can prove (a tax ruling is mandatory) that the foreign entity is not an artificialstructure aimed at achieving an undue tax advantage.The income subject to tax in Italy is computed by applying the Italian rules in the case ofa controlled foreign entity; in the case of an associated entity it can also be determined byapplying given coefficients to the book value of certain assets. The accounts of the foreignentity should be duly certified by an independent audit firm. Taxation is applied separately(i.e. available tax loss carryforwards cannot shelter the CFC income).Dividends originally paid by a non-EU entity passing only the business vitality test are subjectto full taxation in the hands of the ultimate Italian resident recipient (i.e. no participationexemption), while those paid by an entity passing the subject to tax test qualify for the (95percent) exemption.Participation exemption on capital gains (transfer of shares)Capital gains realized on the disposal of shares in foreign entities are treated just likedomestic gains. In addition, the 95 percent exemption is also conditional upon a three-yearperiod of residency in a ‘white-list’ country.Participation exemption on inbound dividendsDividends paid by countries that will not be included in the ‘white list’ (i.e. that are includedin the ‘black list’ today) are generally taxable at the full corporate income tax rate unless aruling has been obtained (subject to tax test).Anti-hybrid rules: the 95 percent dividend exemption is granted on condition that thepayment is not tax deductible by the non-resident payer (as declared by the payer).5.1.12 Foreign tax creditsTaxes paid on foreign source income are credited up to the amount of IRES due, whichcorresponds to the ratio of foreign income to total income (net of any tax loss carryforward).The limit applies per country (baskets).The credit is claimed in the tax return filed for the year when the foreign income is declaredand the foreign tax paid is definitive. Should that income be partially exempt (as, for example,foreign dividends) the foreign tax is reduced proportionally. More favourable conditions maybe available under double tax treaty provisions.Excess foreign tax credits may be carried forward or backward for eight years.Specific rules apply in the case of domestic/worldwide tax consolidation.Many of the tax treaties in force with Italy still include ‘matching credit’ or ‘tax sparing’clauses, which allow Italian investors to credit notional foreign taxes, irrespective of the actualor lower payments in the country of source (due, for instance, to local tax incentives).© 2012 KPMG S.p.A., KPMG Advisory S.p.A., KPMG Fides Servizi di Amministrazione S.p.A., KPMG Audit S.p.A., Italian limited liability share capital companies, and Studio Associato Consulenza legale e tributaria, anItalian professional partnership, are member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.49