Investment in Italy

Investment in Italy10.1.3 MergerThe merger of two or more companies is tax-neutral and does not lead to the realizationor distribution of capital gains or losses. The tax neutrality of this transaction implies thefollowing:• all the assets and liabilities of the absorbed companies are taken over by the survivingcompany on a tax-neutral basis, i.e. without any step-up in their tax basis. Solely inthe case of mergers between unrelated entities in existence for at least two years, ismerger goodwill of up to EUR 5 million tax free• any merger difference (merger surplus/deficit) is disregarded for tax purposes (i.e. is nottaxable/deductible)• all rights and obligations (including taxes) of the absorbed companies are transferred tothe surviving company, starting from the date on which the merger takes effect.The tax-deferred reserves of the merged companies are included in the taxable income ofthe company resulting from the merger, unless the reserves are reinstated in its balancesheet. However, reserves that are taxable only upon distribution are taxable if and to theextent that:• the merger surplus is distributed; or• the increase in share capital exceeding the sum of the share capital of the companiesparticipating in the merger is repaid to the shareholders.While a merger is generally a tax-neutral event, the tax recognition of the excess mergercosts can be obtained under the substitute tax regime described in 10.1.2 above.The survival of the tax losses (and of interest carryforwards - see 5.1.9) of the companiesinvolved in the merger is subject to the following tests:• Business Vitality test: the profit and loss account of the company whose losses areto be carried forward must show, for the financial year prior to the merger resolution,revenues and labour costs higher than 40 percent of the average values of the two priorfinancial years• Net equity test: the tax loss carryforwards must be within the limit of the statutory netequity of the entity before the merger (disregarding any contributions obtained in thetwo years preceding the merger).The tax effects of the merger can be backdated to the beginning of the tax year in which themerger takes place. In this scenario the vitality and net equity test must also be applied tothe tax loss accrued in the interim period.A merger is not subject to VAT. In general, each merger is subject to a flat registration taxof EUR 168.00.Mergers fall within the scope of the anti-avoidance provisions discussed in 5.1.5 above.90© 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.