The 2018 Budget Law, recently approved by the Italian Parliament, includes several interesting measures for businesses and individuals. Below we briefly cover some of the main changes introduced by the 2018 Budget Law.
► Tax regime of dividends and capital gains for individuals
The tax regime of dividends paid by qualified participations to individuals, acting as non-entrepreneurs has been changed.
The new regime provides for a 26% final withholding tax to be applied to dividends paid by qualified participations in Italian companies to individuals, resident in Italy and acting as non-entrepreneurs. A participation is deemed qualified when it represents more than 2% of the voting rights or 5% of the capital in case of participations in listed companies or 20% of the voting rights or 25% of the capital in case of participation in non-listed companies. Previously, only dividends paid by non-qualified participations (i.e. participations falling below these thresholds) were subject to the 26% withholding tax, whilst dividends deriving from qualified participations were subject to income tax at progressive rates that was applied on 58.14%, 49.72% or 40% of their amount depending on the year of accrual.
A 26% final withholding tax is applied also to dividends paid to individuals, resident in Italy and acting as non-entrepreneurs, by qualified participations in non-resident companies other than those with preferential tax regime. Previously, such dividends were subject to a withholding tax applied as advanced payment on a reduced taxable base (58.14%, 49.72% or 40%) and then subject to income tax at progressive rates.
The tax regime of dividends deriving from participations in companies resident in a country with a preferential tax regime (black-listed countries) remained unchanged and they are generally taxable at progressive rates on their full amount, unless certain conditions are satisfied.
The new regime applies to dividends paid from 1 January 2018; however, in case of dividends accrued up to 2017 and approved for distribution from 1 January 2018 to 31 December 2022, the previous regime remains in force.
A 26% substitute tax is levied also in case of capital gains realized by individuals, resident in Italy and acting as non-entrepreneurs, deriving from qualified participations in resident and non-resident companies. The new regime applies to capital gains realized starting from 1 January 2019. Capital gains realized in 2018 from qualified participations are subject to income tax at progressive rates on 58.14% of their amount.
The same 26% substitute tax is levied also on capital gains realized by non-residents individuals on qualified participations in Italian companies (unless the applicable tax treaty provisions provide for an exemption).
► Introduction of the “Web tax” on digital/web-based services
A new 3% web tax will be withheld on payments for “digital services” made by Italian companies to resident and non-resident service providers as from 1 January 2019, where the same service provider is engaged in more than 3,000 transactions during a calendar year.
The web tax will apply:
- to services provided over the internet or electronic networks and characterized by a high degree of automation and minimal human intervention (online sales of goods should not be subject to the web tax);
- on the amount of the consideration paid in exchange for the performance of the above services, net of Value Added Tax, and regardless of where the services are rendered from;
- when the payer is a withholding tax agent or a permanent establishment of a non-resident entity;
- when the provider has notified to the service recipient (either in the invoice or an equivalent document) that the annual threshold has been exceeded
The web tax is remitted by the service recipient to the Government no later than the 16th day of the month following the payment of the consideration.
The rules on the application of the web tax in respect of assessments, penalties, payment and litigation will be VAT rules, as compatible.
The Ministry of Finance will issue guidance regulations by 30 April 2018 that will identify the services subject to the web tax and provide implementation rules.
► The amended domestic definition of Permanent Establishment
The budget law has changed the definition of a Permanent Establishment (PE) to align it with the revised definition in the 2017 version of the OECD model tax treaty, taking also into account the report of BEPS Action 1.
Under the new provision, a significant and continuous economic presence in Italy of the foreign entity, set up in a way that it does not result in a substantial physical presence in the same territory, may constitute a fixed base that could give rise to an Italian PE.
This implies the possibility of a PE presence even in the case where a company does not have a physical presence in the Italian territory, to the extent that other factors constitute a significant presence. This may refer to or include companies that carry out digital transactions on the territory.
At the same time, the rule providing that computers and auxiliary equipment for the collection of information and the transmission of data for the sale of goods or services cannot give rise by themselves to any permanent establishment is cancelled.
In addition, the “negative” list, which includes the instances where a fixed base will not constitute a PE, is modified to reflect the OECD language and to provide that the exceptions apply only where the activities carried out by the foreign company are preparatory or auxiliary in relation to the business as a whole.
Specific rules are included to prevent the foreign company from splitting up the business into smaller units or using other related legal entities or permanent establishments to benefit from the preparatory or auxiliary exception.
The “dependent agent” concept is broadened to provide that a PE will be deemed to exist if:
- (i) the agent habitually concludes or is involved in the conclusion of contracts on behalf of the foreign company that are routinely approved by the foreign company without material changes; and
- (ii) the contracts are in the name of the foreign company or involve the sale or the transfer of the right to use goods owned by the foreign company or the provision of services by the foreign company.
For the purposes of determining whether a PE exists, the independent agent exclusion is amended to clarify that it will not apply where the agent acts exclusively or almost exclusively for one or more related parties. A foreign company and the independent agent are considered related parties for these purposes if one controls the other or if they are under the common (direct or indirect) control of a third entity based on the specific facts and circumstances. Control is deemed to exist where one party owns more than 50% of the voting or economic rights in the other.
► Measures for the effectiveness and efficiency of MAPs, advanced tax rulings and patent box rulings
The Revenue Agency is required to recommend measures to remove obstacles that prevent Italy from resolving disputes under the mutual agreement procedure (MAP), the advanced international tax rulings (preventive and written opinion providing the correct application of specific tax provisions) and the advanced agreement for companies with cross-border activities in the framework of the patent box regime.
Such measures should include a set of minimum standards to ensure that the disputes are resolved in a timely, effective and efficient manner.