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Italy introduces branch exemption regime

Italy
19 Nov 2015
As part of a comprehensive tax reform, the Legislative Decree no. 147/2015 (“Internationalisation Decree”) has introduced the so-called “Branch Exemption regime” which enables to exclude from Italian taxation profits and losses of a foreign Permanent Establishment. Taxand Italy provides an overview of this decree.

New Rule

The Italian tax resident companies may exclude the relevance for Italian tax purposes of the profits and losses realised abroad through a Permanent Establishment (“PE” or “branch”). This new regime, which is an exception to the worldwide principle, is elective and the option is not revocable.

Conditions

The option applies to all PEs. However, in case of branch:

  • located in a black-listed country, or
  • located in a white-listed country that generates more than 50% of its proceeds from passive income, which are subject to an actual taxation lower than 50% of the taxes that it would be subject to in Italy

Such PE is excluded from the special regime and is taxed according to the CFC rules, unless one of the available CFC exemption tests is met.

The election must be made at the time of the setting up of the branch and takes effect from such fiscal year. In case of existing PEs, it is possible to make the option within the second year following the one during which the regime enters into force.

Consequences

In case of election of the branch exemption regime, the taxable basis (profits or losses) of the PE shall be separately highlighted in the tax return.

The computation of the taxable basis will follow the ordinary rules provided by the Italian Tax Code and great care must therefore be taken to (i) the intercompany transactions (with the headquarters or other companies of the group), (ii) to the allocation of the assets to the PE and (iii) to the attribution of the so-called “free capital”.

It should be pointed out that the new regime could trigger a loss recapture. Indeed, if the branch has incurred a net tax loss over the five years period before the application for the exemption regime, future income will be included in the taxable basis of the Italian Company, with a corresponding tax credit, up to the amount of the pre-existing tax losses.

This rule also applies in case of a transfer of a foreign PE to a related party having opted for the branch exemption.

Entry into force

The rules will become effective as of the financial year following the one in which the legislative decree enters into force (i.e. 2016).


Your Taxand contact for further queries is:
Guido Arie Petraroli
T. +39 02 7260591
E. gpetraroli@fantozzieassociati.it

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Taxand's Take

The new rule is an opportunity for Italian multinationals that want to invest abroad.

At first impression, the most evident advantages will be achieved in all cases in which the branch is in a profitable position and the tax rate applicable in the foreign country is lower than the one applied in Italy. Indeed, assuming that the net income of the branch is equal to the taxable basis in Italy, the tax advantage will be the difference between the tax rates applied respectively abroad and in Italy. 

It is clear that the branch exemption regime will be a limitation if the PE is in a tax loss position since the headquarter cannot offset its taxable basis against such loss.

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