Insights

Italy's Penalty Protection Regime for Hybrid Mismatches

Editorial Team 11 Apr 2025

An overview by Alma LED, Taxand Italy

Italy has recently strengthened its response to hybrid mismatches – tax inconsistencies between jurisdictions that allow double deductions or deductions without inclusion – by aligning with international (BEPS Action 2) and EU (ATAD 1 & 2) standards. Legislative Decree no. 142/2018 (ATAD Decree) introduced anti-hybrid rules, and the Ministerial Decree of 6 December 2024 established a penalty protection regime for taxpayers who properly document their assessment of such mismatches.

To qualify, taxpayers must prepare detailed, timestamped electronic documentation describing their group structure, tax positions, relevant transactions, and mismatch analysis. This documentation must be submitted upon request and declared in the tax return. Protection applies only to documented transactions for the relevant tax period and is void if the documentation is incomplete or unreliable. Risk indicators for structured arrangements are also provided to help identify abusive planning schemes.

Giuseppe Ferrisi from our Italian member firm Alma LED has provided a more detailed overview of these provisions and its impact below.

Hybrid mismatches have become an increasingly important issue in the Italian legal system and the Italian government has committed to enacting ad hoc regulations. These mismatches arise from differences in the tax treatment of an entity or financial instrument under the laws of two or more jurisdictions, resulting in either a deduction without a corresponding inclusion in the tax base of the other state (D/NI) or a double deduction (DD), i.e. a deduction of the same expense in both jurisdictions.

Common scenarios include hybrid financial instruments that are treated as debt in one jurisdiction and equity in another, or payments made to hybrid entities that are considered fiscally transparent in one state and opaque in another, or mismatches in the allocation of income to permanent establishments.

In response to these practices, and in line with the BEPS Action 2 report and the European Union’s Anti-Tax Avoidance Directives ATAD 1 and ATAD 2, Italy introduced comprehensive anti-hybrid rules through Legislative Decree no. 142 of 29 November 2018 (ATAD Decree), which aims to neutralise the tax benefits arising from hybrid mismatches by denying deductions or requiring inclusion in the tax base.

Building on this legislative framework, a recent ministerial decree (Decree of the Ministry of Economy and Finance of 6 December 2024, hereinafter the “Ministerial Decree”) was issued to introduce a penalty protection regime for taxpayers that adequately document their assessment and treatment of hybrid mismatches.

Recognising the complexity involved in the identification and treatment of hybrid mismatches and the potential for unintentional errors, the Italian legislator introduced Article 1, comma 6-bis, of Legislative Decree no. 471 of 18 December 1997 by Article 61 of Legislative Decree No. 209 of 27 December 2023. This provision stipulates that any penalties for increased tax or reduced credit resulting from disputes related to the hybrid mismatch rules will not apply if the taxpayer, during tax audits or investigations, provides the tax authorities with documentation deemed acceptable under the Ministerial Decree to verify the correct application of the anti-hybrid rules.

The Ministerial Decree represents a significant milestone in Italy’s approach to hybrid mismatches by regulating the penalty protection mechanism. By establishing clear guidelines for the preparation and submission of comprehensive documentation, the Ministerial Decree incentivises taxpayers to thoroughly analyse their cross-border transactions and correctly apply the complex anti-hybrid rules introduced by the ATAD Decree.

In order to benefit from the penalty protection, taxpayers must proactively engage in a robust assessment process to ensure that their documentation accurately reflects the nature of their transactions, describing their tax treatment in all relevant jurisdictions and the analysis conducted to identify potential hybrid mismatches and the application of the relevant anti-hybrid rules. Compliance with the structural, formal and procedural requirements set out in the Ministerial Decree is essential.

The documentation can be prepared by any taxpayer resident or established in Italy or by a designated taxpayer for a group.

The purpose of the newly issued Ministerial Decree is precisely to define the characteristics and content of the documentation required to benefit from this penalty protection.

Documentation requirements

Annex A of the Ministerial Decree sets out detailed requirements for the structure and content of the documentation, covering information at both the multinational group and taxpayer level. This includes:

• Information on the MNE group: the information required includes that on the organisational structure, legal and ownership arrangements, geographical locations, business activities and tax qualification of the group entities (if a tax transparent or tax opaque entity) in their respective jurisdictions. Details of any permanent establishments (PEs) are also required, including whether their existence is recognised in both the company’s state of residence and the state in which the PE is located.
• Taxpayer information: including general information, tax residence, tax qualification of the taxpayer (if tax transparent or tax opaque) and details of any PEs located in Italy or abroad.
• Information on the hybrid mismatch identification process: a detailed description of the internal process adopted by the MNE group to identify and evaluate transactions that give rise or may give rise to a hybrid mismatch (hereinafter “relevant transactions”).
• Information on Relevant Transactions: for each “Relevant Transaction” (defined as a transaction that creates or is reasonably likely to create a hybrid mismatch), the documentation must include: information on its legal characteristics; a description of the tax treatment of the transaction; an analysis of whether a “Relevant Hybrid Mismatch” exists or the reasons why it does not; an identification of income components that could create a “Relevant Hybrid Mismatch” in a subsequent tax period; a description of the analytical process used to identify mismatches and supporting documentation.
• Information on Homogeneous Groups of Relevant Transactions: the same information as above is required for “Multiple Relevant Transactions” forming a “Homogeneous Group”, with specific provisions for documenting a sample of the five highest value transactions within the group.

Annex B of the Ministerial Decree sets out the guidelines for assessing the existence of a hybrid mismatch (including imported hybrid mismatches). It provides detailed procedures for identifying deduction without inclusion and double deduction scenarios.

Formal documentation requirements

The documentation must be written in Italian and electronically signed with a time stamp by the legal representative (or delegate) of the taxpayer or the designated taxpayer by the deadline for filing the income tax return for the relevant tax period.

The documentation must be prepared in electronic format and made available in this format to the tax authorities upon request within twenty working days.

Taxpayers who have prepared the documentation must inform the Italian tax authorities of its possession when filing their income tax return for the tax period to which the documentation relates.

Effectiveness and limits of the penalties protection

The protection from penalties granted by the Ministerial Decree is specific to the relevant transactions and homogeneous groups documented and is effective only for the tax period to which the documentation relates. The documentation must be kept until the statute of limitations for tax assessment has expired.

It is important to note that providing documentation during a tax audit does not automatically guarantee protection from penalties if the documentation is incomplete, does not comply with the requirements of the Decree (including the electronic signature and time stamp requirements), or contains unreliable information. However, partial omissions or inaccuracies that do not affect the tax authorities’ analysis will not invalidate the penalty protection.

Identifying Structured Arrangements

Recognizing that hybrid mismatches can also arise within structured arrangements involving non-associated enterprises, Annex C of the Ministerial Decree also provides a non-exhaustive list of risk indicators to assist taxpayers in identifying such arrangements that are designed to generate relevant hybrid mismatches. These indicators include situations of deliberate tax planning schemes exploiting hybrid mismatches to achieve D/NI or DD results, often through artificial structures or contractual clauses lacking real economic substance.

Taxpayers should carefully consider these risk indicators when analysing their transactions and preparing their documentation.

Article tags

Italy | Reporting | Tax Law