Tax Pills

Italy’s CbC reporting: set out the last administrative framework for the automatic exchange of information
The Revenue Agency issued the final rules for multinational groups with revenues exciding €750 million. From now on, Italian parent companies will have until December 31, 2017 to transmit all data relating to 2016 tax year, in line with the requirements of the 2015 EU Directive

The Italian Revenue Agency has recently published the final instructions for Italian-based multinational companies required to communicate the data of subsidiaries, as part of the automatic exchange of information on tax matters, also known as country by country reporting or CbC reporting.
How the CbC reporting works and its procedural background - Particularly, in the case of groups of multinational companies with a consolidated financial statements that report total revenues of at least € 750 million, the parent companies resident in Italy must disclose the 2016 data by the December 31, 2017 deadline. In brief, this ad hoc measure, signed by the Director of the Revenue Agency, Ernesto Maria Ruffini, in fixing the deadline for the transmission of data and providing further indications, is the final step of a long implementation process. In fact, originally was the Finance Act of 2015 to introduce firstly into Italian law the CbC report requirements based on the Action 13 of the Oecd Base Erosion and Profit Shifting (Beps) Project and to provide a framework for their effective implementation.  Then it was the turn of the Decree of February 23, 2017 through which the Italian Ministry of Economy and Finance implemented the EU Directive 2016/881 dated May 25, 2016 setting out the procedures to be applied to meet country-by-country (CbC) reporting requirements in Italy and also establishing January 1, 2016 as the relevant date for its application.
The various entities that may be required to file a CbC report in Italy -  First of all, all Italian entities need to assess if their MNE Group falls within the CbC reporting regime, as said before in the case the consolidated group revenue exceeds Euro 750 million, and if so, they also have to determine which entity will be the Reporting Entity. That said, various entities can cover this particular and strategic role. To begin, the Ultimate Parent Entity of an Italian-based MNE Group with consolidated revenue of Euro 750 million or more or, under certain conditions, an Italian entity required to make a local or secondary filing as a Constituent Entity because the jurisdiction of its Ultimate Parent Entity does not require CbC reporting or does not have an appropriate competent authority agreement with Italy to permit information exchange. Yet, the Reporting Entity can be also a “surrogate parent entity”, in brief an entity other than the Ultimate Parent Entity (UPE) that will file the CbC report in its jurisdiction of tax residence as the sole substitute of the UPE and on behalf of the entire MNE group. Finally, the UPE role can also be performed by an EU designated entity, resident in Italy, appointed to file a CbC report in its tax jurisdiction in order to satisfy the requirement for secondary filing on behalf of all EU entities.
First submission by 31 December 2017 - For multinational groups with a reporting tax period starting on 1 January 2016 or later and ending before 31 December 2016, the communication must be made by 31 December 2017. The CbC report deadline will be within 12 months of the end of the relevant fiscal reporting period. The information must be transmitted through the telematics services of the Revenue Agency.
Information to be reported - Multinational companies must disclose information concerning:
• the tax jurisdictions in which the entities belonging to the group of multinational companies are resident for tax purposes or, in the case of permanent establishments, where the latter are located;
• revenues (consisting of the sum of the revenues of all the entities belonging to the group of multinational companies);
• profits (or losses) included gross income taxes (consisting of the "Result before taxes") of all the entities belonging to the group;
• the income taxes paid during the tax period by all the entities belonging to the group;
• current taxes accrued on the taxable profit or loss for the year to which the reporting of all the entities belonging to the group refers;
• the declared capital, given by the sum of the share capital and capital reserves of all the entities belonging to the group;
• profits not distributed;
• the number of employees;
• tangible fixed assets.
The data flow speak two languages ​​- According to the last provision published recently, multinationals operating in Italy will have to submit the documentation both in Italian and in English for the subsequent exchange of information with the other jurisdictions, in line with the provisions of 2016/1963 fixed by the European Commission.
Penalty regime – A penalty regime was introduced in the 2016 Finance Act and remains unchanged. Failure to file a CbC report or disclosure of incomplete or inaccurate information will entail penalties from Euro 10.000 to Euro 50.000.

Italy’s Revenue Agency issued new guidelines on tax treatment of carried interest
On 16 October 2017, Italian Tax Authorities released further official guidelines on the new tax regime related to carried interest. The document, an ad hoc Circular, provides significant clarifications on the scope, requirements and conditions envisaged under the new tax regime.

Clarifications on carried interest – Whit Circular 25/E of 16 October 2017, Italy’s Revenue Agency clarified, among other points, that: in addition to the directors/employees of UCIs, managing companies (SGRs) and target companies, the employees/directors of their advisory companies also may benefit from the new tax regime (Eligible Entities). Yet, only employees and directors of Eligible Entities may benefit from the new tax regime while professionals are explicitly barred. As far as eligible instruments are concerned, they may also be issued by industrial and trading companies not operating in the financial sector, whilst the 1% investment threshold includes shares/units directly or indirectly held in Eligible Entities by the Beneficiaries, also through trusts and foundations.

On the carried interest rule - Article 60 of the Decree introduced a non-rebuttable presumption whereby remuneration derived from certain carried interest schemes qualified as income from capital, or capital gain, is generally subject only to a 26% tax. Therefore, if the conditions envisaged under the new tax law are met, carried interest cannot be taxed as income from employment which is subject to individual income tax (Irpef) at progressive rates, up to approximately 45%, and social security contributions (ranging from 36% to 45%).

How does it works - Under the new tax regime income from direct or indirect participation in companies, entities or undertakings for collective investment (UCI) derived by their employees or directors or by employees or directors of other entities controlling, controlled by, or in charge of the management of the latter (the Beneficiaries) arising from shares or other similar financial instruments granting enhanced economic rights (so called carried interest) is deemed as income from capital or capital gain rather than employment income when the following conditions are met: first of all, the overall investment commitment of all the employees and directors entails an actual cash outlay of, at least, 1% of the overall investment carried out by the UCI or of the net equity, in case of companies or other entities.
Secondly, the above income accrues only after that all shareholders have received an amount equal to the equity invested plus the minimum yield provided by the by-law, even in the case of change of control.
And still, the fund managers maintain their investment for at least five years, or for a shorter period in the case of change of control or change of management. Particularly, the five-year holding period starts from the date of each subscriptions/acquisition. If an incoming employee/director acquires eligible instruments from a leaving employee/director, the accrued holding period is not inherited by the former Beneficiary.
Finally, eligible instruments are issued by UCIs, companies or entities that are tax resident or established in Italy or in a State that allows an adequate exchange of information with Italy.

Time matters – This new tax regime is applicable to income from eligible instruments that is received and/or realized by the Beneficiaries starting from the date of entry into force of Law Decree 24 April 2017, No. 50, thus from 24 April 2017.

The real risk also matters - The Beneficiaries should actually run a real risk in making the investment in the eligible instruments. Thus, the new tax regime would be disregarded if for subscribing the eligible instruments Beneficiaries receive financing from their employer, whose repayment is waived.

The five years holding period - If the carried interest is paid before the holding period is met, it is temporarily treated as financial income. However, if later on the eligible instruments are disposed of before the holding period is met, such income may be re-categorized into income from employment thus triggering Irpef, at progressive rates, and social security contributions.

A way to support investment efforts and planning - The new tax regime on carried interest provides an stimulating opportunity to implement management investment plans not only within the private equity field.

The indispensable chance to submit an advance ruling - However, income derived from carried interest schemes, lacking any of the previously mentioned requirements, does not automatically qualify as income from employment, therefore a case-by-case analysis would be required in order to verify the nature of the income. Italian tax Administration has confirmed that under these circumstances taxpayers may apply for an advance ruling on the income characterization of the carried interest.

Extra-time to enjoy the new tax regime – Italy’s Revenue Agency also confirmed that the new tax provision can apply to subscriptions made even before 24 April 2017 from which employees /directors derived income that has been subsequently paid. Furthermore, it was also confirmed that carried interest schemes approved before 24 April 2017 may be amended in order to benefit from the new regime.

FiscoOggi è una pubblicazione dell'Agenzia delle Entrate - Ufficio Comunicazione
Testata registrata al Tribunale di Roma il 19.9.2001 con n. 405/2001
Direttore responsabile Claudio Borgnino