Tax Pills

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.

Italy in action: the cutting edge tools to foster the international tax cooperation
Reinforcing administrative action, by means of a stronger international tax cooperation, and improving the relationship between Tax Administrations and taxpayers, thanks to an increased tax certainty, are two of the main goals of worldwide fiscal authorities.
Within the framework of OECD and European Union guidelines, Italy is more and more engaged in implementing projects aiming at stimulating growth and investments in the Country, by establishing a renewed relation with taxpayers based on trust, transparency and cooperation. In this context, actions focused on reducing tax uncertainty and decreasing international disputes, play a strategic role. Shifting from ex-post to ex-ante or real time tax controls is one of the common feature of these activities.
The Joint Audit International Conference, held on the last 19 October at the Italian Revenue Agency headquarter in Rome, was an important occasion to deeply discuss on some innovative control and compliance tools, such as Joint Audit, Cooperative Compliance and ICAP. In particular, the Conference was organised in the framework of the cooperation between the Italian Revenue Agency and the Bavarian Ministry of Finance, that are realising together cross-border audits on groups operating in the two territories. Representatives of Tax Administrations, International Organisations, Academia and Business had a fruitful debate about these strategic tools, analised from various perspectives.    
Joint Audit - Joint Audit is an innovative form of reinforced administrative cooperation, consisting in a tax audit jointly conducted by two or more Tax Administrations on groups of companies, operating in various Countries. This form of cooperation falls within OECD framework which describes Joint Audit as a coordinated action between two or more Countries joining together to form a single audit team to examine transactions of one or more related taxable persons (both legal entities and individuals) with cross-border business activities. Countries involved in Joint Audit procedure have a common or complementary interest   and the audit team includes Competent Authority representatives from each Country.  
Joint Audit could focus on direct taxation critical areas, such as Transfer Pricing, Permanent Establishment or other BEPS related issues. It is aimed to reach important goals, namely:  enhancing the administrative cooperation by sharing and developing best practices and  lightening administrative burdens for taxpayers due to simultaneous action by Tax Administrations. Moreover, this types of controls, reducing incidences of double taxation, leads to a decreased number of international disputes, thus reducing the number of MAP procedures or making the MAP related process faster.
A precondition for conducting a Joint Audit is the definition of the legal framework. Article 26 of the OECD Model Tax Conventions on simultaneous examination and tax examination abroad, Article 9 of the Convention on Mutual Administrative Assistance in Tax Matters and EU Directive 2011/16 with reference to the active presence of foreign officers and simultaneous controls can be identified as the most suitable legal bases.
According to this legal framework and to recommendations provided by OECD and European Commission, the Joint Audit is generally carried out on the basis of an agreement signed between the Competent Authorities of the States involved.
The Italian Revenue Agency and the Bavarian Ministry of Finance started with a pilot Joint Audit project in October 2012, aiming at jointly conducting tax controls on cross-border transactions, to ensure compliance with tax rules by companies operating in the two territories. The pilot phase of the project involved Veneto and Bavaria. After this first stage, the Italian and Bavarian Tax Administrations have continued and enhanced their joint commitment to strengthen administrative cooperation in tax matters, by extending the Project to other companies and involving further Italian regions, such as Lombardy, Piemonte, Tuscany, Emilia Romagna and the autonomous provinces of Trento and Bolzano.
Joint Audit Project has also been analised from the academic point of view: Universities of Bologna and Heidelberg conducted a Research Project, focused on Joint Audit legal framework, with reference both to the domestic - Italian and German – and international context. Academic research also aimed at getting a deeper knowledge of issues related to the taxpayer right protection, the chance for them to independently request for the launch of a Joint Audit as well as the need for Tax Administrations to request the prior consent of taxpayers concerned. The study also focused on the legal nature of Memorandum of Understanding, signed between Competent Authorities of the States involved in the Project, and on the chance for the taxpayers to access the Project related information.
Cooperative Compliance - Cooperative Compliance is a programme aiming at efficiently influencing and improving taxpayer compliance behaviour. It is addressed to large taxpayers and based upon the principle “Transparency in exchange for certainty”. It means that taxpayers, in exchange for an open disclosure of their business model and the implementation of an adequate Tax Control Framework, can have a direct and steady dialogue with the Tax Administration in order to asses and reduce tax risks.
Such programme comes from OECD approach in terms of recommended actions towards reinforced relations between Tax Administration and taxpayers, based upon mutual trust and cooperation. Already since 2008 the OECD Forum on Tax Administration (FTA) promoted the establishment of “enhanced relationships” between Tax Administration and taxpayers, providing some key pillars in this regard. Afterwards, in 2013, OECD published the Report “Co-operative Compliance: A Framework from Enhanced Relationship to Co-operative Compliance”, in which the setting up of a Tax Control Framework (TCF), by the taxpayers, plays a fundamental role. In a few words, OECD promotes the Cooperative Compliance as an important compliance risk management strategy tool, “leading to payment of the right amount of tax at the right time”.    
Italy, in the framework of implementing a tax certainty package, introduced in 2015 the Cooperative Compliance by Legislative Decree No 128. This specific program is reserved to several specific types of business taxpayers, for instance  resident and non-resident entities having a Permanent Establishment in Italy with a total turnover or operating revenues exceeding 10 billion euros and entities granting execution to the opinion of the Italian Revenue Agency in response to the advance tax ruling on new investments, notwithstanding threshold of turnover or revenues. Taxpayers, once admitted to the regime, get some benefits, such as collaborative dialogue with the Italian Tax Administration  before filing the tax return, fast track ruling procedure regarding the application of fiscal provision to specific cases, reduction of applicable penalties in case of tax assessment. Furthermore, no guarantees are required to obtain refunds of direct and indirect taxes. The impact of the Cooperative Compliance regime on effective audits risk is very important since it allows the Italian Tax Administration to free up resources for high risky taxpayers, thus increasing the efficiency of its activity.
ICAP - ICAP is an innovative tool to conduct an effective multilateral risk assessment and thus providing tax certainty to taxpayers, thanks to a stronger international cooperation among Tax Administrations. It is a voluntary programme that use CbC Reports and other information to facilitate open and cooperative multilateral engagement between multinational groups and Tax Administrations.
ICAP follows the implementation of OECD BEPS Actions, related to Transfer Princing, Country by Country Reporting (Action 13) and MAP (Action 14). OECD identifies a range of benefits related to the implementation of ICAP for multinational groups and Tax Administrations: a fully-informed targeted use of CbCR information, a more efficient use of resources and a co-ordinated approach to engagement, a faster clearer route to tax certainty and a fewer number of disputes entering into MAP. 
The Italian Revenue Agency have started working together with other six Tax Administrations to explore the feasibility on ICAP Pilot. Italy is strongly committed in the risk analysis activity, also aiming at the identification of critical areas of intervention to ensure compliance of multinational groups.
The objective behind the ICAP pilot is to examine ways to leverage CbC information and other data available to Tax Administrations to assess tax risk multilaterally.

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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