Background - exit tax
The exit tax is defined pursuant to article 166 of the Italian tax law (Presidential Decree no. 917 of 1986).
- Companies and corporations are tax residents of Italy if their “legal seat” or place of management or the main object of their business is maintained in Italy for more than 183 days, per year.
- An outbound transfer of the “legal seat” of an Italian company—that is, a transfer determined to be a transfer of the company’s tax residence—is considered to be a taxable disposal of all the company’s assets (i.e., a transfer of going concern, including goodwill).
- With respect to such transfers, corporate income tax—i.e., the “exit tax”—is levied at a rate of 27.5% on the amount of unrealized or “embedded” gains in the company’s transferred assets. Such amounts of gain are determined by the difference between the book value of the transferred assets and their market values.
- There is an exemption available from the exit tax if the company’s entire assets / going concern are allocated to a permanent establishment in Italy.
- The company’s untaxed reserves must be reflected within the capital account of the permanent establishment to which the assets are allocated. Otherwise, reserves will be taxed, upfront.
- An Italian company’s tax loss carryforwards are preserved to the extent that all the company’s assets and liabilities are allocated and conveyed to the permanent establishment. There may be limits on the amount of carryforwards—the amount may be reduced proportionally to a lower amount of assets and liabilities as allocated to the permanent establishment and, in any event, may be subject to a cap of the book value of the capital account.
Changes to exit tax regime to reflect National Grid Indus case
On 24 January 2012, in line with the principles set out by the Court of Justice of the European Court in the National Grid Indus case (C-371/10), a new paragraph was added to article 166.
Subsequently, two implementing regulations (ministerial decrees) were issued—one on 2 August 2013 and the second on 2 July 2014. The July 2014 changes supersede the August 2013 release (and because of this new guidance, the date of execution of a transfer may dictate which rules are to apply).
As a result, if the transfer of a company’s legal seat is made so as to constitute a transfer of the company’s tax residence, (according to Italian domestic law and, if any, applicable tax treaty provisions) to another EU or EEA Member State and that country to which the tax residence is transferred has agreed to provide assistance to Italy with respect to the collection of taxes (similar to EU Directive 2010/24), then payment of the exit tax can be divided into equal installment amounts or may be deferred—however, the deferral opportunity may be partially lost when there is actual or “deemed” realization of the unrealized or “embedded” gains (with interest on such tax payments being due).
The same rules also apply with respect to the transfer of an Italian permanent establishment to an EU/EEA Member State.
In more detail:
- Exit tax is calculated once, at the time of the transfer, and is not affected by subsequent losses on the transferred assets.
- Exit tax is calculated based on the overall gain realized with respect to the transferred assets or going concern, including goodwill, and also by taking into consideration the risks and functions transferred.
- The exit tax deferral or installment mechanism cannot be selectively applied; in other words, it is an “all or nothing” situation.
- The deferral or installment mechanism cannot be elected—in other words, there will be “upfront taxation”—with respect to certain accounts or types of assets including: (1) gains (net of losses) on inventory goods and portfolio investments; (2) untaxed reserves that are not reflected in the books of the Italian permanent establishment that is “left behind;” (3) certain timing differences originating in previous years.
- The deferral mechanism will be available for 10 years (with interest to be paid at a rate of 4% interest due per annum), and is terminated with regards to the respective assets when gains on such assets are realized or deemed to be realized.
- The exit tax installment mechanism is only to be applied for six years, in equal installments (again, with interest at a rate of 4% due per annum).
- Once the company elects to apply either the exit tax deferral or installment mechanism, the following items will be deemed to be a gain realization (and thus trigger the exit tax, to be due proportionally): (1) for tangible or intangible assets, pursuant to the standard Italian GAAP depreciation / amortization rules; (2) for share investments and similar interest, in the tax year of distributions of dividends or capital reserves; (3) for financial instruments, including derivatives, gain is taxed in equal installments for the duration of the instrument; (4) in general, in the tax year when the Italian tax rules would deem the gain to be “realized;” (5) another transfer of tax residence, or a transfer of the assets, outside of the EU / EEA by means of a merger, de-merger, transfer of a going concern; (6) insolvency or on “winding up” of the company or cancellation of the company; or (7) on transfer of interest by partners of the transferred partnership.
Moreover, the July 2014 regulations (Regulation no. 2014/92134, 10 July 2014) provide the following additional measures:
- Companies electing to apply the exit tax deferral or installment payment mechanism must notify the tax authorities and must keep all information relevant to the transfer in an electronic format, and made ready to be provided to the Italian authorities if and when requested.
- The documentation must be updated to record actual or deemed realizations of gain.
- Companies opting for the 10-year deferral mechanism must regularly file an income tax return reporting the amount of the deferred exit tax (net of actual or deemed realization occurred each year).
- Installment payments of the exit tax are due as of the date when the company used to pay the balance of income tax due (i.e., for calendar year taxpayers, 16 June of the following year).
- Companies electing to apply either the deferral or installment payment mechanism must provide guarantees, if so required, at discretion of the tax authorities. An exception to the requirement for a guarantee may be available for those companies in a “tax paying position” during the last three years of their residence in Italy and whose book value of their net assets exceeds the amount of the exit tax.
For more information, contact a tax professional with the KPMG member firm in Italy:
Marco Bassan Guerrieri
+ 39 02 676441
Giorgio Dal Corso
+ 39 045 8114111
+ 39 045 8114111