The Situation: On December 24, 2019, the Italian Parliament approved the Budget Law for 2020.
The Result: New favorable tax changes have been introduced, but also new taxes will be imposed on digital services and the consumption of plastics and sugar.
Looking Ahead: Multinationals should reconsider debt/equity ratio in light of the newly reinstated notional interest deduction system and consider making step-up elections to benefit from higher amortization and have to face the introduction of the digital, plastic, and sugar taxes.
On December 24, 2019, the Italian Parliament approved the Budget Law for 2020, which contains a package of tax increases and decreases with varying effective dates, described below.
New Favorable Tax Changes
- Notional interest deduction reinstated. The Budget Law for 2019 (i) repealed the so-called notional interest deduction ("NID") system and (ii) replaced the NID system with a reduced corporate income tax rate applicable to certain retained earnings. The Budget Law for 2020 has reinstated the NID system that was repealed by the 2019 budget law. The NID rate provided for by the Budget Law for 2020 is 1.3%.
- Changes to taxation of real estate asset enacted. The Budget Law for 2020 provides for the repeal of the so-called municipal unified tax ("IUC"), which was comprised of municipal real estate tax ("IMU"), municipal tax on indivisible services ("TASI"), and municipal tax on waste ("TARI"), with the exception of the TARI that is therefore confirmed. TASI had the same taxable base as IMU and, it being a duplication of the latter, has been merged with IMU. The provisions governing IMU continue to apply with some amendments. The tax rate of IMU is 0.86%, but each municipality can increase the tax rate up to 1.06%. According to the Budget Law for 2020, 50% of IMU paid in relation to business real estate assets can now be deducted for corporate income tax and self-employed income tax purposes.
- Tax credit introduced. In order to boost the investments, the Budget Law for 2020 provides for certain tax credits for new investments.
A tax credit is granted for investments carried out by Italian companies in business tangible assets (also 4.0 tangible assets) and 4.0 intangible assets. For purchases of 4.0 tangible assets, the tax credit varies from 20% to 40%, depending on the amount of the purchase. For the purchase of all other tangible assets, the tax credit is equal to 6% of the purchase price. For the purchase of 4.0 intangible assets, the tax credit is equal to 15% of the purchase price. The tax credit applies to purchases carried out by December 31, 2020, or by June 30, 2021, provided that certain conditions are met.
A tax credit is also granted for investment in research and development, green change, high technological innovation, and other innovative activities, including designs carried out by companies active in the fashion, shoes, glasses, gold, and furniture sectors. The tax credit varies from 6% to 12% of the purchase price depending on the nature of the investment. Implementing regulations of such tax credit should be issued within 60 days of the Budget Law for 2020 entering into force.
The Budget Law for 2020 confirmed the tax credit—already provided for by the Budget Law for 2019—for certain employee training expenses. The tax credit varies from 30% to 50% (depending on the size of the company) of the employee expenses, limited to the hours spent on training activity and aimed at the acquisition of skills in technologies relevant for the implementation of the business transformation process.
In order to limit the single use of plastic packaging ("MACSI"), a tax credit equal to an amount of 10% of the expenses incurred from January 1, 2020, to December 31, 2020, for technological adjustments for production in the MACSI sector. Such credit cannot, however, exceed EUR 20,000. In addition, the taxpayer claiming the tax credit must comply with specified requirements and formalities set forth under the EU State Aid regulations.
- Certain tax step-up regimes confirmed. The Budget Law for 2020 also has extended to 2020 two tax step-up regimes already available. In particular, the Budget Law for 2020 has confirmed the regime that allows business taxpayers who do not adopt the International Accounting Standards Board to step up the tax value of assets held by paying a substitute tax on the increased value at the rate of 12% for depreciable assets and 10% for nondepreciable assets.
New Unfavorable Changes
- Digital services tax enters into force. The Budget Law for 2018 introduced in the Italian tax system a tax on digital transactions, which was intended to enter into force in 2019, conditional to the issuance of the relevant implementing regulations. Such implementing regulations were never issued. With the Budget Law for 2019, the Italian legislature (i) repealed the tax law on digital transactions provided for (but never entered into force) by the 2018 Budget Law and (ii) introduced a digital services tax ("DST") that would have been effective only upon issuance of implementing regulations. Now the Budget Law for 2020 provides that the DST is effective in 2020 regardless of the issuance of any implementing regulations. The Budget Law for 2020 also amended the original provisions contained in the Budget Law for 2019.
In summary, the Italian DST applies to any persons, resident, or nonresident who carries out a business activity, provided that they meet in the previous calendar year, individually or as a group, the following two conditions: (i) the overall worldwide revenues are at least equal to EUR 750 million and (ii) the overall revenues supplied in Italy from qualified digital services are at least EUR 5.5 million. The tax rate is 3% and applies to all the revenues deriving from certain qualified digital services in the field of digital advertising, intermediation services, and transmission of data.
- Plastic tax enacted. In order to limit MACSI, the Budget Law for 2020 has introduced a so-called "plastic tax." For plastic tax purposes, MACSI are those items created to contain, protect, handle, or deliver goods or foods. The tax is equal to EUR .45 per each kg of plastic materials.
The taxable persons are (i) the manufactures for MACSI produced in Italy; (ii) the importers for MACSI imported in Italy from a non-EU country; and (iii) the persons who buy MACSI or the persons who sell it if the product is sold to a consumer, in the event that MACSI is sold in Italy from another EU country.
The tax is due (i) at the time of sale to another Italian person if MACSI is produced in Italy; (ii) at the time of import if MACSI is imported in Italy; or (iii) at the time of purchase/sale if MACSI is delivered in Italy from another EU country. The tax is not due where MACSI is delivered for consumption within the EU or exported. A quarterly tax return is required to be filed. The plastic tax will enter into force two months after the issuance of the implementing regulations (expected to be issued by the end of May 2020).
- Sugar tax enacted. To discourage the use of soft drinks prepared with sweetener materials, the Budget Law for 2020 has enacted a so-called "sugar tax." The sugar tax is equal to EUR 10 per hl, in case of finished goods, and EUR 0.25 per kg, in case of products prepared to be used after dilution.
The taxable persons are (i) the Italian manufacturers of products produced in Italy; (ii) the importers for MACSIs imported in Italy from a non-EU country; and (iii) the buyer if the drink is bought from another EU country.
The tax is due (i) at the time of sale by the Italian manufacturers; (ii) at the time of import if the drink is imported in Italy; or (iii) at the time of supply of the drink if the latter is introduced in Italy from another EU country. The tax is not due where the drink is delivered for consumption within the EU or intended to be exported. A monthly tax return is required to be filed. The implementing regulations of the sugar tax should be issued by the end of August 2020.
Three Key Takeaways
- Favorable tax changes will require a review and potential reorganization of existing structures for multinational companies.
- A new Italian digital services tax will take effect immediately.
- The new plastics and sugar taxes will be effective if and when implementing regulations are adopted.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.