NEWSLETTER NO. 17 - 2020 / COVID-19: CLARIFICATIONS

The Italian tax authority provided the following clarifications as to the fiscal news introduced under the Italian law-decree no. 18/2020 described in our previous newsletter.

SUSPENSION OF TAX OBLIGATIONS

The suspension of tax obligations other than tax payments and withholdings due in the period between 8 March 2020 and 31 May 2020 refers to:

• notices to the Financial Data Archive (Archivio dei rapporti finanziari);
• monthly INTRASTAT lists for February 2020 to be filed by 25 March 2020;
• deeds subject to registration within a fixed deadline for registration duty purposes and payment of the duties due upon registration (however, if registration is requested despite suspension, even the relevant duties are due);
• the filing of declarations of succession;
• the answers to requests for documentation made during formal tax return assessments pursuant to section 36-ter of the Italian DPR 600/1973;
• the answers to black list costs under section 110 (11) of the Italian Tax Code (TUIR).

However, by way of example, the suspension of tax obligations does not refer to:

• the invoices that must be issued within the ordinary deadlines;
• the preparation of inventories (e.g. three months from the acceptance under the benefit of inventory etc.).

For those who benefit from the suspension of the withholding tax payment deadline even controls on withholding taxes and offsets made by principles under contracting and subcontracting are suspended.

The suspension of the payment deadlines and other tax obligations for accommodation and tourism businesses and other industries heavily hit by the COVID-19 epidemiological crisis applies to those who carry out such activities as their main activity vis-à-vis any other possible activities (the main activity is the one generating the highest proceeds or income in the last tax period based on the income tax return filed). The same criteria apply to the suspension of VAT payments owed by controlling companies of VAT groups and to the settlement of group VAT (Italian tax authority, newsletter no. 8 as of 3 April 2020).

MEASURES IN SUPPORT OF BUSINESSES

A tax credit for entrepreneurs equal to 60 percent of the expenses incurred in March 2020 for rental leases on land registry category C/1 properties is introduced under the "Cure Italy" decree. Lease rental agreements for properties classified under land registry categories other than C/1, even if used for trade purposes, such as land registry category D/8 properties by way of example, are excluded from such tax benefit. Furthermore, the Italian Ministry for Finance and Economy clarified that the tax credit is recognized for rental lease agreements for shops and stores, but not for agreements that in addition to the availability of the property also include other assets and services, such as agreements on the lease of business branches or other forms of contract that regulate the relations between the tenant and the owner of the commercial properties.

PAYMENT BY INSTALLMENTS OF CAPITAL GAINS ON TRADEMARKS NOT INCLUDED IN THE BALANCE SHEET

The capital gain may be paid by instalments pursuant to section 86 (4) of the Italian tax code (TUIR), even for intangible assets not included in the balance sheet. More specifically, the capital gain resulting from the sale of a trademark not included in the balance sheet may be paid by instalments, if no costs have been incurred for its purchase and/or development. In order to determine the capital gain, the cost of asset shall be assumed to be zero, if the assets have been entirely amortised (Italian tax authority, answer to advance ruling no. 19 as of 4 February 2020).

DEDUCTIBILITY OF DIRECTORS FEES - LIMITED LIABILITY COMPANY

Fees paid to sole directors of limited liability companies established as sole shareholder companies are deductible under section 95 (5) of the Italian tax code (TUIR). Further to the objections raised by the Italian tax authority on this issue, the response to a parliamentary questioning clarified that section 60 of the Italian tax code (TUIR) setting forth the non-deductibility of fees paid to individual entrepreneurs is not applicable (response to parliamentary questioning no. 5-02714 as of 5 February 2020).

TAX RELIANCE INDEX (ISA) RETURN FILED AFTER EXPIRY OF DEADLINE

The beneficial regime under section 9-bis (11) of the Italian law-decree no. 50/2017 is applicable, even though the return is filed late, provided that such return is submitted within 90 days upon the expiry the ordinary filing deadline (Italian tax authority, answer to advance ruling no. 31 as of 6 February 2020).

TERMINATION OF BUSINESS AND USE OF LOSSES

The remaining tax loss relating to the 2017 tax period may be entirely used to reduce the business income accrued in the last year of activity of the "minor" business that applies cash basis accounting (Italian tax authority, answer to advance ruling no. 45 as of 10 February 2020).

MERGER LEVERAGE BUY-OUT AND DEDUCTION (MLBO) - LOSSES CARRIED FORWARD

The Italian tax authority confirmed the non-application of the thresholds for losses carried forward, interest expense and excess NID (notional interest deduction) under section 172 (2) of the Italian tax code (TUIR) after a merger leverage buy-out and deduction (Italian tax authority, answer to advance ruling no. 57 as of 13 February 2020).

ASYMMETRICAL DIVISION

The Italian tax authority did not find that a division in favour of a beneficiary acting as a lessee under an agreement on the lease of a business branch transferred in the context of such division constitutes any grounds for an abuse of rights pursuant to section 10-bis of the Italian law no. 212/2000. Indeed, the Italian tax authority judged the transaction as legitimate and "physiological" since it is intended to <<allow each shareholder to continue to exercise its own activity>> (Italian tax authority, answer to advance ruling no. 98 as of 27 March 2020).

REPATRIATES REGIME

The Italian tax authority has recently provided some important clarifications on the repatriates regime under section 16 of the Italian legislative decree no. 147/2015. More specifically:

• an employee who did not request the application of such regime neither to the employer nor at the time of filing the income tax return cannot benefit from such tax advantage for the tax period of repatriation to Italy, but for the remaining eligible tax periods only, as of the date of the application subsequently made to the employer or at the time of filing of the income tax return (Italian tax authority, answer to advance ruling no. 59 as of 13 February 2020); 
• as regards equity incentive plans, the income relating to the variable salary for work carried out abroad is not eligible for the tax advantage, even if it is received in the tax period in which the employer already became resident for tax purposes in Italy (Italian tax authority, answer to advance ruling no. 78 as of 27 February 2020);

as regards the time requirement under (2) of such provision (24 months period of work abroad), it is impossible to cumulate periods of work and study (Italian tax authority, Principio di diritto n. 4, 2020).

Under Italian law (section 8 (35) of the Italian law no. 67/1988) loans or secondment of personnel for which the relevant costs only are reimbursed are irrelevant for VAT purposes. Nonetheless, according to the European Court of Justice (Case C-94/19), if there is a synallagmatic trade relationship between the parties - or the loan of personnel is granted vis-à-vis the payment of a consideration - the transaction may be relevant for VAT purposes and must be subjected to tax in any case. As a consequence, in such case the Italian provision would not be compliant with European legislation.

VAT CREDIT/DEBIT NOTES - PRINCIPIO DI DIRITTO

If one of the requirements for the issuance of a credit note for VAT adjustment occurs, due to the reference to section 19 of the Italian DPR no. 633 as of 26 October 1972, contained in section 26 of the same decree, the right to deduction may be exercised no later than at the time of filing of the VAT tax return relating to the year in which such right has arisen and at the conditions applicable at the time in which the right itself may be exercised.

VAT credit/debit notes issued within such deadline authorize the issuer to deduct the relevant VAT originally charged to the purchaser and obliges the beneficiary to register such notes pursuant to section 26 (5) of the Italian DPR 633/1972>> (Italian tax authority, Principio di diritto n. 5, 14 February 2020).

VAT CREDIT/DEBIT NOTES - BANKRUPTCY

A creditor not included in the bankruptcy statement of enforceable liabilities cannot not issue VAT credit/debit notes under section 26 (2) of the Italian DPR no. 633/1972. The issuance of credit/debit notes as a result of insolvency proceedings is, indeed, subordinated to the unfruitfulness of the proceedings upon expiry of the deadline for the submission of remarks to the final distribution plan or upon expiry of the deadline for complaints against the bankruptcy closing ordinance. Consequently, the unfruitfulness of the proceedings may not be assessed for a creditor not included in the statement of enforceable liabilities and, hence, admitted to the distribution plan (Italian tax authority, answer to advance ruling no. 33 as of 7 February 2020).

VAT RECEIVABLE FROM OMITTED PAYMENT

If the amounts requested due to the failure to provide for periodic VAT payments after automatic assessment are paid by instalments, such payment by instalments will give rise to a VAT receivable to be shown in the newly established VQ and VL12 fields of the annual VAT tax return for each year of reference. Hence, the VAT receivable resulting from omitted payments <<arises at the time and to the extent payments are made, even if they are made after several years>> (Italian tax authority, answer to advance ruling no. 81 as of 27 February 2020).

ELECTRONIC FILING OF RECEIPTS - INAPPLICABLE PENALTIES

The penalties under section 2 (6) of the Italian legislative decree no. 127/2015 for the omitted storage and submission of receipts do not apply, if taxpayers provide for the regularization of the electronic filing of receipts by 30 April 2020, provided that the duty to submit data on transactions made in the six months from 1 July 2019 until 31 December 2019 only has been breached (Italian tax authority, decision no. 6 as of 10 February 2020)

Moreover, the Italian tax authority also clarified that the duty to electronically store and submit data expires if taxpayers document the transaction through issuance of regular invoices, as provided for under the Italian DPR 633/1972. 

EXEMPTION FROM GIFT TAX

The gift tax under section 3 (4-ter) of the Italian legislative decree no. 346/1990 does not apply, if the legal ownership of a controlling share package of a company limited by shares is donated to children, provided that:

• the legal owners are attributed the right of vote in the shareholder meeting, by way of derogation from section 2351 of the Italian civil code;
• the recipients confirm that they intend to keep control for at least 5 years from the date of transfer;
• the donation is made in favour of children as joint ownership and they maintain such joint ownership for at least 5 years from the date of transfer (Italian tax authority, answer to advance ruling no. 38 as of 7 February 2020).

DECLARATIONS OF INTENT

The Italian tax authority disclosed an updated form for declarations of intent (contained in decision no. 96911 as of 27 February 2020) aimed at the purchase and/or the import of goods and services without the application of VAT, including instructions and technical specifications on how to fill out the declaration and on how to submit it electronically.

However, according to the above decision, interested taxpayers may use the previous form for declarations of intent (as under the decision adopted on 2 December 2016) up to the 60th day following the disclosure of this decision.

The Italian tax authority provides clarifications on new modes of accessing declarations of intent electronically via the "Tax Box" (Cassetto fiscale), as provided for under section 12-septies (3) of the Italian law-decree no. 34/2019.

The economic impact of the current global health crisis is already being felt by business operators, including not only independent enterprises but also multinational groups of any size. These negative effects will continue to be felt not only in the upcoming months of 2020 but they will most probably impact the supply chains and operational models for years to come.

As a consequence, for multinational groups it will be paramount that all business operators start to plan a series of activities that aim to assess the effects of the current exceptional economic circumstances on their business models, on the transfer prices applied until 2019 and - hence - on the splitting of profits amongst different group companies. Therefore, the effects to be assessed will not only be short-term effects, but they will impact also in the medium term (at least in 2021 and in 2022).

Hence, in order to be able to identify and to implement corrective measures to the transfer pricing policies adopted so far, multinational groups must start to allocate resources at least to the following activities:

1. collection of documentation on the developments in the industry to which they belong to and in related sectors;
2. simulation of the 2020-2021-2022 economic results of all group companies;
3. evaluation of short-term and medium-term financial needs;
4. revision of inter-company contractual arrangements.

Hence, the following inter-company issues must be carefully evaluated on the basis of the above-mentioned business years:

1.   evaluation of functions, risks and assets of each company, with special focus on the ability of the single subsidiaries to cope with the financial impacts of current risks;

2.   review of the functional characterisation of the single companies and, hence, the business model (e.g. limited risk distributor model with principal; decentralized model; etc.) in order to better adjust to the new circumstances under which the group must operate;

3.   development, exploitation and right to use intangible assets (DEMPE functions);

4.   consistent review of group finance (e.g. loans, credit facilities, cash-pooling, guarantees) in the light of the changes in market conditions and the role of the single subsidiaries;

5.   review of planned profitability targets for the single subsidiaries and loss splitting modes (e.g. review of gross-margin based models (resale price method and cost plus method) and net-margin based models (TNMM); profit split models);

6.   amendments to intra-group agreements in order to adjust to the changes in economic circumstances and to the new business model, if any.

Furthermore, once possible adjustments and amendments to the transfer pricing policies have been identified, also the time of validity must be carefully evaluated: More specifically, multinational groups will need to decide whether the identified adjustments must be made - for example - for the 2019 business year only or whether they will be adopted in the medium and long term as part of the group's amended business model.

Against this backdrop, please to do hesitate to contact our Transfer Pricing & Tax Value Chain team of specialists who will be pleased to assist you and to provide you with advice on any steps of these complex activities. 

SUSPENSION OF JUDICIAL PROCEEDINGS SET FORTH UNDER THE "CURE ITALY" LAW-DECREE EXTENDED UNTIL 11 MAY 2020

On 7 April 2020 the Italian council of ministers adopted a law-decree (the so-called Liquidity decree) containing urgent measures for businesses, strategically relevant industries and justice. This is a first package of measures that the Italian government intends to supplement and finalise in the so-called "April decree".

As to the area of justice, please note that all civil and criminal proceedings pending in front of all courts as well as the deadlines for all acts relating to civil and criminal proceedings (adoption of judicial orders and filing of explanations, filing of legal pleadings and enforcement proceedings, challenges, preliminary investigations and all procedural time-limits in general) have been newly extended from 15 April 2020 until 11 May 2020, except for urgent proceedings as specified under the previous decrees.

Moreover, all judicial proceedings in front of the finance courts, the Italian court of auditors and the military courts are suspended for the same period of time.

Kind regards

HAGER & PARTNERS