Paragraphs 87-95 of article 1 of the Law 197/2022 (so-called Budget Law 2023) provided an optional tax incentive to promote the repatriation of carried forward profits by holdings based in low taxation countries. The payment of a reduced substitute tax is required.

The incentive consists of a tax relief according by which, at the completion of a procedure, the distribution of the profits originated by the participated entity will be fully exempt for the Italian recipient.

The Ministry of Economy and Finance provided the implementing rules for this optional regime by the Decree 26.06.2023 ("M.D.").

1. Eligible taxpayers

The tax relief can only be granted to corporate taxpayers and individuals carrying out a business activity. It cannot be granted to individuals for investments held out of any entrepreneurial purpose.

In case of indirect participation in the entity abroad, the option can be adopted as well, irrespective of any intermediate holding being resident of Italy or not. However, should this be the case, the option shall be exercised by the intermediate holding rather than by the top shareholder, based on the "closest to the border" principle. The intermediate entity will then receive tax-exempt dividends by the entity based in the low taxation country.

2. Taxable basis

The taxable basis of the substitute tax is represented by the amount of retained earnings resulting from the financial statements of the low taxation jurisdiction subsidiary outstanding as of December 31st 2021 (calendar year entities only), further reduced by the amount of profits distributed before January the 1st 2023.

Note that:

  • it is allowed to opt for the relief also with reference to the earnings distributed after January 1st 2023, if the resolution of the shareholders meeting approving such payments took place before that date;
  • the profits shall be compliant features to art. 44 of the Italian Income Tax Code, thus not being deductible in the jurisdiction of the subsidiary.

Non Euro currencies shall be converted by the exchange rate at the end of the financial year 2022.

3. Eligible profits

The repatriation option can be exercised separately for each low taxation entity and with reference to all or just a portion of the outstanding carried forward earnings.

4. Substitute tax

The substitute tax is applied to the carried forward earnings based on the direct/indirect profits share attributable to the shareholder, by the rate of 9% for corporations and 30% in all other cases.

The substitute tax shall be paid in a single installment, within the deadline for payment of the income taxes due for the financial year 2022 (i.e. June the 30th, 2023, extended to July the 20th, 2023 for corporations). The new law expressly denies the possibility to offset the substitute tax with any tax credit in the F24 form pursuant to art. 17 of Legislative Decree. 241/97.

5. Repatriation of profits and reduced rate

The substitute tax rate can be reduced of 3%, leading to a rate of 6% for corporations and 27% for individuals, upon the following conditions:

  1. profits must be paid to the Italian shareholder within the deadline for the settlement payment of the income taxes relating to 2023 (i.e., June the 30th 2024);
  2. such profits must be segregated in a specific equity reserve not available for distribution for two years.

Further to the above, the M.D. clarifies that:

  • the reduced rates can be benefitted only in the event of legal control of the foreign investee;
  • the segregation of profits must be jointly resolved with the approval of the financial statements relating to the fiscal year during which the profits are actually paid;
  • the segregated profits can be used for offsetting future losses within the two years but no profit can be distributed if the reserve has not reached again the initial amount;
  • the reserve is also relevant for ACE (Allowance to Capital Equity) benefit base.

6. Instructions

The repatriation option shall be achieved by filing section RQ of the corporate income tax return related to fiscal year 2022, within November the 30th,2023 for taxpayers whose financial year is calendar (i.e. from January the 1st to December the 31st).

Omitted payment, total or partial, of the substitute tax does not jeopardize the valid effects of the option; in such circumstances, penalties provided for omitted income taxes are due.

Therefore, it should in principle be allowed:

  • to arrange the payment of the substitute tax by July 31st 2023, applying the 0.4% extension compensation;
  • to amend omitted payments after the expiry date by applying voluntary settlement procedures.

7. Profits distribution

As long as the relief process is achieved, any distribution of carried forward profits by the entity based in a low taxation country will be attributed in preference to the released portion of its retained earnings.

Originally published 19 July 2023.

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.