Italy Tax Alert - 9 February 2012
Optional exit tax deferral introduced for deemed gains on intra-EU/EEA migration
By Luca Bosco, Francesca Muserra and Stefano Schiavello
The Italian government approved Law Decree No. 1 on 24 January 2012 that amends Italy’s exit tax rules to provide an optional deferral regime for the exit tax on deemed gains when an Italian company migrates to a another jurisdiction within the EU/EEA.
The decree is in response to the 29 December 2011 decision of the European Court of Justice in the National Grid case, in which the court held that, while an EU member state (in this case, the Netherlands) can impose an exit charge on unrealized gains upon the transfer of an entity’s place of effective management to another member state, the requirement that the exit charge be paid immediately upon the transfer of seat, without the possibility of deferral of tax collection, violates the freedom of establishment principle in the Treaty on the Functioning of the European Union.
Under article 166 paragraph 1 of the Consolidated Law on Income Tax (TUIR), the transfer of tax residence abroad by an Italian company triggers a deemed sale, at market value, of the assets of the business, unless the assets remain part of an Italian permanent establishment (PE) of the company (created as a result of the migration). This rule is also applicable if the assets are subsequently transferred out of the Italian PE. Any built-in gain in the assets of a foreign PE of the Italian company that transfers its tax residence abroad is, in any case, deemed as immediately sold at market value.
Article 166 paragraph 2 provides that any net equity reserve with a tax suspension status, including reserves taxable only upon distribution to the shareholders, resulting from the financial statement for the tax year preceding the transfer of the tax residence abroad is subject to the exit tax unless booked in the net equity of the Italian PE (created as a result of the migration).
Before Law Decree No. 1, the transfer of tax residence abroad by an Italian company triggered immediate taxation at the full corporate income tax rate of:
- Any existing built-in gain in the assets moved outside Italy, determined as the difference between the fair market value of the asset and its tax base under the Italian tax rules; and
- Any net equity reserve with a tax suspension status resulting from the financial statement for the tax year preceding the year of transfer of the tax residence abroad (unless booked in the net equity of the Italian permanent establishment of the company).
New optional regime
Article 91 of Law Decree No. 1 introduces a new provision in article 166 TUIR, according to which a taxpayer that transfers the tax residence of a business entity to another EU/EEA jurisdiction may opt for deferral of the exit tax on the built-in gains in the assets transferred abroad. The option to defer, however, is conditioned on the other jurisdiction having signed a bilateral agreement with Italy for the recovery of tax claims comparable to the provisions of the EU mutual assistance directive.
As a law decree, the measure must be converted into ordinary law by the Parliament within 60 days (of the issue date of the law decree) and a ministerial decree with implementation rules also must be issued within that time frame. The implementation rules will address events that may terminate deferral under the new regime, the method for determining the taxable gain and payment of the exit tax itself. The option to defer exit tax liability, however, can be exercised for transfers of corporate tax residence abroad made after 24 January 2012 (the date the law decree entered into force).