2023 Budget Law: Substitute taxation on undistributed earnings from blacklisted companies

According to 2023 Budget Law, profit and non-distributed profit reserves accrued by foreign participated company, benefitting from a preferential tax regimes, can voluntarily be subject to a reduced substitute tax, compared to the Italian corporation income tax ordinarily applicable upon their distribution, so that such profits are no longer subject to taxation in Italy upon receipt.

***

Pursuant to the ordinary tax regime, dividends paid by foreign companies, resident or established in States or territories with a privileged tax regime - as identified by Article 47-bis TUIR[1] - are either fully taxable in Italy, or, provided that the foreign companies carry out an effective economic activity[2], to 50% of their amount.

Article 1, paragraphs 87-95, of Law no. 197/2022 (2023Budget Law) introduced the possibility for individuals and legal entities that hold, as part of their business activity, equity interests in foreign black-listed companies, whether directly or indirectly (through controlled entities), to opt for the payment of a reduced substitutive tax on the amount of the undistributed profits resulting from their 2021 financial statements (for calendar-year company).

The substitutive tax to be paid by Italian companies amounts to 9% of the blacklist profits (30% for individual and non-business entities), which may be reduced to 6% provided that  (i) the profits are received by the resident companies by the deadline for the payment of the balance of income taxes due for 2023 FY (generally, 30 June 2024), and (ii) the same are set aside for a period of not less than two financial years in an equity reserve.

The blacklist profit subject to the 9% or 6% tax will no longer form part of the income of the Italian companies upon collection.

In essence, in case of profit distribution from black-listed companies, the substitute regime allows for an average tax saving of approximately 15 or 18 percentage points for IRES subjects - depending on whether the substitute tax is applied at the rate of 9% or 6%, respectively - which is reduced to 3 or 6 percentage points for blacklisted profits taxable on 50% of their amount.

The option may be exercised separately for each black-listed company and with respect to all or part of the undistributed profits.

The option must be exercised in the tax return to be filed for the 2022 FY.  The substitute tax shall be paid in a lump sum by the deadline for the balance of corporate income tax due for the 2022FY and may not be offset.

The 9% (6%) tax also allows Italian taxpayers to step-up the tax basis of the foreign participations by an amount equal to the profits on which the substitute tax has been paid (to be then reduced accordingly in case the profits are collected). The option for the substitutive tax is therefore to be considered in the event of future disposal of the blacklisted equity interest, as it allows the amount of the fully taxable capital gain to be reduced accordingly.

The law framework will be completed within ninety days from the date of entry into force of the Budget Law 2023 with the issuance of implementing provisions by the Minister of Economy and Finance.

This article is for information purposes only and is not, and cannot be intended as, a professional opinion on the topics dealt with. For any further information please contact Laura Frisoli and Barbara Aloisi.

[1] In particular, black-listed earnings are those formed in the hands of investee companies resident in States or territories, other than those belonging to the European Union (plus Iceland, Norway and Liechtenstein), where they are subject to effective taxation of less than half of the Italian rate, in the case of controlling interests, or, in the case of non-controlling interests, where the nominal level of taxation is less than 50% of that applicable in Italy, taking into account special regimes. Since the rules for identifying privileged tax regimes have been subject to numerous amendments over time, in order to verify whether in the period of 'formation' of the profit the investee company is resident in a privileged or ordinary taxation State, it is necessary to consider the rules in force in the respective tax years. However, the profit is not subject to full taxation if the foreign State, at the time of distribution, no longer fulfils the conditions to be considered a 'tax haven' and this condition is verified, applying the current rules, also to the years in which the profit is accrued.

[2] The full taxation of black list dividends does not apply, however, if it can be shown that the participation does not have the effect of locating the income in the privileged taxing State from the beginning of the holding period (Article 47-bis para. 2(b) TUIR).