Country - Italy
Taxes
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A. AVAILABLE INVESTMENT STRUCTURES
Which legal structures are available for an investment in real estate in Italy?
- Direct acquisition of the asset from abroad.
- Direct acquisition of the asset from abroad through a local permanent establishment.
- Indirect acquisition through a local company.
- Indirect acquisition using a foreign entity.
- Indirect acquisition using a local permanent establishment.
- Indirect acquisition through a local holding company.
- Real estate investment funds and SIIQ.
B. TRANSFER TAXES, NOTARY FEES AND OTHER ACQUISITION COSTS
How is the purchase of a real estate asset taxed?
The following indirect taxes may apply, depending on the structure of the deal:
Direct acquisition of the asset:
- VAT (imposta sul valore aggiunto, IVA);
- registration tax (imposta di registro);
- mortgage tax (imposta ipotecaria); and
- cadastre tax (imposta catastale);
Indirect acquisition through a corporate entity:
- stamp duty (imposta sui contratti in borsa).
Stamp duty applies only to contracts for the transfer of shares, i.e. only if the investment is made though the purchase of a corporate vehicle. In this case, no other indirect taxes apply.
Sales of commercial real estate carried out by VAT-taxable persons are exempt from VAT unless: (i) the seller is a construction company that built or renovated the relevant property not more than four years prior to the sale; (ii) the buyer is a VAT-taxable person with a limited right to reclaim VAT (e.g. banks or insurance companies with a VAT deductibility percentage equal to or below 25%); (iii) the buyer is a consumer; (iv) the seller expressly elected to subject the transaction to VAT in the sale and purchase agreement.
The VAT exempt transactions mentioned above are still subject to the following transfer taxes: (i) registration tax at 7% rate; (ii) cadastral tax at 1%; and (iii) mortgage tax at 2%.
Transactions subject to VAT, on the other hand, are subject to the following additional transfer taxes: (i) registration tax at a fixed amount of EUR 168; (ii) 1% cadastral tax; and (iii) 3% mortgage tax. The overall burden of the additional cadastral and mortgage taxes is reduced to one-half of these amounts, to an aggregate percentage of 2% for transactions involving real estate funds, or for those transactions which involve leasing companies, banks and financial intermediaries registered pursuant to Articles 106 and 107 of the Banking Act, provided, in such latter cases, that the real estate is purchased in connection with financial leasing transactions.
VAT can be reclaimed. Registration, mortgage and cadastre taxes are not recoverable.
Do any specific rules for transfer taxes apply if the asset is a shopping centre or another asset used for retail activities?
Unless the parties agree to the sale/purchase of the corporate vehicle owning the property, buying a shopping centre or hotel must normally be structured as the purchase of a going business concern (azienda), where not only the building, but also the trade licence and other tangible and intangible assets of the business are purchased. The acquisition of a going concern is not subject to VAT but is subject to registration tax at the following rates:
- real estate: 7% (or 8% for undeveloped land) of the value; and
- other assets and goodwill: 3% of the value.
The mortgage and cadastre taxes apply at the rates of 2% and 1% respectively.
How is the purchase of shares in an SPV holding real estate taxed?
The purchase of shares in an SPV is only subject to stamp duty at a rate of 0.14% of the purchase price.
The stamp duty is a substitute for registration tax and other minor taxes that are applicable.
The transfer of shares is VAT exempt and no registration tax applies. This tax on share purchase agreements does not apply to intra-group transactions or to some transactions involving banks and financial intermediaries or to transactions between banks or between intermediaries.
Who normally pays the transfer taxes, the buyer or the seller?
The buyer normally pays the transfer taxes, but both buyer and seller are jointly and fully liable for payment and for any assessments by the tax authorities.
Are notary fees determined by law or should they be negotiated?
Notary fees are set by law. The relevant tariff structure consists of bands related to the value of the transaction, and each band sets a minimum and a maximum fee. Negotiation is sometimes possible within the scope of each band.
Are there any other costs related to the purchase of real estate assets or SPVs?
Other costs include the fees of professional advisors.
C. TAXATION OF CURRENT INCOME
How is income generated from the letting of real estate taxed in Italy?
(a) Direct investment through a permanent establishment
If a foreign investor [disposes of] a permanent establishment in Italy, the income generated by the permanent establishment is subject to corporation tax ("IRES") at 33% and profits tax ("IRAP") at 4.25%.
Taxable income for IRES purposes is the net revenue after costs have been deducted, as shown in the annual profit and loss account. With some minor exceptions, all costs relating to the activities of the permanent establishment can be deducted, including interest payments subject to limitations under thin capitalisation rules (see below). Property tax ("ICI") and IRAP are not deductible for IRES purposes. Depreciation of the property is deductible to the extent allowed by law (see below). In certain circumstances, taxable income can be mitigated for IRES purposes by using appropriate leverage.
Taxable income for IRAP purposes is the same as for IRES. However, not all costs relating to the activities of a permanent establishment can be deducted from income. ICI is deductible but interest payments and costs relating to employees are not. For this reason there will usually be some taxable income for IRAP purposes.
(b) Direct investment without a permanent establishment
If a foreign investor does not have a permanent establishment in Italy, income derived from letting property is subject to corporation tax ("IRES") at 33%. 85% of the gross income derived from letting is taxable and no depreciation or other costs can be deducted. Interest on loans secured on the property is not deductible for tax purposes.
Where the investor does not have a permanent establishment in Italy, neither the income generated by letting nor income generated by the sale of property are subject to profits tax ("IRAP").
(c) Indirect investment through a corporate entity
Income from letting is subject to corporation tax ("IRES") at 33% and profits tax ("IRAP") at 4.25%. Taxable income for the purposes of IRES is equal to the net income after the deduction of costs, as shown in the annual profit and loss account.
(d) Indirect investment through a partnership
The only form of partnership which can be used for investment in real estate is the limited partnership (società in accomandita semplice, s.a.s.). This is the only vehicle by which the partnership's liability can be limited. Only profits tax ("IRAP") is payable by the partnership as opposed to the partners themselves.
How can income generated by investment be transferred to a foreign investor?
(a) Direct investment through a permanent establishment
Once the profits have been taxed in Italy, income can be transferred to foreign investors without further taxation.
(b) Direct investment without a permanent establishment
Income can be transferred directly to a foreign investor and no withholding tax applies. The foreign investor must pay corporation tax ("IRES") in Italy but, under many tax treaties, will be entitled to an equivalent tax credit in his country of residence.
(c) Indirect investment through a corporate entity
Distribution of dividends to shareholders.
Once a company has paid tax on letting income, and possibly capital gains, the company can distribute dividends to the shareholders. Such a distribution may occur without being subject to withholding tax if the shareholder is resident in Italy for tax purposes. Italian tax residence applies where the shareholder has its registered office in Italy (i.e. is an Italian entity) or is a foreign entity with a permanent establishment in Italy. No withholding tax applies if the shareholding is held by such a permanent establishment. If the shareholding in the corporate vehicle is held by a non-tax-resident entity, withholding tax at 27% must be paid by the corporate vehicle at a point when the distribution of dividends is made (article 27 Presidential Decree no. 600 of 29 September 1973).
- the EU Parent-Subsidiary Directive applies (in which case no withholding tax applies); or
- a tax treaty reduces withholding tax to a lower level (under the OECD Model tax treaty, withholding tax is reduced to 15% or 10%, depending on the size of the foreign investor's holding).
If withholding tax applies because of a tax treaty, the shareholder will normally receive an equivalent tax credit in his country of residence.
Taxation at the level of the shareholder
If a shareholder resident in Italy for tax purposes (including a foreign entity with a permanent establishment) receives dividends, these are subject to taxation at the level of the shareholder. 5% of distributed dividends are subject to corporation tax ("IRES") at 33%, and this income is, therefore, taxed twice. This double taxation cannot usually be neutralised under a tax treaty.
It is possible to avoid additional taxation at the level of the shareholder by opting for "tax consolidation" of the corporate vehicle and the Italian shareholder (where the shareholder is a resident company or the permanent establishment of a foreign entity).
If a shareholder is not tax resident in Italy, the dividends will not be taxed in Italy, but only in the country where the shareholder is tax resident. In this situation, withholding tax may have been charged in Italy.
(d) Indirect investment through a partnership
After the payment of profits tax ("IRAP") and property tax ("ICI"), net income is distributed to the partners according to their profit participation. IRAP and ICI are not deductible for corporation tax ("IRES") purposes at the level of the partner. If the partners are individuals (whether or not they are tax resident), their share is taxed under the rules for Italian personal income tax ("IRPEF"). If the partner is an entrepreneur or company (whether or not they are tax resident), the distributed income is taxed under the IRES rules. The tax payable is 33% of taxable profit.
If a partner is not tax resident in Italy, the net income after tax can be transferred to the partner's country of residence without any further taxation in Italy.
Are there local taxes on the possession of real estate assets?
The main local tax is property tax or ICI.
ICI is a tax relating to the possession of real estate, calculated on the basis of a hypothetical income (rendita catastale) determined by the municipality in which the property is located. The rendita catastale (which is recorded in the cadastral register and publicly available) is multiplied by a set figure to give the cadastral value of the property (valore catastale). Each municipality is authorised to set ICI at between 0.4% and 0.7% of the cadastral value. Typically, the cadastral value is below, and sometimes substantially below, the property's market value. Even with newly built properties, the cadastral value rarely exceeds 90% of market value. Around 0.4% to 0.5% of the purchase price should be allowed for ICI.
D. DEPRECIATION
What are the basic rules for the depreciation of real estate assets?
The normal depreciation rate for real estate is 3% per annum on a linear basis. If the property is a building used for "large scale distribution" (grande distribuzione), the depreciation rate is increased to 6% per annum. Shopping centres, outlets and other buildings used for major retail activities are normally included in this category. Different depreciation rates are applied as follows:
- for the year in which a property is purchased, the depreciation rate is reduced to 50% of the ordinary rate;
- for the first year (or first three years if the property was "new" when purchased) the depreciation rate can be doubled. A "new" building is one that has been newly built or refurbished, and was not already let at the time of purchase; and
- the taxpayer can also opt to reduce the depreciation rate.
Can land be depreciated?
Land may not be depreciated for both statutory and tax purposes. If a separate value for the land is not specifically mentioned in a relevant sale and purchase agreement, it is assumed to have a value equal to 20% of the total purchase price. If undeveloped land is acquired and a building constructed on it, the basis of depreciation for the building includes the cost of construction and the cost of acquiring the land.
Can a participation in an SPV holding real estate be depreciated?
No.
E. VAT
Is the purchase of real estate assets subject to VAT?
If the seller sells the property as part of his business activities, the purchase price is subject to VAT at 20% (10% for residential property). If the seller is an individual or if the transaction involves the sale or purchase of certain types of residential buildings, VAT does not apply. VAT can normally be recovered.
How can VAT paid on the purchase price be recovered?
There are three ways to recover VAT:
- by offsetting it against VAT received (for example VAT on rental income);
- by offsetting it against other taxes; or
- by requesting a refund.
The investor can use a VAT credit by offsetting it against VAT received on its own invoices, starting from the first month or quarter following the date of the acquisition. As an investor's income will normally be limited to rental income, recovering VAT can take a considerable amount of time, although there is no limit on the amount of VAT which can be offset in this way.
Alternatively, a VAT credit can be used to pay other taxes due from the investor in the normal course of business, such as corporation tax ("IRES"), profits tax ("IRAP") or withholding taxes on other income. VAT can be offset against other taxes up to a maximum of EUR 516,456.90 per year.
Finally, there are three alternative refund procedures available:
- an ordinary annual refund of up to EUR 516,456.90;
- an ordinary annual refund exceeding EUR 516,456.90; and
- a quarterly refund.
A request for a refund can be submitted between 1 February and 31 October in the year following the year in which the VAT was paid. It must be filed with the tax office (concessionario della riscossione) in the area in which the investor has his registered office. The tax office will ask the investor to present a bank or insurance guarantee for the amount of the refund requested within 40 days of filing the request. This guarantee must be valid for three years from the date the VAT refund is requested. After a further 20 days, the tax office should transfer the refund into the investor's bank account. If the time limit is not met, then the investor is entitled to receive interest at 2.75% per annum on the requested amount. Reimbursement of VAT normally takes between two and 12 months.
A request for a refund of an amount exceeding the threshold of EUR 516,456.90 must be filed with the tax agency (agenzia delle entrate). The procedure is identical to the one described above, except that the refund is not normally paid until two to three years later. After 90 days from the filing of a VAT tax return, an investor is entitled to receive interest on the requested amount of 2.75% pa. Once the refund is granted, the investor must present a bank or insurance guarantee for the amount requested which is valid for the remainder of the tax assessment period, but not for more than three years.
The quarterly refund procedure can be used to request a refund of VAT paid in the preceding quarter. In order to qualify for a quarterly refund, at least two thirds of the investor's purchases in that quarter must have been purchases of fixed (depreciable) assets, such as property. It should be noted that a quarterly refund cannot be requested for VAT paid in the last quarter of the calendar year. The request must be filed with the tax agency (agenzia delle entrate) by the following dates:
- 30 April for the first quarter;
- 31 July for the second quarter; and
- 31 October for the third quarter.
The tax agency must pay the requested refund within 20 days of the second month following the end of the quarter to which the refund request relates. If payment is not made by this date, interest at an annual rate of 2.75% will accrue. As in the case of an annual refund, the investor must present a bank or insurance guarantee for the amount requested with a duration at least equal to the remaining assessment period, but not more than three years. The quarterly refund procedure is not subject to the EUR 516,456.90 limit.
F. LEVERAGE, THIN CAPITALISATION RULES
If interest payments are to be tax deductible, is it necessary for the financing to be taken out simultaneously with the purchase of the asset?
No, but the financing must be used by the company only for activities relating to its business.
Are there rules which limit the deductibility of interest for third party (bank) financing?
Thin capitalisation rules limit the full deductibility of interest paid on any loans guaranteed by "qualified shareholders" or "related parties".
Are there thin capitalisation rules in Italy and if so, how do they work?
Since the beginning of 2004, thin capitalisation rules have applied in Italy. These rules apply to interest paid by a resident company on loans granted or guaranteed by "qualified shareholders" or "related parties". Where a debt to equity ratio of 4:1 is exceeded, interest is not deductible.
Thin capitalisation rules are based on the following definitions:
- "equity" means all capital injections provided by shareholders as "risk capital"; corresponding to the net assets of the company and is identified by the share capital, the reserves and the participating loans (associazione in partecipazione di capitale) included in the patrimonio netto as set out in the Italian Civil Code;
- "debt" means loans granted or guaranteed by qualified shareholders, or by other parties "related" (parti correlate) to the qualified shareholder;
- "qualified shareholder" means a shareholder holding more than 25% of the share capital of the company including both direct (parent-subsidiary) and indirect (parent-sub-holding-subsidiary) participation: a qualified shareholder may therefore be a company which is not listed in the company's shareholders' register; and
- "related party" means a company which is "controlled" by a qualified shareholder, as defined by the Italian Civil Code. This specifies "control" as the possession of at least 51% of the voting rights in a company or having an influence over or de facto control of a company.
Does Italy apply any withholding taxes on interest paid to foreign financing banks or to foreign shareholders?
When interest is paid to a foreign entity, withholding tax equal to 27% or 12.5% must usually be paid. In cross-border scenarios, these rates of withholding tax may be reduced where bilateral tax conventions for the avoidance of double taxation apply. Using certain financing structures, it is possible to obtain an exemption from withholding tax, however, strict anti-avoidance rules may apply.
G. TAXATION OF CAPITAL GAINS
How are capital gains deriving from the sale of real estate assets taxed in Italy?
(a) Real estate assets held by foreign investors directly without a permanent establishment in Italy
Gains derived from the sale of real estate ("capital gains") are not subject to corporation tax ("IRES") if the property is sold more than five years after its acquisition. If a sale occurs before the expiry of this five-year period, IRES applies at the rate of 33%. Since depreciation is not permitted in the absence of a permanent establishment, taxable gains are limited to any difference between the acquisition cost at the time of purchase and the price agreed for the sale of the property.
(b) Real estate assets held by foreign investors through a permanent establishment in Italy
Regardless of the time which has passed since its acquisition, profits received from the sale of property are always subject to corporation tax ("IRES") at 33%. The profit is the difference between the book value of the property at the time of sale (as reduced by depreciation) and the agreed purchase price. Under certain conditions, it is possible to spread the payment of tax on capital gains over a period of five years.
How are capital gains deriving from the sale of shares/interests in property companies/partnerships taxed in Italy?
Where the participation exemption rules do not apply, profits generated by a resident company from the sale of shares/interests is subject to corporation tax ("IRES") at 33%.
Are there any rules regarding participation exemptions in Italy?
Italian tax law provides for a participation exemption. In certain circumstances, no capital gains tax is payable on profits generated by the sale of shares in Italian companies. Unfortunately, the participation exemption has little relevance for corporate transactions in the real estate sector. The company whose shares are sold must carry out a commercial activity. Holding real estate assets does not fall within this category. An exception is made for real estate companies running shopping centres or other commercially focused activities although certain criteria must be met.
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