investing in italy: legal and tax implications moscow, 2 february 2012

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Investing in Italy: legal and tax implications

Moscow, 2 February 2012

Paolo Bonolis – partner – legal

Carlo Romano – partner – tax

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Agenda

9:00 Introduction to the Italian legal and tax system

9:30 - buying a real estate in Italy

- acquisition of an interest stake in Italian company

- the energy and renewable market

- private equity

10:15 Tax audit trends

- transfer pricing

- permanent establishment

10:45 Q&A session

11:00 Conclusions

2Paolo Bonolis – Carlo Romano Moscow – 2 February 2012 Breakfast briefing

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Introduction to the Italian legal and tax system (1)

The legal framework

—No restriction to ownership and private initiative—Anybody can own property—Anybody can be a shareholder of a company

—Ownership of real estate and certain assets (cars, yachts) proved by registration in public registries

—A notarial instrument is required for registration

Italian Companies- most common forms:—Limited liability company (Srl) – minimum capital € 10.000 -

ownership proved through registration with the companies registry —Joint sock companies (SpA) – minimum capital € 120.000 -

ownership proved by possession of a duly endorsed share certificates and registration with the company’s ledger


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— Personal Income Tax (PIT) 23% to 43% (+ 3% up to 2013 for income higher than 300k)

— Corporate Income Tax (CIT) 27,5% (increased to 38% for dormant companies)

— Regional Tax on Productive Activities 3,9% (4,65% x banks; 5,9% for insurance)

— Value Added Tax (VAT) 21% (4% or 10%; 23%/12% as of 1.10.12)

— Real Estate Municipal Tax 0,4% to 0,76%

— Registration duties



The tax framework

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Focus on Corporate Income Tax

— EU law protection

— Developed Tax Treaty network

— Participation exemption

— domestic WHT on interest 20%

— domestic WHT on dividends 0% - 1,375% - 20%

— Capital gains 0% - 13,675% - 20%

— Loss carry forward rules - minimum tax for companies in loss position for 3 FYs5Paolo Bonolis – Carlo Romano Moscow – 2 February 2012 Breakfast briefing


The tax framework

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Restrictions to Russian investments

Agreement on Reciprocal Promotion and Protection of Investment Between Italy and the Russian Federation 9 April 1996

• Provides for the reciprocity: favors, benefits, or penalties granted by one of the two states to the citizens or legal entities of the another, should be returned in kind.

• No specific limits or restrictions to Russian entities and citizens in investing in Italian companies or real estates



The legal framework

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Italy-Russia Tax Treaty

Agreement entered into force in 1998 OECD Model Convention Ordinary tax credit Business profits only taxed in the residence State unless PE Construction PE if more than 12 months Dividend WHT not more than 5% or 10% Interest WHT not more than 10% Royalties only taxed in the residence State Capital gains on shares only taxed in the residence State



The tax framework

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The legal framework

— Limitation to foreign companies to invest in certain sectors

— Investing in real estate in Italy (current status of the market)

— Taking a stake-holding in Italian companies – arrangements between shareholders

— Joint venturing in Italy

— Energy sector— Incentives in renewable investments

— Privatisation of the Italian public estates— Project finance


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Investments in Real Estate (1)

—No restriction

—Sale&Purchase contracts: formal requirements

—Registration with the Land registry

—Ownership rights and other rights in re

—How to safely purchase a property

Paolo Bonolis – Carlo Romano Moscow – 2 February 2012 Breakfast briefing

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Investments in Real Estate (2)

—Process of Development and Disposal of Public Real Estate

• Scope: stop the process of gradual devaluation of the public real estate

• Legislative Decree no. 85/2010 is focused on the creation of a real "federal state property”.

• New era of privatization has been announced by the Italian Government

7th Perm Economic Forum - Transfer pricing - 22 April 2011 - Carlo Romano - [email protected]

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Investment in Real Estate (3)

— Real estate funds• Standstill situation unlikely to continue indefinitely

thus opportunities when request will eventually align with expectations of purchasers

• Several Italian funds are almost on their expiry date. Foreseen of 5 billion of Euro in real estate free on the market


Investing in Italian companies (1)

— Establishment of an Italian company

— Purchase of a shareholding

— Limited liability

— Governance and control

— Shareholders agreement (no publicity)

7th Perm Economic Forum - Transfer pricing - 22 April 2011 - Carlo Romano - [email protected] 12

Investing in Italian companies (2)

—Joint venture agreements: possible alternatives under Italian corporate law

—Restriction to financing Italian companies

—Acting as “financial shareholders”

—Venture capital/private equity (investment agreements)


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THE ENERGY SECTOR - Investment in PV Plants (1)

—The PV Plan markets has been very attractive until 2011

—Lot of projects realized with very high returns

—No good news:• The “Development Decree” substantially determines the

end of incentives (feed in tariff) for large ground mounted PV plants

• Relatively limited opportunities for incentivized ground mounted PV plants (industrial sites, contaminated land)


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THE ENERGY SECTOR – Investment in PV Plants (2)

—Old and New Opportunity• However, market for ground mounted PV plants may

revive when “grid parity” is reached: that target may not be too far away in Southern parts of Italy with higher irradiation

• Potential opportunities for acquisition of authorized projects (or suitable sites for future development) for future construction of PV plants when prices of components (modules and inverters) will allow economic feasibility of non-incentivized PV plants


THE ENERGY SECTOR – Investment in PV Plants (3)

• PV GREENHOUSES NOT CAPTURED BY BAN + Feed in tariff for PV greenhouses has been increased (now treated as roof-top projects)

• Focus on roof-top PV plants

—already an existing trend, likely to continue to growth, probably at faster pace

—Residential PV plants also expected to grow significantly, also due to increased awareness of general public of benefits deriving from residential PV generation

—Net-metering scheme for residential PV plants likely to create a market for new electricity company (as distributors)


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THE ENERGY SECTOR – Investment in Renewables

—Decreto “Clini” (still to be approved)• New regulation implementing 2011 legislation introducing latest EU

directive on renewable energy

• New decree should eventually provide long-awaited rules on incentives for RES plants

• Apply to RES other than PV:

—Wind

—Biomass

—CHP (Combined Heat and Power)

—Hydro

—Geothermal


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Project Finance and Infrastructure

• The current aim of the Italian Government is to realize infrastructures through project finance

• Scope: simplify the procedure to raise funds in order for private companies to participate in the construction of infrastructures

• Participation of private companies will be also guaranteed with placement of Project Bonds to qualified investors

• Law still under discussion

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Aggressive campaigns on MNCs and cross-border transactions• Treaty shopping• PSD and IRD• Black list transactions• PE• Transfer pricing• Business restructuring• Permanent establishment


Tax audit trends

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Transfer pricing

Little focus on TP by Tax Authorities historically

Only one (main) administrative practice → 1980 circular letter Tax inspectors looked at TP as very complex matter

General 100% - 200% penalty regime was applicable Few cases before the Courts

Negotiations with penalty reduction down to at least 25%

Tax amnesties


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What changed over time

Increased attention at OECD and EU levels resulted in: Enhanced training programs for Italian Tax Auditors

People hired from the business community

Criminal law ramifications not yet clear


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Transfer pricing: two instruments to reduce the risk

(Unilateral) advance pricing agreements – APA Valid only for the future

Introduced in 2003

Bulletin released on April, 21st 2010

Documentation requirements (2010) Valid for the past

4 years period of assessment from the date of filing of the tax return

General penalty regime (100% - 200%) no more applicable


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APA. Procedures, steps, compliance, possible issues and solutions

APA in Italy

The procedure ends up, possibly but not mandatorily, with a 3 years binding agreement between the taxpayer and the Italian tax authorities which sets out the criteria and methods for calculating the normal value of the transactions to which the application refers to, or, in other cases, the criteria for application of the concerned legislation.

During the 3 years period the International Ruling Office verifies that the terms of the agreement are complied with and also ascertains whether any changes have occurred to the de facto or de jure conditions which constitute the assumptions on which the clauses of the agreement are based. This activity is carried out also by means of one or more agreed visits to the premises where the enterprise carries on business.


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APA. Procedures, steps, compliance, possible issues and solutions APA in Italy – inputs from statistics

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Table 1

Applications for the international ruling procedure in 2004-2009

Applications submitted 52

International ruling granted 19

Procedures in process as at December 31, 2009 17

Applications rejected due to the lack of subjective or objective elements

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Applications withdrawn 9


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Table 2

International ruling procedure completion time

months number of agreements signed

1-6 2

7-12 3

13-18 5

19-24 4

25-30 2

31-36 2

37 or more 1

25



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Table 3.1

Traditional methods used for determining APAs

CUP - Internal comparables 1

CUP - External comparables 0

Cost Plus - Internal comparables 2

Cost Plus - External comparables 1

Resale Price - Internal comparables 0

Resale Price - External comparables 0

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Table 3.2

Alternative methods used for determining APAs

TNMM – mark up on total cost 7

TNMM – return on sales 3

Profit Split – contribution analysis 0

Profit Split – residual analysis 5

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Table 4

Classes of taxpayers by turnover

Taxpayers’ turnover Number of taxpayers %

< 100 MEuro 13 48,15%

from 100 to 300 MEuro

4 14,81%

> 300 MEuro 10 37,04%



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Table 5

Relationships between associated parties

Non-resident parent company – Italian subsidiary 9

Italian parent company – non-resident subsidiary 8

Italian related company – non-resident related company

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Italian PE – non resident head office 2

Non-resident PE – Italian head office 0

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Table 6

Cases of transactions in the agreement signed

Sale of tangible property into Italy 11

Purchase of foreign goods 4

Performance of services by Italian entity 3

Performance of services by non-Italian entity 0

Cost sharing agreements 1

Transactions involving intangible property 1

Attribution of profits to a PE 2

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Paolo Bonolis

Partner

Banking & Finance, Infrastructure & Project Finance,Insurance & Funds, Private Equity

CMS Adonnino Ascoli & Cavasola Scamoni

[email protected]

Milan

Via Michelangelo Buonarroti, 39

T: +39 02 4801 1171

F: +39 02 4801 2914

Rome

Via Agostino Depretis, 86

T: +39 06 478 151

F: +39 06 483 755


Contact details

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Contact details

Carlo Romano, LL.M., Ph.D.

Partner

Corporate Tax, International taxation, Transfer Pricing, Tax Litigation, EU Law

CMS Adonnino Ascoli & Cavasola Scamoni

[email protected]

Milan

Via Michelangelo Buonarroti, 39

T: +39 02 4801 1171

F: +39 02 4801 2914

Rome

Via Agostino Depretis, 86

T: +39 06 478 151

F: +39 06 483 755


investing in italy: legal and tax implications moscow, 2 february 2012

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