Abstract This article deals with the cross-border tax issues resulting from the purchase, holding, sale and gratuitous transfers of real estate. These transactions may be carried out either directly or indirectly, by a non-resident company or a non-resident individual, so to give rise to various potential combinations which are analysed in this article. Introduction This article deals with the cross-border tax issues resulting from (i) the purchase of real estate, (ii) the holding of this real estate and its renting out to lessees, (iii) the sale of the real estate at some point in time in the future, as well as (iv) the gratuitous transfers through gifts or by way of death, and all this under the tax laws of Italy. These transactions may be carried out either directly or indirectly through the acquisition of shares in a local company holding the real estate. Furthermore, the transactions may be carried out by a non-resident company or a non-resident individual. These alternatives in the structuring of the transactions (ie directly or indirectly; by a company or an individual) give rise to various combinations which will be dealt in the next paragraphs. Acquisition of real estate Direct acquisition General The direct acquisition of real estate (ie asset deal) by a non-resident (either individual or company) is subject to indirect taxes depending on the following aspects: the type of immovable property (residential or commercial); its cadastral category and the status of the seller, ie individual/company that carries out a business activity or individual/company that does not. More specifically, such indirect taxes are value-added tax (VAT; imposta sul valore aggiunto), registration tax (imposta di registro), mortgage, and cadastral taxes (imposte ipotecaria e catastale). Value-added tax The sale of Italian real estate is subject to VAT 1 if the seller is a taxable person. Yet, it may be subject to two different sets of rules depending on the nature of the supplier. On the one hand, if the supplier is not a construction/refurbishment company (impresa di costruzioni/ristrutturazioni) of the properties,2 the following regime applies: Sale of commercial buildings: the transaction is VAT exempt, unless the seller exercises the option for the application of VAT3 in the transfer deed. In such a case, the reverse charge mechanism will apply.4 Sale of residential buildings: the transaction is VAT exempt, yet, differently from the previous case, there is no possibility to opt for the application of the reverse charge.5 On the other hand, if the seller is a construction/refurbishment company of the properties, the applicable regime for both, commercial and residential buildings, is as follows: The transaction is subject to VAT because the sale is made within a period of five years starting from the date of completion of the building (at the rate of 10 per cent or 22 per cent depending on the kind of immovable property) or its renovation6 (at a general rate of 10 per cent7). The transaction is VAT exempt because the sale is made five years after the completion of the building or its renovation and the seller has not opted for the application of the reverse charge mechanism. In all the above-mentioned situations, the VAT taxable amount is the consideration agreed between the parties,8 ie the price of the transfer deed. Registration, mortgage, and cadastral taxes The transfer of commercial buildings is subject to a fixed registration tax (EUR 200)9 and to mortgage and cadastral taxes applied, respectively, at a 3 and 1 per cent tax rate. As regards the sale of residential buildings: when the transfer is subject to VAT, fixed amounts of registration tax, mortgage, and cadastral taxes are levied (EUR 200 each);10 and when the sale is VATexempt or out of the scope of VAT, the registration tax is applied at a 9 per cent rate11, while mortgage and cadastral taxes are levied at a fixed amount (EUR 50 each).12,13 Indirect acquisition General The indirect acquisition of Italian real estate (ie carried out through the purchase of shares of an Italian company which holds the real estate assets) by a non-resident individual/company is the second scenario that will be analysed. Income tax From a direct tax perspective, the purchase price of the shares/quotas is the tax base used for calculating the capital gain realized upon their alienation.14 Value-added tax From an indirect tax perspective, if the seller is an entrepreneur (ie VATable person), the purchase of a participation in an Italian real estate company (eg a company incorporated in Italy as a joint stock company or a limited liability company) is VAT exempt,15 but subject to registration tax at a fixed amount of EUR 200. If the seller is not an entrepreneur, the transaction is out of the scope of VAT, but subject to registration tax at a fixed amount of EUR 200. In both cases, no mortgage and cadastral taxes are due. Financial transaction tax The acquisition of shares in an Italian joint stock company (società per azioni) would trigger a 0.2 per cent financial transaction tax, (0,1% in case of listed companies) while said tax would not apply in case of a transfer of quotas in an Italian limited liability company (società a responsabiltà limitata).16 Holding of real estate Direct holding General The direct holding of Italian real estate by a non-resident individual/company is the third scenario that will be analysed, on the underlying assumption that the foreign investor who carries out the investment activity does not have a permanent establishment in Italy. Income taxes Income arising from the lease of real estate properties located in Italy is subject to income tax therein. However, the specifics of the tax treatment change depending on the juridical nature of the investor:17 income earned by a company18 is subject to corporate income tax Imposta sui Redditi delle Società (IRES) and conditionally, to regional income tax Imposta Regionale sulle Attività Produttive (IRAP); while income earned by an individual is subject to personal income tax Imposta sui Redditi delle Persone Fisiche (IRPEF). As regards corporate taxpayers, corporate income tax is applied at the ordinary 24 per cent rate,19 while, as mentioned before, regional income tax (IRAP) is applied at the ordinary 3.9 per cent rate (that regions may increase by 1 per cent) only to the extent that the immovable properties located in Italy are part of a permanent establishment of the non-resident investor.20 With respect to individuals, the personal income tax on which rental income is subject is applied at a progressive rate of up to 43 per cent (plus local surcharges, not exceeding 2 per cent). However, not only the tax, but also the rules for calculating such income are contingent upon the juridical nature of the investor. Companies’ income deriving from rental contracts stipulated with third parties is determined by considering the highest between: (i) the lease payment provided for by the lease agreement, reduced on a lump sum basis (5 per cent) in accordance with a rate set forth by the law and (ii) the cadastral income resulting from the cadastral registry.21 Individuals’ income is calculated as a forfait amount based on the real estate’s cadastral data.22 More precisely, income from buildings is computed by applying the schedule of estimated values established for each category and class;23 but if the property is leased, the taxable base is the highest between the imputed cadastral income and the actual income, net of any directly attributable expense up to 5 per cent of the gross income (ie the actual net income cannot be lower than 95 per cent of the gross income). Indirect taxes on lease Any income deriving from the lease of real estate, either by an individual, either by an entity carrying out a business activity, is subject to VAT24 and registration tax25 (for the registration of the lease agreement26) depending on the nature of the asset. Commercial buildings: general rule: VAT exempt; registration tax 1 per cent; and if the lessor opts for VAT: VAT 22 per cent, registration tax 1 per cent. Residential buildings: general rule: VAT exempt; registration tax 2 per cent; and in case of buildings constructed or renovated by the lessor who opts for the application of VAT: VAT 10 per cent; registration tax EUR 67. Property taxes Both resident and non-resident individuals/companies owning real estate assets located in Italy27 are subject to the local property tax (IMU, imposta municipale propria) and to the tax on services (TASI, tassa per i servizi indivisibili). IMU is yearly due at the 0.76 per cent ordinary rate on the value of the property (that the municipality in which the property is located may increase or decrease by a coefficient of up to 0.3 per cent).28 According to IMU provisions, the relevant tax base is the cadastral value of the real estate resulting from the cadastral register on 1 January of each relevant year, plus a 5 per cent thereof, multiplied by a coefficient that ranges from 55 to 160, depending on the cadastral classification of the property. Normally, however, such taxable base is significantly lower than the fair market value of the building. TASI is basically applied using the IMU rules29 at the rate of 0.1 per cent, that, however, each municipality may increase or decrease by a rate that is within a given range. For the sake of completeness, it must be mentioned that if the building is rented out, from 90 per cent to 70 per cent (depending on the municipality)30 of the TASI is to be paid by the lessor, while the residual by the lessee. Indirect holding General The fourth scenario is the indirect holding of real estate (ie non-resident individual/company holding an Italian company which, in turn, holds Italian real estates). Corporate income tax Italian companies are subject to IRES and IRAP. The former applies at a 24 per cent31 rate on the net profit adjusted according to the rules set forth by the Italian Income Tax Code; the latter at a 3.9 per cent on the net value of the company’s production.32 The depreciation of the real estate assets would be deductible from IRES and IRAP taxable base each fiscal year according to the depreciation rates set forth by the Ministry of Economy and Finance33 (ie normally, 3 per cent of the fiscal value for commercial real estate). On the contrary, interest expenses stemming from any financing (irrespective of whether it is a shareholder loan or third party debt) are, in principle, deductible for IRES purposes but not for IRAP ones.34 Eventually, they are deductible, each financial year, on an accrual basis according to the so-called ‘EBITDA rule’, pursuant to which net interest expenses (ie the portion that exceeds interest income) may be subtracted from IRES taxable base up to an amount equal to the 30 per cent of the gross operating income (EBITDA) resulting from the profit and loss account of each fiscal year. Net interest expenses of a fiscal year exceeding such threshold may be carried forward with no time limits and deducted from the taxable base in the subsequent fiscal years within the relevant 30 per cent of EBITDA. In addition, if the said threshold is not reached during a certain fiscal year, the unused portion of EBITDA can be carried forward as well, with no time limits. Needless to say, the purpose of the norm is to allow the taxpayer to increase the usable 30 per cent of EBITDA in the subsequent fiscal years. Notwithstanding the above, interest expenses paid in connection with mortgage bank loans secured by real estate held for leasing35 may be fully deducted from the IRES taxable base to the extent that the company’s main activity is the lease of real estate and provided that the following requirements are met: the value of the assets in the balance sheet is composed mainly by the value of the real estate assets held for lease; and at least two-third of the revenues in the profit and loss account are proceeds deriving from the leasing activity. Non-operating company regime As a general remark, in case of Italian real estate company other than partnership, it must be carefully monitored whether or not such company falls within the scope of the ‘non-operating companies rule’ (società di comodo).36 A real estate company may be considered ‘non-operating’ if, having its properties accounted for in its financial statements as fixed assets, the rental income resulting from its profit and loss account of the relevant year is lower than the ‘deemed income’. Such ‘deemed income’ is calculated as a percentage of the value of the assets as accounted for in the balance sheet, according to the specific rates set forth by the law (ie 6 per cent for commercial real estate properties; 4.75 per cent for real estate assets accounted as fixed assets). If a company is considered as a ‘non-operating’ one, the IRES rate would be increased by 10.5 per cent (ie 34.5 per cent applicable IRES rate) and applied on the above-mentioned ‘deemed income’. Furthermore, it would not be allowed to claim refund for the VAT credit arising from the annual VAT return, nor to offset such VAT credit against other taxes. Lastly, when for three consecutive tax periods the company does not carry out VAT relevant transactions amounting, at least, to the deemed income, it is not allowed to carry forward the excess VAT credit resulting from the annual VAT return and ask for compensation. The negative consequences entailed by the non-operating companies rule (ie the application of a deemed income, the increase of the IRES rate, etc) are applicable also in case a company has accounted for tax losses for five consecutive fiscal years (excluding the year of incorporation) or has tax losses for four consecutive fiscal years and in the fifth one it has an income that is lower than the minimum ‘deemed income’ (società in perdita sistematica).37 Indirect taxes on lease Please see Holding of real estate – Direct Holding section. Property taxes Please see Holding of real estate – Direct Holding. Sale of real estate Direct sale General The fifth scenario is the direct sale of Italian real estate (ie asset deal) by a non-resident individual/company. Corporate income tax Capital gains on real estate assets realized by a non-resident are, in principle, taxable in Italy,38 but: If the seller is a non-resident individual, the capital gain is subject to IRPEF at progressive rates (up to 43 per cent, plus local surcharges, depending on the beneficiary’s overall income).39 In case the seller is a non-resident company, the capital gain is subject to IRES at the ordinary rate of 24 per cent.40 Capital gains resulting from the alienation of immovable properties located in Italy, realized by non-resident without a permanent establishment therein, are not subject to income tax in Italy if the properties are owned for, at least, five years.41 This allocation rule holds true also from an international perspective, whereby Article 13(1) of the OECD MC provides that the capital gains from the alienation of real estate assets (as defined in Article 6 thereof) shall be taxed where such immovable properties are located. The potential double taxation arising therefrom should be eliminated by the other contracting state, ie the country where the investor is resident, pursuant to the tax credit method or the exemption one (depending on the choice made by the specific bilateral tax treaty). Indirect taxes Please see Acquistion of real estate - Direct Acquisition. Indirect sale General The sixth scenario is the indirect sale of Italian real estate (ie performed through the sale of shares of an Italian company owning the real estate) by a non-resident individual/company. Corporate income tax Capital gains realized by a non-resident investor through the alienation of shares in an Italian resident company directly investing in immovable properties are, in principle and from a domestic perspective, subject to tax in Italy.42 However, it should be noted that the vast majority43 of the double tax treaties signed by Italy is consistent with the OECD Model Convention which, under Article 13(5), provides that gains derived from the alienation of equity interests shall be taxable only in the contracting state of which the alienator is a resident. Indirect taxes Please see Acquisition of real estate - Indirect Acquisition. Gratuitous transfer of real estate Direct transfer Under Italian Law,44 transfers of any assets and rights resulting from death, donation, or other gratuitous transactions (eg transfer of assets to a trust) are subject to inheritance and gift taxes. As regards the territorial scope of application of inheritance and gift taxes, the following rules apply: in case the deceased (or donor) is resident in Italy at the time of death (or when the gift is made), inheritance and gift taxes would apply on all assets, wherever located; and conversely, in case the deceased (or donor) is not a resident in Italy at the time of death (or when the gift is made), inheritance and gift taxes would only apply on Italian-situs assets. The tax rates at which, both, inheritance and gift taxes are applied are identical and mainly depend on the relationship between the deceased/donor and the heir/donee. More specifically: transfers in favour of spouse (or party of a civil union) and direct descendants or direct ancestors are subject to a tax rate of 4 per cent calculated on the value exceeding EUR 1,000,000; transfers in favour of siblings are subject to a tax rate of 6 per cent calculated on the value exceeding EUR 100,000; transfers in favour of relatives up to the fourth degree or relatives-in-law up to the third degree are subject to a tax rate of 6 per cent; and any other transfer is subject to a tax rate of 8 per cent. Specific exemptions apply in case of transfer in favour of a disabled person.45 Moreover, it is worth noting that mortgage and cadastral taxes are levied on any transfer of Italian-situs immovable property at an aggregate 3 per cent rate, which applies regardless of whether it is exempt from inheritance and gift taxes. The methods of evaluation of the assets depend on the kind of assets that are transferred. As a rule, the taxable base for inheritance and gift taxes purposes is the fair market value in the day of death, gift, or any other gratuitous transfer. Yet, the Italian tax authorities cannot assess the value that is declared in the donation deed or in the inheritance tax return if it is, at least, equal to the cadastral value of the real estate. The latter is a ‘forfait’ value to be determined by multiplying the ordinary average income (rendita catastale)—set forth by the competent municipal office for each property—for a specific coefficient that varies depending on the property cadastral category (apartments, offices, commercial properties, land, etc). The cadastral value is normally considerably lower than the fair market value, especially when it comes to valuable real estate. A 50 per cent exemption applies to Italian immovable property recognized as having a certain cultural value after the decease; while in case of gift of assets of cultural value (including immovable property), gift tax is due at the fixed amount of EUR 200. Lastly, under domestic legislation, capital gains realized upon disposal of inherited immovable property are not subject to income tax in Italy.46 Indirect transfer The gratuitous transfer of a participation in an Italian company is subject to Italian inheritance and gift taxes as described under Gratuitous transfer of real estate - Direct Transfer section. As regards participations in listed companies, the taxable base is the average fair market value of the participation in the last quarter. As to participations in non-listed companies, the taxable base is equal to the proportional quota of the net asset value resulting from the last financial statements (or from the inventory). However, when the partnership has neither published (and regularly approved) financial statements nor a regularly prepared inventory, the value of the interest in the partnership should amount to the relevant portion of the value of the underlying assets. It is also worth pointing out that an exemption applies to transfers of participations in companies (S.p.a., Società per azioni; S.r.l., Società a responsabilità limitata; and S.a.p.A., Società in accomandita per azioni) and interests in partnerships (S.a.s. Società in accomandita semplice; S.n.c., Società in nome collettivo) in favour of the spouse, party of a civil union or of descendants (ie children and nephews). The exemption at stake applies provided that the heir/donee (i) receives a controlling stake or achieves the control (ie more than 50 per cent of the voting rights) of the company—taking into account other participations already owned before the transfer—and (ii) holds the participations for at least five years after the mortis causa transfer or the gift. For direct tax purposes, mortis causa transfers or gifts of a participation in companies do not trigger the taxation of the accrued capital gains in the hands of, both, the transferor and the transferee. Raul-Angelo Papotti is a partner in Chiomenti’s Milan and London office. He received his Degree in Economics from Bocconi University and his Law Degree from State University. He also received an LL.M. in International Taxation from the University of Leiden (The Netherlands). He is qualified in Italy as Avvocato and as a Dottore Commercialista. He advises on all areas of tax law, with particular emphasis on international tax law. He has a special expertise in the taxation of trusts and tax planning structures, advising corporate and private clients alike. Clients include investment banks, private banks, corporates as well as high net worth individuals, families and family offices. He frequently lectures at post graduate masters programs and seminars, both in Italy and abroad. He has been speaker at different congresses and seminars held by STEP, the International Bar Association (where he serves as officer with the private client committee) and the International Fiscal Association, both in Italy and abroad. Amongst the others, he was a panelist at the IFA 2011 Paris conference on a seminar dealing with the tax treaty aspects of immovable property, and at the IFA 2017 Madrid conference on a seminar dealing with venture capital and private equity funds and their managers. He has published extensively on international tax topics, on issues such as trusts, group taxation, tax treaties, EU tax law and the taxation of financial instruments, and contributed to books and journals such as the Bulletin for International Fiscal Documentation, European Taxation, Trusts and Trustees, Intertax, Derivatives and Financial Instruments, the British Tax Review, STEP Journal, Tax Notes International, Rivista di Diritto Tributario, Bollettino Tributario and others. He is also a frequent publisher on daily financial and juridical newspapers in Italy such as IlSole24Ore, Italia Oggi, Milano Finanza and MF. He is a member of the Italian branch of the International Fiscal Association and of STEP (where is chairman of the cross-border estate SIG group), of the American Bar Association and of the International Bar Association, where he also serves as officer with the Private Clients Committee. He is also an Academician with the International Academy of Estate and Trust Law. Footnotes 1. art 10 (1) (8-bis) and (8-ter) of the Presidential Decree 26 October 1972, No 633. 2. art 3(1)(c), (d), and (f) of Presidential Decree 6 June 2001, No 380. 3. art 10(1)(8-ter) of Presidential Decree 26 October 1972, No 633. 4. art 17(6)(a-bis) of Presidential Decree 26 October 1972, No 633: the supplier issues the invoice without mentioning VAT because it will be the recipient who will calculate the relevant percentage and report it in his VAT return. Since the recipient generally has the right to deduct such input VAT, this mechanism results in input and output VAT offsetting. 5. art 10 (1) (8-bis) of Presidential Decree 26 October 1972, No 633. 6. The Revenue Agency (Circular Letter 29 May 2013, No 18 / E, para 3.3) has clarified that the date of ‘completion of the building or of the renovation works’ must be identified in the date in which the real estate asset is ready to be used. 7. Point 127-quinquiesdecies, pt III, Table A, attached to the Presidential Decree 26 October 1972, No 633. Different VAT rates applies to specific categories of buildings. 8. art 13(1) of Presidential Decree 26 October 1972, No 633; Study of the Italian National Council of Notaries No 46-2015; Assonime, Circular letter 1 March 2005, n 10. 9. art 40, Presidential Decree 26 April 1986, No 131. 10. Note to the art 1, Tariff, pt I, attached to Legislative Decree 31 October 1990, No 347 and art 10(2) Legislative Decree 31 October 1990, No 347. 11. art 1, Tariff, pt I, attached to Presidential Decree 26 April 1986, No 131. 12. art 10(3), Legislative Decree 14 March 2011, No 23. 13. It is worth pointing out that, in case the seller is not a VAT taxable person, the acquisition would be out of VAT scope and registration tax would apply at a 9% rate. In such a case, mortgage, and cadastral taxes are levied at a fixed amount of EUR 50 each. 14. arts 151(3) and 68(6) of the Presidential Decree 22 December 1986, No 917 (hereafter ‘Income Tax Code’). 15. art 10 of Presidential Decree 26 October 1972, No 633. 16. art 1(491) of the Law 24 December 2012, No 228 and art 2 of the Ministerial Decree 21 February 2013. 17. art 23(1)(a) of the Income Tax Code. 18. Meaning the entities listed in art 73(1)(d) of the Income Tax Code, ie ‘companies and […] other entities, included trusts, with or without legal status, that are not resident in the territory of the State’. 19. arts 73(1)(d) and 77 of the Income Tax Code. This implies the obligation to file the income tax return in Italy. 20. art 12(2) of Legislative Decree 15 December 1997, No 446. See also Circular Letter of the Italian Revenue Agency issued on 12 November 1998, No 263/E, para 2. 21. art 37(4-bis) of the Income Tax Code as amended by art 4(74) of the law No 92 of 2012. At present the applicable reduction is 5%. Before the said amendment the lump sum reduction was 15%. 22. art 26(1) of the Italian Tax Code. 23. art 37(1) of the Italian Tax Code. 24. art 10(1)(8) of the Presidential Decree 26 October 1972, No 633. 25. art 5, Tariff, pt I, attached to Presidential Decree 26 April 1986, No 131. 26. art 2-bis, Tariff, pt II, attached to Presidential Decree 26 April 1986, No 131. 27. arts 8 and 9 of Legislative Decree No 23 issued on 14 March 2011. 28. art 13(6) of Law Decree No 201 issued on 6 December 2011, converted with amendments into law with Law No 214 issued on 22 December 2011. 29. art 1(675) of Law No 147 issued on 27 December 2013. 30. art 1(681) of Law No 147 issued on 27 December 2013. 31. art 85 of the Presidential Decree 22 December 1986, No 917. 32. art 5 of the Legislative Decree 15 December 1997, No 446. The IRAP taxable base is generally represented by the company’s gross margin determined according to specific lines of its financial statements. In principle, any risk provisions and bad debt provision, interest income/expense and extraordinary items are excluded from the computation of the taxable base. 33. Ministerial Decree 31 December 1988. 34. art 96 of the Income Tax Code. 35. art 1(36) of the Law 24 December 2007, No 244, as amended by art 4(4) of the Legislative Decree 14 September 2015, No 147. 36. art 30 of Law 23 December 1994, No 724. 37. art 2(36-decies)(and following) of Law Decree 13 August 2011, No 138, converted into Law 14 September 2011 No 148). 38. art 23(1)(a) of the Income Tax Code. 39. arts 2(1) and 11 of the Income Tax Code. 40. arts 73(1)(d) and 77 of the Income Tax Code. 41. art 23(1)(f) of the Income Tax Code and art 67(1)(b) of the Income Tax Code. 42. art 23(1)(f) of the Income Tax Code. 43. Exceptions to this rule (ie taxation of capital gains form the alienation of equity interest only in the state of residence in which the alienator is resident) are provided in the double tax treaties entered into by Italy with, for example, France, Finland, USA, and Sweden. 44. Legislative Decree 31 October 1990, No 346. 45. art 2 (49-bis) Law Decree 3 October 2006, No 262. 46. art 67(1)(b) of the Income Tax Code. © The Author(s) (2018). Published by Oxford University Press. All rights reserved.
Trusts & Trustees – Oxford University Press
Published: Feb 1, 2018
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