The taxpayer retains complete discretion in choosing the amount of profit to be subject to the substitute tax.
There are two different tax rates for the payment of the substitute tax, depending on the subject exercising the option
The Minister of Economy and Finance has published the explanatory report on the implementing and coordinating provisions of the rules contained in the Budget Law for 2023 on substitute tax for the liberation and/or repatriation of foreign profits and retained earnings.
This is a temporary optional scheme for the liberation and possible repatriation of profits and retained earnings resulting from the financial statements of foreign subjects, with the effect of exempting the profits from taxation, in the hands of the investee tax resident or located in Italy, profits from said foreign investees.
What are the advantages of this regulation?
The regulation allows for the imposition of a substitute tax on foreign profits and retained earnings that have not yet been received as of the effective date of the law (January 1, 2023) and are present in the balance sheet for the fiscal year ending before January 1, 2022, of the foreign investee. This avoids the ordinary taxation of profits at the time of their receipt in Italy.
This possibility is available to both resident and non-resident participants. Specifically:
Indirect Shareholdings:
In the case of indirect shareholdings, liberation is granted when the shares are held through controlled foreign entities (intermediary foreign entities) and/or through resident subjects that, in turn, are controlled or permanent establishments in Italy of controlled foreign entities.
As indicated in the explanatory report, this refers to the case of a permanent establishment in Italy – a foreign company controlled by an Italian company – which holds shares of intermediary foreign entities in its assets.
The taxpayer retains full discretion in choosing the amount of profit to be subject to the substitute tax, meaning that they can decide both which foreign subsidiary to consider, each to be indicated independently when exercising the option, and the number of profits and retained earnings to be included for the purposes of the substitute tax payment.
In this regard, the Ministry of Economy and Finance explains that the taxpayer must keep a record in the accounting or non-accounting documentation related to the foreign subsidiary of the choices made regarding the profits and the corresponding amounts subject to liberation.
The option is finalized by specifically indicating so in the income tax return for the fiscal year ending on December 31, 2022, and becomes effective from the beginning of the following fiscal year.
Payment of the Substitute Tax:
Regarding the determination and payment method of the substitute tax, there are two different rates depending on the subject exercising the option:
- 9% for IRES subjects (corporations)
- 30% for IRPEF subjects (individuals)
Therefore, if the option is exercised by a partnership resident in Italy, regardless of whether it is constituted by individual taxpayers or IRES subjects, the tax rate to be paid is 30% or 27%, if eligible for a reduced rate, as provided for IRPEF subjects.
Additionally, failure to make the payment does not invalidate the effectiveness of the option. In such cases, the ordinary rules regarding assessment, collection, disputes, and penalties applicable to income taxes will apply.
