Italy

In Italy, the basic Italian corporate income tax (IRES) rate is 24% applied to the net profit shown in the financial statements as adjusted according to specific tax rules.

Additional surcharges are also provided for, equal to:

• 3.5% for financial intermediaries;
• 25% for the production, distribution, sale and exhibition of pornographic material and material inciting violence, as well as for the use of television broadcasts aimed at exploiting public credulity and addressed to the public through premium-rate telephone numbers (so-called Ethical Tax).

An additional 10.5% surcharge to the corporate income tax rate is also provided for shell companies.

Finally, a 50% reduction of the basic corporate income tax rate is granted to non-profit entities and for companies that, by 31 December 2023, have undertaken a new business initiative in so-called Special Economic Zones (subject to the fulfilment of additional conditions).

Italian companies and entities are also subject to the regional tax on productive activities (IRAP), which is levied at a general rate of 3.9% rate. Regions may increase or decrease the rate by up to 0.92%.

For the 2026–2028 period, the Italian Budget Law for 2026 introduced a 2% increase in the IRAP rate for:

• financial intermediaries, which during the 2026–2028 period will determine IRAP on the basis of a 6.65% rate; and
• insurance companies, which during the 2026–2028 period will determine IRAP on the basis of a 7.9% rate.

For the years 2026 and 2027, Law Decree No. 21/2026 also introduced a 2% increase in the IRAP rate applicable to companies operating in the energy sector.

Italy has implemented the global minimum tax through Legislative Decree No. 209/2023, thereby introducing the OECD/G20 Pillar Two framework into domestic law.

The regime applies to entities located in Italy that are part of multinational enterprise (MNE) groups and large-scale domestic groups with consolidated annual revenues of at least EUR 750 million in at least two of the four fiscal years preceding the relevant fiscal year.

The top-up tax corresponds to the difference between the taxes borne by the group in a given jurisdiction and the minimum rate of 15%. Three mechanisms govern the collection of the top-up tax:

• the introduction of a Qualified Domestic Minimum Top-up Tax (QDMTT);
• the application of an Income Inclusion Rule (IIR);
• the application of an Undertaxed Payments Rule (UTPR).

The IIR is the primary mechanism for ensuring a global minimum effective tax rate of 15%. Under the IIR, a top-up tax is imposed at the level of the ultimate parent entity of a group where the profits of that group are not subject to the minimum effective rate of 15%.

Where the application of the IIR does not result in the global minimum effective tax rate of 15%, the UTPR steps in.

The UTPR is collected in the form of an additional charge. All constituent entities located in Italy are jointly and severally liable for it. The group appoints the constituent entity located in Italy that is designated to pay the top-up tax under the UTPR and can allocate the UTPR liability among the constituent entities located in Italy; any intra-group recharge of the UTPR is not fiscally relevant.

The QDMTT is levied on the domestic excess profits of low-taxed constituent entities located in Italy and is charged directly to the relevant Italian entity, irrespective of the shareholding structure of the ultimate parent entity. The QDMTT is calculated in accordance with the same computational rules that apply to the IIR and the UTPR.

The IIR and the QDMTT apply to fiscal years beginning on or after 31 December 2023, while the UTPR applies to fiscal years beginning on or after 31 December 2024, subject to limited transitional deferral rules.

During the first five fiscal years of the initial phase of international activity, the IIR and the UTPR may be reduced to zero where:

• the group operates in no more than six jurisdictions; and
• the aggregate net book value of tangible assets located outside the reference jurisdiction does not exceed EUR 50 million.

A similar five-year transitional relief applies to large-scale domestic groups upon their first entry into the scope of application of the rules.

In Italy, the tax treatment of companies primarily depends on whether the company is considered resident or non-resident for tax purposes. Italian resident companies are subject to taxation on a worldwide basis. Instead, non-resident companies are taxed only on Italian-source income, generally where such income is attributable to activities carried out in Italy or through an Italian permanent establishment (PE).

For income tax purposes, companies and entities are considered resident if, for the greater part of the fiscal year, they have in the territory of the state their registered office, their place of effective management or their principal place of ordinary management.

Income

IRES is charged on the total net income reported in the financial statements of the company, as adjusted in accordance with specific tax rules. As mentioned, the standard IRES rate is 24%.

Capital gains

For resident companies, capital gains ordinarily constitute business income and are taxed at the standard IRES rate.

However, gains derived from the disposal of qualifying shareholdings benefit from a 95% participation exemption (PEX) if the following cumulative conditions are satisfied:

• the shares have been held continuously from at least the first day of the twelfth month preceding the disposal (the last-in, first-out method applies, “the LIFO method”);
• the participation is classified as a financial fixed asset in the first financial statements closed during the holding period;
• the subsidiary is not resident in a low-tax jurisdiction (unless the taxpayer proves the absence of profit shifting); and
• the subsidiary has carried on an effective commercial activity from at least the beginning of the third tax period preceding the disposal (not required for listed companies).

Capital losses on PEX-qualified participations are non-deductible.

For non-resident entities, capital gains are generally taxable in Italy only if they derive from Italian-source assets, subject to treaty limitations.

Foreign-source income

Given the worldwide taxation principle, foreign-source income realised by resident companies is in principle fully subject to IRES. Double taxation is mitigated through:

• a foreign tax credit mechanism, limited to the proportion of Italian tax that is attributable to the foreign income;
• the optional branch exemption regime, under which income and losses of foreign permanent establishments may be irrevocably excluded from the Italian tax base;
• the participation exemption regime, which may indirectly relieve economic double taxation on foreign subsidiaries through the 95% exemption on qualifying capital gains and dividends.

Italy levies several indirect taxes, the principal one being value added tax (VAT). The Italian VAT system is harmonised at EU level pursuant to Council Directive 2006/112/EC (the VAT Directive).

VAT applies to:

• supplies of goods and services made for consideration in the course of a business or professional activity;
• imports of goods; and
• intra-Community acquisitions.

The standard VAT rate is 22%. Reduced rates of 10%, 5% and 4% apply to specific categories of goods and services.

Certain transactions are exempt without the right to deduct input VAT, notably financial and insurance services and the letting of immovable property. By contrast, exports and intra-Community supplies are zero-rated, meaning that they are exempt while preserving the right to deduct input VAT.

Besides VAT, Italy also levies other indirect taxes under separate legislation, including:

• registration tax, levied on certain legal acts (e.g. transfers of real estate or businesses, where not subject to VAT);
• stamp duty, levied on specified documents and financial instruments;
• mortgage and cadastral taxes on transfers of real estate; and
• excise duties on products such as energy products, alcohol and tobacco.

In Italy, withholding taxes constitute an integral component of the tax collection mechanism and apply both to certain domestic payments and, more significantly, to outbound cross-border payments of passive income.

The system distinguishes between withholding levied as a final tax and withholding applied as an advance payment against the recipient’s ultimate income tax liability.

From an international perspective, withholding taxes primarily affect dividends, interest and royalties.

Dividends

Dividends distributed by an Italian company to a non-resident company are generally subject to a 26% withholding tax.

However, this rate may be reduced under an applicable double taxation treaty (typically to between 10% and 15%) or eliminated under the EU Parent-Subsidiary Directive, provided the requisite conditions are satisfied (notably a minimum 10% shareholding held for at least one year, subject to anti-abuse provisions).

Moreover, dividends distributed by an Italian company to an EU or EEA company are generally subject to a 1.20% withholding tax.

Dividends distributed by an Italian company to another Italian company are not subject to withholding; instead, they are taxed under the participation exemption regime, whereby 95% of the amount received is exempt from corporate income tax.

Interest

Interest paid to non-residents is, as a general rule, subject to a 26% withholding tax. Relief may be available under tax treaties, which commonly reduce the rate to between 0% and 10%.

The EU Interest and Royalties Directive may provide for a full exemption where qualifying associated companies are involved, and the prescribed holding and anti-abuse requirements are met.

In domestic situations, interest paid to business entities may be subject to different mechanisms depending on the circumstances and the nature of the instrument.

Royalties

Royalties paid to non-residents are generally subject to a statutory 30% withholding tax.

As with dividends and interest, treaty relief may significantly reduce this burden, and the EU Interest and Royalties Directive may grant full exemption where the relevant conditions are fulfilled.

In Italy, a General Anti-Avoidance Rule (GAAR) is set out in Article 10 bis of Law No. 212/2000. The provision applies to all taxes—direct and indirect—and operates as a residual, general clause against abusive tax planning.

In particular, Italian law defines the abuse of law as “one or more transactions lacking any economic substance, which, despite being formally compliant with the relevant tax provisions, are essentially aimed at achieving undue tax advantages”:

• “transactions lacking any economic substance” means facts, acts and contracts, whether or not linked to each other, which cannot produce significant effects other than tax advantages. Indicators of lack of economic substance are, in particular, the inconsistency of the qualification of individual transactions with the legal basis of the arrangement as a whole and the choice of certain legal instruments that are not consistent with ordinary market practice; and
• a tax advantage is considered to be undue if the related benefits are achieved contrary to the purpose of the relevant tax provisions and the principles of the tax system.

The tax benefit must be the essential effect of the arrangement. Transactions justified by valid extra-tax and non-marginal reasons, aimed at improving the enterprise (or the taxpayer’s professional activity) from a structural and (or) operational standpoint, are not considered to be abusive.

As anticipated, the GAAR has a residual function. It may be invoked only where the tax advantage cannot be challenged under specific anti-avoidance provisions or on grounds of simulation or statutory infringement.

The taxpayer retains full freedom to choose among alternative lawful transactions or optional regimes, even where such choice results in a lower tax burden. The mere existence of a more onerous alternative does not in itself demonstrate abuse.

The burden of proof lies primarily with the tax administration, which must demonstrate all the elements provided by the GAAR, including the undue character of the advantage and the absence of economic substance.

A frequent source of disputes concerns the deductibility of business expenses, in particular the requirement that costs must be “inherent” to the business activity.

The Italian Tax Authority often scrutinises whether expenses are genuinely connected to the taxpayer’s business operations and whether they were incurred for business purposes.

Controversies commonly arise in relation to management fees, consultancy services, intercompany charges and marketing expenses, where the authorities may challenge either the existence of the service or the economic benefit obtained by the taxpayer.

Transfer pricing is also one of the most significant areas of tax controversy for multinational groups operating in Italy. The Italian Tax Authority closely examine whether transactions between associated enterprises comply with the arm’s-length principle, as reflected in the Italian corporate tax law and the OECD Transfer Pricing Guidelines.

Disputes typically concern the allocation of profits within multinational groups, the pricing of services and intangibles, and the level of remuneration attributed to Italian entities performing routine or limited-risk functions. Transfer pricing audits may result in substantial adjustments and penalties, although taxpayers may mitigate penalty exposure where adequate transfer pricing documentation has been prepared.

Another significant area of controversy relates to the application of tax incentives and preferential regimes. Italian legislation provides a wide range of incentives aimed at promoting investment and innovation, such as R&D tax credits, innovation incentives and other sector-specific benefits.

Disputes frequently arise where the tax authorities challenge the eligibility of certain activities or costs for the relevant incentive, the correct quantification of the benefit, or the documentation supporting the claim. Given the complexity of the rules and the technical nature of some incentives, these matters often give rise to administrative disputes and litigation.

Tax controversies in Italy are governed by a combination of procedural tax rules, administrative provisions and judicial procedures regulating both the assessment phase and the subsequent litigation before the Italian Tax Courts.

The main legislative framework is set out in Legislative Decree No. 546/1992, which governs the tax litigation process before the Italian Tax Courts.

According to Article 1, paragraph 2 of Legislative Decree No. 546/1992, Italian Tax Courts shall apply the specific provisions of such a decree and, to the extent compatible, the rules of the Italian Civil Procedure Code.

The administrative phase of tax disputes is primarily governed by Presidential Decree No. 600/1973 (for direct tax purposes) and Presidential Decree No. 633/1972 (for VAT purposes), which set out the rules for tax assessments, audits and the issuance of tax assessment notices. These provisions define the powers of the Italian Tax Authority to carry out inspections, request information and challenge the taxpayer’s declared tax position.

Additional fundamental principles are contained in Law No. 212/2000, which establishes guarantees for taxpayers in their relations with the tax administration, including principles of transparency, cooperation and legitimate expectations.

Under Italian tax law, there are several proceedings that regulate claims before an appeal is filed before the Tax Courts. These procedures may contribute to reducing the time and costs of litigation and, in some cases, can lead to a reduction in tax penalties.

The key features of these procedures are analysed below.

Early payment

If taxpayers pay the total amount of the assessed taxes (with related interest) within 60 days from the service of a tax assessment notice, they are entitled to a reduction of penalties of up to one-third of the minimum applicable penalty.

Voluntary correction of tax return

The voluntary correction of a tax return procedure allows taxpayers to remedy omissions or amend irregularities in the filing of tax returns or in the payment of taxes.

The process entails a reduction of the applicable penalties, the extent of which depends on the moment at which it occurs.

Self-defence

The Italian Tax Authority has the power to correct its own errors without the need for a judicial decision. The unlawful deed may be autonomously withdrawn by the Italian Tax Authority or at the taxpayer’s request. However, the submission of such an application does not affect the deadline for filing an appeal before the Tax Court.

Withdrawal may also be carried out if the tax dispute is ongoing before the Italian Tax Court or if the act has already become final due to the expiration of the deadline for filing of an appeal.

Tax settlement

The tax settlement procedure allows the taxpayer to settle a tax assessment notice before filing an appeal.

As of 30 April 2024, Legislative Decree No. 13/2024 has amended the procedure to comply with the mandatory preventive cross-examination set forth in Article 6 bis of Law No. 212/2000.

For tax assessment notices subject to the mandatory preventive cross-examination, the Italian Tax Authority, even if a tax audit report has been issued, must make available to the taxpayer a draft tax assessment notice that could be issued.

The taxpayer may alternatively, upon receiving the draft of the tax assessment notice:

• submit defensive briefs within 60 days; or
• submit a tax settlement application within 30 days.

However, the parties may agree on a tax settlement even after the defensive briefs have been submitted, if the conditions are met.

If the taxpayer decides not to submit a tax settlement application upon receiving the draft of the tax assessment notice, the taxpayer may still do so within 15 days of the service of the tax assessment notice. In this case, the term for filing an appeal against the tax assessment notice is suspended for 30 days.

For tax assessment notices not subject to the mandatory preventive cross-examination, the taxpayer may submit a tax settlement application within the time limit for the appeal (60 days). In this case, the term for filing an appeal against the tax assessment notice is suspended for 90 days.

In any case, if the parties reach an agreement, the contents of the agreement are set out in a written document, which is signed by both parties. The tax settlement is not subject to appeal and cannot be modified by the Italian Tax Authority. This results in a reduction of penalties of up to one-third.

Judicial settlement

Judicial settlement allows the parties to the tax controversy to settle the dispute before a decision is issued by the Italian Tax Court. It may be activated by the taxpayer, the Italian Tax Authority or the judge. This procedure applies to all disputes and may take place before or during the public hearing (of first or second instance).

If a settlement is reached, the agreement between the parties is reported in the minutes of the hearing.

If a settlement is reached beforehand, the agreement is communicated to the judge, who must declare the proceedings closed. If the agreement is considered inadmissible by the judge, it schedules the hearing date and the proceedings will continue as usual.

In a judicial settlement, the amount of tax is set out to close the dispute. By settling the dispute, the taxpayer also obtains a reduction of penalties due:

• in the case of a settlement before the Tax Court of first instance, the taxpayer would pay a penalty equal to 40% of the amount provided for by law;
• in the case of a settlement before the regional Tax Court of second instance, the taxpayer would pay a penalty equal to 50% of the amount provided for by law; and
• in the case of a settlement before the Supreme Court, the taxpayer would pay a penalty equal to 60% of the minimum provided for by law.

Mutual agreement procedure

In double taxation cases, taxpayers can start a procedure under which the competent authorities designate representatives to work together to resolve international tax disputes (mutual agreement procedure (MAP)), if it is allowed by the relevant bilateral tax treaty.

If the dispute concerns a related party that is resident in another EU Member State, taxpayers may activate a MAP procedure according to the EU Arbitration Convention.

In both cases, the pending tax litigation is suspended.