ITALY

 

COMPANY FORMATION
INCORPORATION OF AN S.R.L.

GENERAL INFORMATION
TAXATION FEATURES

INTRODUCTION
Italy is strategically located at the centre of Europe and has a long tradition of trading profiting of its market economy, and of its skilled workforce. Italians have a particular gift for design and this talent is applied to produce items of everyday life. In addition they have a special ability in mechanics and in solving new problems. As a founding member of the European Union, based on the free movement of goods, workers, services and capital, Italy offers access to a wider market of approximately 500 million consumers.

The structure of business, which welcomes foreign investments, has produced encouraging results in the last decade. Furthermore, the present government policy which favours privatization of state-owned enterprises, offers foreign investors the opportunity of setting up a business in Italy through the acquisition of privatized enterprises. The reduction of state intervention compounded by privatization offers foreign investors some attractive opportunities of setting up business in Italy.

THE LEGAL SYSTEM
The sources of law and the principles of the legislative process are enshrined in the Constitution. The law is consolidated in four main Codes: the Civil Code, the Code of Civil Procedure, the Criminal Code and the Code of Criminal Procedure.

In addition to the Civil Code, there are special Acts regulating business and commerce: the Bankruptcy Act, the Banking Acts, the Trademark Act, the Patent Act, the Copyright Act, the Anti-Trust Act, etc. Some provisions relating to business activity are also laid down in ministerial decrees.

Foreign investors must be aware of the applicable EU Laws.

 

INVESTMENT INCENTIVES
Incentives are provided to businesses which enhance the country’s economic activity and this is related to government-designated priority sectors and areas. Incentives are provided for investments to be made in less favoured areas of the country.

Subsidies are also available to businessmen for the recruitment of personnel, with particular emphasis on the training and employment of junior staff. Moreover, social security exemptions and rebates are available to increase employment in depressed areas.

BUSINESS CHOICE FOR INVESTORS
Foreign investors are free to adopt any form of business investment. Business choice will largely depend on the strategy to be adopted, as well as on management, financial and tax considerations.

Foreign investors may acquire a stake in or control of a company which has already been set up, of a listed company, or they may set up a company or branch or appoint an agent in Italy.

Foreign investors are subject to the “reciprocity clause”. This means that their own country must recognize and provide the same rights to Italian investors operating on its territory. The main types of business are regulated by the fifth book of the Civil Code, which gives a general definition of enterprise and lists the necessary elements for each kind of Business Company. Acquisitions and asset sales in Italy are unrestrained. They are supervised by the National Commission for Companies and Securities Exchange (CONSOB) only in case of major acquisitions or operations concerning listed companies.

The purchase of significant shares of capital must be authorized by the Bank of Italy, which has to be notified of significant movements in the capital of financial institutions. Cartels are prohibited. Besides national anti-trust law, foreign investors must also be aware of Articles 85 and 86 on competition law set forth in the Treaty of Rome and other EU regulations. Agents are entitled to commissions only if duly registered.

REPATRIATION OF CAPITAL AND PROFITS
Non-residents are free to invest in Italy in foreign currencies and Euro and to repatriate their Italian earnings, as well as their original investments through:

Dividend distribution;
Repayment of capital;
Royalties, management and service fees;
Liquidation.
No authorization of foreign exchange transactions is required.

CONVERSION
Since January 1, 2002 the Euro is the official currency of Italy, as well as of other eleven countries of the Union. All values of commercial contracts previously denominated in lira are automatically converted in Euro (€), at the fixed rate of 1,936.27 lira for 1 Euro.

CONCLUSIONS
Foreigners are free to invest in Italian businesses. The equity capital of an Italian enterprise may be totally owned by foreigners. The Italian Government favours foreign investments.

INCORPORATION
COMPLIANCE SHEET

	LIMITED LIABILITY COMPANY (SRL)	STOCK COMPANY (SpA)	BRANCH
Company law	Art. 2472 ff. Codice Civile; + Società per azioni (Art. 2325 ff. Codice Civile)	Italian Civil law (Codice Civile), reformed by legal regulation of 01/17/2003 (amended 07/04/2003)	Italian Civil law
Company purpose	free, some purposes are subject to authorization (as per Art. 2329 Codice Civile), which has to be existent for incorporation	free, some purposes are subject to authorization, which has to be existent for incorporation	main company
Founders	at least 1 founder	at least 1 shareholder	main company
Capital requirements	10,000 EUR	120,000 EUR legal minimum, is increased for some companies	main company
Liability	limited to contribution	limited by shares
Incorporation	articles of association + notary deed + registration with Registry of Commerce + publication in a legal gazette	articles of association + notary deed + registration with Registry of Commerce + publication in a legal gazette	notary deed + entry in the ordinary section of the company register
Company name	free + company form	free + company form	main company
Formalities	moderate	high	moderate
Credit / funds	possible	possible	possible
Accounting obligation	yes	yes	yes
Management	at least 1 director	board of directors + supervisory board *3	1 director
Nationality	free	free	free
Image	good	very good	main company
Taxation	IRPEG (imposta sul reddito delle persone giuridiche = corporate tax) + IRAP (Imposta regionale sulle attivá produttive = regional tax)	IRPEG (imposta sul reddito delle persone giuridiche = corporate tax) + IRAP (Imposta regionale sulle attivá produttive = regional tax)	CT (IRPEG)

TAXATION IN ITALY

GENERAL OVERVIEW
DIRECT TAXES
The Italian tax system is composed of two main types of taxes: direct taxes (or income taxes) and indirect taxes.

Personal Income Tax (IRE)
Personal Income Tax (IRE) is regulated by the Consolidated Tax Code, Testo Unico delle Imposte sui Redditi (CTC). Italian resident individuals are subject to IRE on their worldwide income. Non-Italian resident individuals are subject to IRE only on Italian source income. Progressive tax rates apply, with a maximum rate of 39% and minimum tax rate of 23%.

In addition a 4% solidarity surcharge tax is due for the portion of income exceeding 100.000 Euro.

Corporate Income Tax (IRES)
Corporate income tax (IRES) is regulated by the Consolidated Tax Code (CTC). Italian resident corporations are subject to IRES on their worldwide income. Non-Italian resident corporations are subject to IRES only on Italian source income.
The flat tax rate on taxable income is 33%.

TAXATION OF RESIDENT CORPORATIONS
CORPORATE INCOME TAX (IRES)
As of January 1, 2004, corporations are subject to a new set of tax rules enacted by the Government in compliance with the principles of the Law of Reform.

Under the new set of rules, the imputation system has been abolished and replaced with the so called 'partial exemption' method, under which corporate profits are subject to income tax at the level of the company and partially exempted at the level of the shareholders. In addition, other significant measures have been introduced, eg, reductions in corporate income tax, the participation exemption regime, the thin capitalization rule, and the domestic tax consolidation regime.

TAXABLE PERSONS, TAX RATES AND TAXABLE PERIOD
Corporate Income Tax (IRES) applies to resident and non-resident corporations. Resident corporations are subject to IRES on their worldwide income, so-called 'unlimited taxation'. Non-resident entities are subject to IRES only on income considered sourced in Italy, 'limited taxation'.

Resident corporations include joint stock companies ('società per azioni'), limited liability companies ('società a responsabilità limitata'), and partnerships limited by shares ('società in accomandita per azioni').

Resident corporations also include companies formed under foreign jurisdictions which, for most of the taxable period, have their statutory office, place of effective management, or main object of their business in Italy.

Resident partnerships not limited by shares, are not subject to IRES. Such partnerships, namely 'società in nome collettivo', or 'società in accomandita semplice', are considered transparent entities. For tax purposes, their income is attributed to the partners and subject to tax accordingly.

For IRES purposes, the taxable period coincides with the company's financial year, as provided by the law or by the articles of association. Otherwise, the taxable period coincides with the calendar year.

IRES is levied at a flat rate of 33%.

REGIONAL TAX ON BUSINESS ACTIVITIES (IRAP)
Regional tax on business activities, Imposta regionale sulle attività produttive (IRAP), is a local tax applied on the value of the production generated in each taxable period by persons carrying out business activities in a given Italian region.

Non-Italian resident corporations are subject to IRAP only on the production generated through Italian permanent establishments.

INDIRECT TAXES
VALUE ADDED TAX (VAT)
The Italian value-added tax (VAT) system conforms fully to European Union VAT rules. In principle, the system ensures that VAT is borne by the ultimate consumer only and that, at the upper level, input VAT is deducted by the suppliers of goods and of services. VAT is charged on any supply or service deemed to be made or rendered within the Italian territory.

The ordinary VAT rate is set at 20%.

TRANSFER TAX
Transfer tax, Imposta di registro, is due on specific contracts if formed in Italy, and contracts including those formed abroad, regarding the transfers or leases of business concerns or immovable properties situated within the Italian territory. The taxable base and rates depend on the nature of the contracts and on the status of the parties.
When transferring immovable properties, cadastral and mortgage taxes also apply.
These are due for formal transcription in the public registers. The tax base matches that of the transfer tax, with tax rates set respectively at 1% and 2%.

Transfer tax, cadastral and mortgage taxes are imposed as a lump sum of €129.11 on transfers of immovable properties subject to VAT. Alternatively, transfer tax rates may vary from 4% up to 15% depending on the type of real property.

MUNICIPAL TAX ON IMMOVABLE PROPERTY
Any owner, resident or non-resident, of real properties located within Italian territory must pay annually the municipal tax on immovable property, Imposta comunale sugli Immobili (ICI). The taxable base equals the sum of the estimated value for the type and class of immovable property, as determined by the Cadastral Office, ie, the cadastral income, and a given multiplier. The municipality where the immovable property is located sets the tax rate at not less than 0.04%, and no more than 0.07%.

INHERITANCE AND GIFT TAX
Inheritance and gift tax were abolished in 2001. Subsequently, only gifts made to persons not having a certain degree of relationship with the donor are subject to other indirect taxes, ie, transfer tax, cadastral, and mortgage taxes.

WITHHOLDING TAXES
There are three main withholding taxes applicable at source on certain payments: dividend withholding tax, withholding tax on interest, and withholding tax on royalties.

Dividend withholding tax
In principles, dividends paid to Italian resident individuals from non-substantial participations in Italian corporations are subject to a 12.5% final withholding tax.
Dividends from substantial participations in Italian corporations are not subject to withholding tax.

Dividends paid to Italian resident corporations, or to Italian permanent establishment of non-resident corporations, are not subject to withholding tax.

Dividends paid to non-resident corporations without, or not through, an Italian permanent establishment, from substantial and non-substantial participations in Italian corporations are subject to a 27% final withholding tax. The withholding tax rate is reduced to 12.5% for dividends from saving shares.

Reduced rates are possible under any tax treaties, Italy has concluded with the recipients' country of residence.

The withholding tax is not due, in line with the EU Parent-Subsidiary Directive, for dividends paid by Italian resident corporations to its EU parent company. The benefit is subject the parent's current ownership dating back at least one year, of no less than 25% of the Italian subsidiary's share capital.

Withholding tax on interests
In principle, interest from bank accounts and deposits, certain bonds, and similar securities are subject to withholding tax at rates of 27% or 12.5%. These taxes, if any, on interest received by Italian residents generally consist of an advanced payment of income tax due by the recipients. As such, gross interest must be included in the recipient's tax base and the withholding tax deducted from the aggregate taxable income.

If non-Italian residents receive interest from bank accounts and deposits through an Italian permanent establishment, no withholding tax is due.

Interest and other profits from certain bonds issued by the state, by banks and by Italian-listed corporations are subject to a 12.5% substitute tax.

If Italian resident corporations receive interest from such bonds no substitute tax is due. If residents in countries listed in the so-called 'White List', ie, those with adequate exchanges of information with the Italian tax authorities, receive interest from such bonds, not through an Italian permanent establishment, no substitute tax is due.

In principle, interest from loans received by residents other than business entities is subject to a 12.5% advance withholding tax. If non-residents receive interest from loans, not through an Italian permanent establishment, the withholding tax is a final payment of tax. The withholding tax rate is set at 27% for recipients resident in countries listed in the so-called 'Black List', ie, countries granting privileged tax regimes.

The withholding tax rate may be reduced under any tax treaties Italy has concluded with various foreign countries.

In line with the provisions of the EU Directive on Interest and Royalties, the withholding tax on interest payments is not levied if these payments are made by Italian resident companies or by Italian permanent establishments of EU resident companies to affiliated (i) companies resident, for tax purposes, in another EU Member State or to (ii) permanent establishments of companies resident, for tax purposes, in another EU Member State. In line with the above-mentioned Directive, the benefit is applicable if certain shareholding requirements are satisfied.

Withholding tax on royalties
Royalties paid to Italian resident corporations, or to Italian permanent establishments of non-resident corporations, are not subject to withholding tax. In principle, royalty payments to non-Italian residents are subject to a 30% final withholding tax. Under certain conditions, the tax base may receive a 25% flat deduction.

The withholding tax rate, if due, can be reduced under any tax treaties Italy has concluded with various foreign countries.

In line with the provisions of the EU Directive on Interest and Royalties, the withholding tax on royalty payments is not levied if these payments are made by Italian resident companies or by Italian permanent establishments of EU resident companies to (i) companies resident, for tax purposes, in another EU Member State or to (ii) permanent establishments of companies resident, for tax purposes, in another EU Member State. In line with the above-mentioned Directive the benefit is applicable if certain shareholding requirements are satisfied.

TAX TREATIES AND EU DIRECTIVES
Italy has concluded tax treaties to avoid double taxation with the following countries:

Albania	Georgia	Mexico	Sweden
Algeria	Germany	Morocco	Switzerland
Argentina	Greece	Mozambique	Tanzania
Australia	Hungary	New Zealand	Thailand
Austria	India	Norway	The Netherlands
Bangladesh	Indonesia	Oman	Trinidad & Tobago
Belgium	Ireland	Pakistan	Tunisia
Brazil	Israel	Philippines	Turkey
Bulgaria	Ivory Coast	Poland	Ukraine
Canada	Japan	Portugal	United Arab Emirates
China	Jugoslavia	Romania	United Kingdom
Cyprus	Kazakhstan	Russia	U.S.A.
Czechoslovakia	Kuwait	Senegal	Uzbekstan
Denmark	Lithuania	Singapore	Venezuela
Ecuador	Luxembourg	South Africa	Vietnam
Egypt	Macedonia	South Korea	Zambia
Estonia	Malaysia	Soviet Union
Finland	Malta	Spain
France	Mauritius	Sri Lanka

The treaties generally provide more favourable taxation of Italian non-residents
than the treatment provided under local Italian law.

Most of these treaties are based on the OECD Model Convention.

EU PARENT SUBSIDIARY DIRECTIVE
Italy has fully implemented the EU Parent-Subsidiary Directive for the abolition of double taxation on corporate profits generated by an EU subsidiary, and distributed to an EU parent resident in another EU Member State.

According to the rules on taxation of dividends, dividends received by Italian parent corporations are 95% exempt from IRES regardless of the size of the underlying shareholding, and of the relevant holding period.

Dividends paid by Italian subsidiaries are exempt from withholding tax provided that the EU parent corporations hold, for an interruptive period of one year, a direct shareholding of at least 25% in the Italian subsidiaries. Italy has not yet implemented the Directive 123/2003 regarding, amongst the other, the reduction of the relevant threshold to 20%.

EU MERGER DIRECTIVE
Italy has fully implemented the EU Merger Directive regarding the tax ramifications arising from mergers, divisions, transfers of assets and exchange of shares between EU-resident corporations.

In line with the EU Merger Directive, Italian tax law specifies the conditions under which income, profits and capital gains from the above indicated business reorganizations - occurring between Italian and other EU-resident corporations - are deferrable.

EU DIRECTIVE ON INTEREST AND ROYALTY PAYMENTS
The EU Directive on Interest and Royalty Payments authorize provides for the abolishment of withholding tax on payments of certain interest and royalties between corporations resident in different EU Member States.

The Italian Government has implemented the Directive with Legislative Decree No. 143 of May, 30, 2005 (entered into force as from July 26, 2005).

The benefit of the exemption from withholding tax on payments made in favour of EU beneficiaries is subject, amongst the others, to the following conditions:

(i) the recipient is the beneficial owner of the interest and royalties payments. To this end, the recipient is regarded as the beneficial owner only if it receives the payment for its own benefit and not as an intermediary, such as an agent, trustee or authorised signatory, for some other person;

(ii) the interest and royalties payments are made:
- by a company which directly holds at least 25 per cent of the voting rights in the ordinary shareholders meeting (“Voting Rights”) of the company which receives the payment;
- to a company which directly holds at least 25 per cent of the Voting Rights in the company which makes the payments;
- to a company whose Voting Rights are directly held for a percentage not less than 25 per cent by a third company which also directly holds said minimum percentage in the company which makes the payments and in the company which receives the payments;
(vi) the minimum 25 per cent stake at point (ii) above is held without interruptions for at least 12 months.

For the purposes of the exemption, the beneficial owner of the payments shall have to attest its residence through a certificate issued by the Tax Authorities of its State of residency.

The Implementing Decree provides that the exemption is applicable on interest accrued or royalties payable as from January 1, 2004.

In addition, the Legislative Decree introduces a withholding tax of 30% on payments made to non-Italian residents deriving from licences of industrial, commercial and scientific equipments.

INCORPORATION OF LIMITED LIABILITY COMPANY IN ITALY
The company law in Italy is governed by Art. 2472 ff. and Art. 2325 ff. of Codice Civile. In general terms Italian Law prescribes two forms of companies having limited liability: (i) limited liability company or S.r.l., which stands for (società responsabilità limitata); and (ii) joint stock company or S.p.A. (società per azioni).

NATURE OF COMPANY
Both S.p.A. and S.r.l. are limited liability companies, but only in the case of joint stock company the share capital is divided into shares, which are embodied in stock certificates. In case of S.r.l. the capital is divided into "quotas", which are only recorded in the 'quota-holders' book. Naturally, quotas are also transferable by means of appropriate instruments to be recorded in the 'quota-holders' book.

Most of the regulations concerning the incorporation and management of an S.p.A. also apply to an S.r.l. In fact, although there are certain regulations, which apply specifically to the latter, broadly speaking, an S.p.A or an S.r.l can be both used to serve as a company having limited liability in Italy.

Each of S.r.l and S.p.A may be converted into the other type of company by resolution of a special quota/shareholders' meeting.

REQUIREMENTS FOR THE INCORPORATION OF A LIMITED LIABILITY COMPANY
The following are required for the purpose of incorporation of a Limited Liability Company:

1. It may be owned by one or more shareholders.
2. The minimum capital required for a Srl is of Euro 10,000.
3. The shareholders' contributions must be in cash, unless the deed of incorporation provides otherwise. Any type of asset which can be economically evaluated can be the object of a contribution. If a contribution is in kind, or consists of a credit, a report of an expert must be submitted. A contribution can also consist of an insurance policy or a bank guarantee.
4. The deed of incorporation must be made before a public notary. The Italian Civil Code provides a list of all the information, which must be embodied in the deed of incorporation, to which the by-laws of the company shall be joined.

PROCEDURE FOR INCORPORATION OF LIMITED LIABILITY COMPANY (S.R.L)
For incorporating a new S.r.l. each quota-holder may appoint attorneys-in-fact in order to be represented. Such powers of attorney must be signed before a Notary, whose signature, in case of a foreign Notary, must be legalized with Apostil. It is possible to incorporate a S.r.l. with a sole quota-holder. In such case, if the company is insolvent the sole quota-holder shall be responsible for all liabilities of the company.

NAME OF THE COMPANY
To incorporate a Limited liability company one need to apply for a suitable name for the company. There is no fees require to avail a name; but one needs to submit company form prescribed by the registry of company.

DEED OF INCORPORATION
The Deed of Incorporation of an S.r.l. consists of a Certificate of Incorporation and By-Laws. In the said documents at least the following details must be provided:

1. All data identifying each quota-holder and the part of capital subscribed by each of them;
2. The name of the company and the address of the legal office;
3. A complete description of the purposes of the company;
4. The corporate capital;
5. Name of those who have the power to represent the company and those who have to audit it;
6. The minimum capital requirement for a S.r.l. is €10,000 (ten thousand Euro)

Italian law requires that at least 25% (twenty-five per cent) of the subscribed capital be deposited with a Bank in Italy before the Deed of Incorporation is executed. However, in the case of a sole quota-holder, Italian law requires that the entire capital be fully paid-in at the time of the incorporation. The Bank will issue a certificate as to the deposit to be attached to the Deed of Incorporation. In order to avoid possible problems, in the event of non-resident quota-holders, capital should be remitted from abroad and negotiated approximately one week before the date of incorporation.

REGISTRATION
Registration with the Register of Companies is done by a Notary, who files the incorporation deed with the Register of Companies. Once the Company is registered with the Register of Companies it acquires its legal status according to Art. 2331 of the Italian Civil Code. If any transactions are carried out in the name and on behalf of the company prior to its registration, those who have so acted are unlimitedly, jointly and severally responsible.

Indeed, to effect the public registration of the S.r.l. in the Register of Companies, each director (or the sole director) must sign a Chamber of Commerce form, which should be deposited within 30 (thirty) days of the date the Notary signs the incorporation deed of the new company.

In general, both the foreign quota-holders and their legal representatives shall elect tax domicile in Italy and shall apply for a fiscal code in Italy (codice fiscale). The fiscal code in Italy functions in many respects as an ID Number of a Social Security Number.

INCORPORATION STEPS – RESUME

(A) INCORPORATION
Srl must be incorporated by means of a Notary deed: the Quota-holders shall sign personally or through a proxy the deed of incorporation before a Notary public.

The deed of incorporation will provide for the following information:

(i) The full data of each quota-holder/s;
(ii) The name of the company;
(iii) The corporate purpose of the company;
(iv) The corporate capital subscribed and paid-in by the quota-holder/s that may also contribute with receivables or other goods;
(v) The rules according to which the company shall operate;
(vi) The name of the directors which are entrusted with the management of the company and of the Board of statutory auditors, if applicable.

The initial corporate capital cannot be lower than Euro 10,000.00 (ten thousand).
25% of the corporate capital must be paid-in and deposited in a non-interest bearing account with a commercial bank in Italy prior to the incorporation. This cash deposit will be returned to the company after registration with the relevant Companies' Register.

However, should the company be incorporated by a sole quota-holder, the entire corporate capital should fully paid-in at the date of the deed of incorporation.

(B) REGISTRATION
After the deed of incorporation is executed before a Notary public, the company must be registered with the Companies' Register where the registered office is located.

(C) TIME TO INCORPORATE
The average time required to complete the procedure (execution of the deed of incorporation, filing and registration with registration with the Companies Register) is 10 working days from the moment in which we receive the necessary information/documents.

(D) SUMMARY OF STEPS
The steps to be taken in connection with the corporate actions necessary for the incorporation of a new company are as follows:

. draft deed of incorporation; in this connection we have to be provided with the necessary information as above mentioned under A) and the relevant special power of attorney issued from each of the quota-holder(s) in case such an activity is carried out by lawyers from our firm in the name and on behalf of each quota-holder(s) and not directly by the respective legal representative of the quota-holder(s);
. deposit of the 25% of the corporate capital (or 100% in case of a sole quota-holder) in a bank account, net of bank charges;
. execution of the deed of incorporation before the Notary Public;
. request of the Italian tax code number of the new Quota-holder(s) and of its legal representatives;
. request of the Italian tax code number of the new Directors to be appointed, in case they are foreign citizens;
. request of V.A.T. number and tax code number of the new company;
. registration of new company with the relevant Companies' Register.