Transitional provision: a chance to minimize taxes on dividends
PKF Studio TCL analyzes the opportunity introduced by the transitional provision
The finance act 2018 removed the taxation difference between “qualifying” and “non-qualifying” holdings held by natural persons.
Historically the legislator granted a lighter taxation on dividends paid by non-qualifying holdings, this financial instrument was considered a tool for savers and therefore 12.50% withholding tax was applied. The following changes in regulations led to an higher withholding tax on dividends that amounts to 26% starting from 1st July 2014.
The latest measure increased the tax burden on non-qualifying shareholders reducing the tax advantages previously granted for this category of investors.
Only 58.14% of financial incomes from qualifying shareholdings were included to IRPEF tax base (with an effective taxation rate of roughly 25% - in previous years the taxation was lower). The finance act 2018 introduced 26% withholding tax on dividends from qualifying shareholdings, generated after the 31st of December 2017 and for the following tax periods.
In order to introduce the new withholding tax gradually, the legislator established a transitional provision to tax dividends from qualifying shareholdings. The transitional provision is shall be applicable for dividends generated before the 31st of December 2017 and paid between the 1st of January 2018 and the 31th of December 2022.
The withholding tax penalizes who has only financial incomes: the taxpayer will not be eligible to use tax credits, tax deductions and carried forward capital losses because 26% withholding tax is directly applied on the dividends.
It is important to evaluate the possibility to pay dividends within 31/12/2022 if incomes were generated by the end of 2017.
According to the transitional provision: (i) 40% of dividends will be included in the IRPEF tax base, if generated by the 31th of December 2007; (ii) 49.72% of dividends will be included in the IRPEF tax base, if generated between 1st of January 2008 and 31th of December 2016; (iii) 58.14% of dividends will be included in the IRPEF tax base, if generated between the 1st of January 2017 and 31st of December 2017.
The transitional system grants an actual taxation lower than 26% withholding tax, moreover taxpayers can benefit from tax credits, tax deductions, and carried forward losses.
PKF Studio TCL - Tax Consulting Legal
Genoa – Milan
New regulations to identify “Tax Haven List” countries
Barbara Pollicina, Partner of PKF Studio TCL, discusses about legislative decree N.142/18 on foreign dividends
The legislator, after renouncing to the “Black List”, he modified the criteria to identify “tax haven countries”. This status is relevant to tax dividends and capital gains.
According to new regulations since a country is part of “Tax Haven List” if it occurs one of the following scenarios: i) the stockholder has control of a foreign corporation and the incomes are taxed for less than 50% of the effective taxation that would have taken place if the controlled company was located in Italy. It is necessary to point out that for the comparison process is not only relevant the corporate income tax rate but the tax base too; ii) the Italian shareholder does not control the foreign company and the foreign corporate income tax rate is lower than 50% of the Italian tax rate, the latest is equal to the sum of IRAP and IRES percentages. Assuming that the corporate income tax rate of a foreign country is 12% and seen the fact it is lower than 50% of the IRAP and IRES sum (3.90%+24%) it would be consequently applied Tax Haven regulations where dividends are fully taxed.
In order to avoid full taxation on dividends, the tax payer needs to prove the conditions as followed: (i) the non-resident company performs an actual economic activity, through the implementation of personnel and capital; (ii) since the first moment where the shareholding has been acquired by the shareholder, he has not pursued the effect of locating the incomes in states or territories where a light tax regime is in force.
We suggest to follow carefully the tax havens regulations because the identification procedures changed yearly and it shall be for the company to prove the non-tax haven nature.
PKF Studio TCL - Tax Consulting Legal
Genoa – Milan
Flash topic: Finally confirmed the 2018 deductions for road hauliers
The Italian Ministry of Economy and Finance announced the amounts recognized to lorry drivers for deductions on transports, in regard to the 2017 tax period. The Ministry stated, by communication no. 7 dated 14th of January 2019, the deductions for undocumented expenses related to transports carried out personally by the entrepreneur, outside the municipality where the company is based. The aforementioned deduction increased from the previous 38 Euro to 51 Euro. On the other hand, for the transport carried out personally by the entrepreneur within the municipal territory, where the firm is based, the deduction is equal to 35% of the amount specified above.
Flash topic: Representation expenses
Representation expenses are one of the most verified type of cost by the Tax Authority’s agents. Representation expenses may be incurred for promoting the activity carried out by the company on the market. Other possible functions are attracting new customers, retaining those previously acquired, developing public relations and consolidating the image of the company.
The difference between representation expenses and advertising expenses is that the first category provides customers with free goods and services meanwhile advertising costs are related to the specific service purchased.
Representation expenses must be inherent to the economic activity carried out, properly documented and they have to be reasonable and congruent with the business. The potential economic benefits must be coherent with the commercial practices adopted in the sector concerned.
Article 108 paragraph 2 of the TUIR sets the following limits on the deductibility of representation expenses:"
- 1.5% of revenues and other income up to 10 million euros;
- 0.6% of revenues and other income for the part exceeding 10 million euro and up to 50 million;
- 0.4% of revenues and other income for the part exceeding € 50m.".
For self-employed worker the rate is 1% of remunerations received during the tax period.