In short: post-acquisition planning in Italy


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Post-acquisition planning

Restructuring

What post-acquisition restructuring, if any, is typically done and why?

Post-acquisition restructuring will vary depending on the specific objective of each transaction. Typically, the acquirer will merge the acquisition company with the target company or implement a tax consolidation to reduce acquisition debt and charge interest expense and transaction costs to EBITDA and taxable profits generated. by the company. Other restructurings may involve the transfer of goodwill or shareholdings of the acquired group to integrate them into a new sub-holding or the existing subsidiaries of the acquirer’s group and properly distribute the acquisition debt (via disposals of ‘shares, spin-offs, contribution of shares, mergers, spin-offs, etc.) and intra-group intellectual property licenses.

Spin off

Can tax neutral divisions of companies be carried out and, if so, can the net operating losses of the divided company be preserved? Is it possible to carry out a spin-off without triggering transfer rights?

A tax-beneficial split of a company for both the Italian companies involved and their shareholders can be achieved through various actions on the companies.

Business assets classified as going concern can be contributed to a newly created or existing company in exchange for newly issued shares. Such a contribution does not generate any taxable capital gain for the benefit of the contributing company. The tax base of the assets and their holding period are transferred to the new shares. These shares can then be sold under the participation exemption regime. As of right, the tax advantage obtained by the seller (compared to the outright sale of the business in activity) cannot be called into question under the general anti-abuse rule. The net operating losses of the split activity remain acquired by the contributing company and cannot be transferred to the absorbing company.

Another way to achieve a tax neutral split of a business or a branch of a business is to split the business for the benefit of an existing or newly created business. The beneficiary company will issue shares to the shareholders of the company resulting from the demerger, on a proportional or non-proportional basis. Recently, the Italian tax authorities clarified that, as a general rule, the sale of shares of the split company or of the beneficiary company under the participation exemption regime should not trigger the application of the general anti-participation rule. -abuse when the two companies continue to carry on their activities a trade or a business in activity. The losses carried forward from the company resulting from the demerger are allocated between this company and the acquiring company in proportion to their adjusted equity, subject to certain anti-avoidance rules. The shareholders of the company being split do not recognize any capital gain.

Transfer taxes apply for a negligible fixed amount to both the contribution and the demerger as well as to the subsequent sale of the shares. Under the new rules, the tax administration should not be able to successfully reclassify the entire transaction as the sale of a running business subject to proportional registration tax.

Residence migration

Is it possible to migrate the residence of the acquisition company or the target company from your jurisdiction without tax consequences?

Under Italian law, a resident company incorporated in Italy may transfer its registered office to another jurisdiction, and possibly be converted into a company governed by the laws of that jurisdiction, without being dissolved or liquidated or in liquidation.

The company can lose its Italian tax residence either by transferring abroad the three connecting factors provided for by domestic law (i.e. the registered office, the registered office and the main object of its commercial activity) or in accordance with the provisions of the tax treaty concluded between Italy and the country of destination (that is to say by fixing abroad the seat of its effective management and the object of its main activity).

The transfer of residence abroad is treated as a taxable (deemed) disposal at the market value of the assets of the company, with the exception of those assets which become part of a permanent establishment located in Italy, if applicable. Tax loss carryforwards that do not offset the exit gain are retained in proportion to the amount of equity of this permanent establishment. Deferred tax reserves are taxable insofar as they are not reintegrated into the balance sheet of this permanent establishment.

A recent judgment handed down by the Italian tax authorities rejected the application of the participation exemption regime with regard to participations forming part of the commercial assets of the migrant company as a going concern.

Companies migrating to an EU country (or certain EEA countries) can choose to pay the exit tax in five annual installments, under certain conditions.

The transfer of residence does not trigger any taxable gain in the hands of the shareholders.

Similar rules apply to other outbound transactions, such as mergers and spinoffs.

Interest and dividend payments

Are interest and dividend payments made outside your jurisdiction subject to withholding taxes and, if so, at what rates? Are there national exemptions from these deductions or are they treaty dependent?

Interest

In principle, the payment of interest paid to non-resident Italian investors is subject to a final withholding tax of 26 per cent.

No withholding tax is applied on payments to companies in the EU and Switzerland if the requirements set out by the EU Directive on Interest Charges or the Agreement of the EU-Swiss Confederation are fulfilled (the beneficial ownership requirement is usually strictly controlled).

Under domestic law, an exemption from withholding applies, inter alia, to:

  • interest paid on bank accounts and deposits and postal savings deposits;
  • interest on “medium to long term” loans (maturity greater than 18 months) paid by Italian companies to certain qualified foreign lenders (banks established in the EU, insurance companies incorporated and licensed in the EU and institutional investors supervised (for example, funds set up in the white list countries as defined by the decree of September 4, 1996)), provided that they meet the regulatory requirements on reserved credit activities;
  • interest on certain repurchase agreements, securities lending and guarantees, if the beneficiary is tax resident in a white list country or is a supervised institutional investor there;
  • interest on the following bonds if the foreign investor resides for tax purposes in a white list country or is a supervised institutional investor established in a white list country: bonds issued by Italian banks and companies whose shares are listed on the ‘EU or EEA regulated markets; bonds traded on EU or EEA regulated markets issued by unlisted Italian companies; bonds not traded on EU or EEA regulated markets issued by unlisted Italian companies, held exclusively by certain qualified investors; and bonds issued by special purpose vehicles as part of securitization transactions.

If none of the above exemptions apply, the withholding tax may be further reduced or eliminated under the applicable double taxation treaty (most provide for a reduced rate of 10 percent).

Dividends

Dividends paid to non-Italian resident investors are subject to a 26 percent withholding tax, unless the exemption provided for by the EU parent-subsidiary directive or the EU-Swiss Confederation agreement applies.

The following reduced withholding tax rates apply under national law:

  • 1.20% on dividends paid to other companies subject to tax in the EU or in countries on the EEA white list; and
  • 11% on dividends paid to pension funds established in the EU or in countries on the EEA white list.

If no national reduced rate applies, a partial refund of foreign tax paid on dividends may be available up to a fraction of 11/26 of the amount withheld in Italy.

In addition, withholding tax can always be reduced or waived under the applicable double taxation treaty (rates typically vary between 5 and 15 percent).

As of January 1, 2021, dividends paid to foreign undertakings for collective investment in transferable securities are not subject to withholding tax of 26 percent, provided that:

  • they comply with Directive 2009/65 / EC (UCITS Directive); Where
  • they are established in EU / EEA countries allowing an adequate exchange of information with Italy and whose portfolio management company is subject to regulatory oversight in its country of establishment in accordance with Directive 2011/61 / EU (AIFM directive).

Royalty fee

Royalties paid to non-resident Italian companies are subject to a final withholding tax of 30 percent which may be eliminated under the EU Directive on Interest and Royalties or the EU-Switzerland Confederal Agreement or otherwise reduced or eliminated under applicable double taxation treaties.

Tax-efficient extraction of profits

What other tax-efficient ways are being adopted to extract profits from your jurisdiction?

Profits can be extracted from an Italian company either by declaring dividends or by paying interest on loans made to the company by its shareholders.

Dividends are not tax deductible and their distribution negatively affects the deduction of notional interest available to the company.

Interest expense is tax deductible, subject to various limitations and restrictions. Usually, the deduction is strictly controlled by the tax authorities under the general anti-abuse rule when the Italian company is granted a shareholder loan for the sole purpose of financing an intragroup asset purchase or the distribution of extraordinary dividends.

Dividend and interest payments are subject to withholding tax unless an exemption applies (usually under EU directives). Unlike the distribution of profit reserves, the distribution of share reserves (such as the issue premium) is not subject to withholding tax. However, a special rule applies whereby profit reserves are considered to be distributed before equity reserves for tax purposes.

The withholding tax does not apply in the event of share buybacks carried out by the Italian company. However, depending on the position of the tax administration, such a conclusion may change if the issuing company purchases the shares to cancel them (rather than using them for stock option plans or merger and acquisition transactions. , for example).

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About Brandon A. Hood

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