ITALY Law and Practice Contributed by: Giuliano Foglia, Foglia & Partners
3.3 Passive Income Dividends Inbound dividends Dividends received by resident individuals are subject to a 26% final withholding tax or substitute tax. Dividends received by resident individuals in the exercise of a business activity, commercial partner - ships and companies are partially included in the tax - able base for income tax purposes (in the measure of 58.14% for individuals/partnerships and 5% for companies). Outbound dividends Dividends paid by Italian resident entities to non-res - ident shareholders are, in principle, subject to a 26% final withholding tax pursuant to Article 27 of Presi - dential Decree No 600/1973. The following domestic reduced tax rates or exemp - tions apply: • pursuant to Article 27 (3-ter) of Presidential Decree No 600/1973, a reduced 1.2% withholding tax applies, provided that the recipient of the dividends is an entity that is subject to CIT in an EU/EEA State and is tax resident therein; • pursuant to Article 27 (3) of Presidential Decree No 600/1973, dividends paid to EU/EEA established undertakings for collective investment (“UCIs”), provided that either the UCIs are established according to the Directive 2009/65/EC (so-called “UCITS Directive”) or their fund manager is subject to regulatory supervision in its country of establish - ment according to Directive 2011/61/EU (“AIFM Directive”); and • pursuant to Article 27-bis of Presidential Decree No 600/1973, implementing Directive 2011/96/EU (so-called Parent-Subsidiary Directive or PSD), no withholding tax is levied, if the relevant conditions are met, on dividends paid to an EU parent com - pany holding a direct shareholding of at least 10%. In addition, the domestic withholding tax rate can also be reduced (generally, to 15%) pursuant to the relevant provisions of the applicable DTCs. As an alternative to the conventional mitigation, the taxpayer may claim a refund up to 11/26 of the withholding tax applied,
In general terms, taxable business income is the income resulting from the profit and loss accounts, as adjusted in accordance with the applicable tax rules. Business profits are taxable and business expenses are normally deductible on an accrual basis, with a few exceptions. Business expenses and other costs are deductible if and to the extent they are inherent to the activity carried out or to the assets producing taxable income, determined or reliably determined, certain as to the tax period they relate, charged to the profit and loss account of the tax period in which they accrue. Italian commercial and non-commercial partnerships are fully transparent for tax purposes, meaning that income is attributed to the partners (in proportion to their participation in the profits) and taxed in their hands, regardless of actual distribution, at progressive tax rates. Tax losses derived from business activities and those attributed by transparency are offset against other income derived by the individual and the possible excess can be carried forward, without any time limit, and offset against business income of the following tax period in the measure of 80% (Article 8 (3) of the ITC). Companies All income derived by companies that carry on com - mercial activities is considered business income and subject to CIT at 24% tax rate. The taxable base for CIT purposes is the company’s worldwide income as reported in the profit and loss account for the relevant financial year, prepared in accordance with applicable accounting standards and adjusted in accordance with relevant tax law provi - sions. Revenues and expenses have, in principle, tax rel - evance on an accrual basis, in accordance with Arti - cle 109 of the ITC. Specific exceptions to the accrual principle are established in relation to peculiar items of income/expenses, such as dividends and directors’ fees.
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