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December 22, 2023

Italy approves BEPS Pillar Two provisions and other significant tax changes including ATAD 2 hybrid mismatches penalty protection regime

  • Significant tax measures have been approved as part of the announced tax reform.
  • BEPS Pillar Two measures have been implemented as well as changes to domestic CFC rules for coordination with the global minimum tax provisions.
  • Other changes include a penalty protection regime for ATAD 2 hybrid mismatches, a business reshoring exemption and the review of tax residence rules.

Executive summary

On 19 December, the Italian government has approved significant measures as a first phase of the upcoming comprehensive tax reform (International Tax Decree).1 In addition to the announced Pillar Two rules and other provisions,2 a penalty protection regime has been introduced with respect to Anti-Tax Avoidance Directive n. 2017/952 (ATAD 2) hybrid mismatches. The International Tax Decree is expected to be published in the Official Gazette and come into force by the end of 2023.

Some of the main International Tax Decree measures of interest to multinationals with Italian operations are highlighted below:

  • Introduction of Base Erosion and Profit Shifting (BEPS) Pillar Two provisions
  • Penalty protection regime for European Union (EU) Anti-Tax Avoidance Directive n. 2017/952 (ATAD 2) hybrid mismatches
  • Coordination of Controlled Foreign Corporation (CFC) rules with Pillar Two provisions
  • Reshoring income exemption
  • Review of tax residence rules for corporations.

Detailed discussion

Introduction of BEPS Pillar Two provisions

The Organisation for Economic Co-operation and Development (OECD) BEPS Pillar Two provisions have been finally transposed in the draft Legislative Decree on international tax matters, as part of the announced comprehensive tax reform (International Tax Decree).

In general, the Italian Pillar Two provisions published in the draft International Tax Decree do not present significant differences in comparison to the text already circulated for public consultation.3 The final text consists of 53 articles (i.e., from Article 8 to Article 60 of the International Tax Decree).4

In brief, the Italian Pillar Two regulations are divided into nine chapters. After addressing introductory elements, including a definition of the scope of the rules (Chapter 1), they introduce the global minimum top-up taxation rules by providing for the three relevant interlocking measures: the Income Inclusion Rule (IIR), translated in Italian as "imposta minima integrativa"; the Undertaxed Payments Rule (UTPR), translated in Italian as "imposta minima suppletiva"; and the Qualifying Domestic Top-Up Tax (QDMTT), translated in Italian as "imposta minima nazionale" (Chapter 2). Other sections introduce rules on the calculation of the effective tax rate at jurisdictional level (Chapters 3, 4 and 5) and on certain group reorganizations (Chapter 6). Other provisions aim to ensure proper coordination between certain domestic tax regimes and the new rules (Chapter 7), introduce provisions on tax compliance (including the Global Information Return) and tax assessment (Chapter 8), as well as some transitioning rules (Chapter 9).

The last article (Article 60) provides for the entry into force of the new rules with reference to financial years (FY) starting on or after 31 December 2023, except for the UTPR provisions that are due to apply to FYs starting on or after 31 December 2024.

Penalty protection regime for ATAD 2 hybrid mismatches

The International Tax Decree introduces a new provision regarding ATAD 2 hybrid mismatch rules with the aim of encouraging cooperation between tax authorities and taxpayers. In particular, under the new provision, in the event of a dispute concerning hybrid mismatch rules leading to a higher tax assessed, the penalty for unfaithful tax return (ranging from 90% to 180%) shall not apply if, in the course of the field agents' activity, the taxpayer delivers documentation in compliance with the instructions to be issued by the Ministry of Finance within 60 days from the International Tax Decree effective date (Qualifying Documentation). Taxpayers complying with Qualifying Documentation shall give appropriate notice to the tax authorities in the manner and terms specified in upcoming instructions from the Ministry of Finance.

With reference to the tax periods prior to that of the entry into force of the International Tax Decree (i.e., 2020, 2021 and 2022 for calendar year companies), the penalty protection regime applies provided that the Qualifying Documentation is prepared by the later of the following two terms: (i) deadline for the submission of the tax return relating to the tax period ongoing at the date of entry into force of the International Tax Decree, or (ii) within six months from the date of enactment of the decree of the Ministry of Finance.

The complete and truthful description of the case as well as the timely communication of the relevant documentation to the tax authorities constitutes proof of the non-existence of the intention to evade income taxes by the taxpayer who has carried out the transactions described and, as such, should significantly mitigate any criminal law implications.

Coordination of CFC rules with Pillar Two provisions

Under current rules, the income of CFCs is attributed to the Italian parent under a flow-through taxation principle if the foreign subsidiary meets two negative conditions: (i) it is subject to an effective tax rate (ETR) lower than 50% of the Italian ETR that would have applied if the entity resided in Italy, and (ii) more than one-third of its revenues qualify as passive income. The ETR test comparison requires a complex computation to redetermine the CFC's taxable income according to the Italian tax rules and — if both conditions are met (i.e., low ETR and more than 1/3 passive income) — such income is taxed to the Italian parent at 24% corporate income tax (CIT). An exception applies for CFCs having an adequate level of local economic substance, in which case the CFC's income is not imputed to the Italian parent.

The International Tax Decree simplifies the mentioned ETR test by providing for a 15% ETR based on the accounting results of the CFC. This simplification is driven by the need to align the required minimum level of CFC's taxation with the minimum global tax under Pillar Two provisions. The minimum 15% ETR test is based on the accounting results of the CFC as a ratio between the foreign tax burden and the foreign accounting earnings before taxes. The foreign tax burden includes current taxes, deferred taxes, and the fraction of the local QDMTT (if any) attributable to the CFC. For the CFC to utilize this simplified ETR test, the CFC's financials must be certified by locally authorized professional auditors, with the findings of the CFC's audit being used for the purpose of the certified stand-alone or consolidating accounts of the parent. If the ETR results lower than 15%, the Italian controlling company may still avoid the CFC income imputation by proving that the latter is subject to a tax burden at least equal to 50% of the theoretical Italian one. This 50% theoretical Italian tax test remains mandatory for CFCs' which financials are not certified by authorized auditors.

As an alternative to the mentioned 15% minimum ETR test (which, if failed, would require a complex redetermination of the CFC's income and taxation at 24% CIT), Italian companies may elect for a further simplified regime requiring a mandatory minimum payment on a three-year period basis. If elected, this regime provides for a substitute tax at 15% applied on the local adjusted accounting profits (i.e., grossed up by current and deferred taxes, as well as by assets' write-offs and provisions). The election made by the Italian parent company involves all CFCs with more than one-third passive income and remains mandatory for a three-FY lock-in period (automatically renewable unless explicitly revoked) irrespective of the minimum 15% ETR test. As a precondition to elect this simplified CFC taxation regime, the CFC's financials must be certified by locally authorized professional auditors.

The new rules should become effective 1 January 2024.

Reshoring income exemption

The International Tax Decree introduces a temporary 50% exemption from CIT (currently levied at 24%) and Local Tax (Imposta Regionale sulle Attivita' Produttive, IRAP, currently levied at standard 3.9%) of the income deriving through going concerns moved from a foreign jurisdiction, other than EU or EEA member states, to Italy. The exemption is limited to income deriving from the reshoring of going concerns that, at least during the previous 24 months, were not located in Italy. From a timing perspective, the exemption applies for the FY of the migration and the following five FYs.

The mentioned income exemption is subject to recapture (with interest but without penalties) if the business going concern is migrated, even partially, from Italy to any other foreign jurisdictions (including EU and EEA countries) in the five years following the expiration of the regime or 10 years for large enterprises as defined by the EU recommendation n. 361 of 6 May 2003 (i.e., with at least 250 employees plus a turnover of at least €50m or, alternatively, total assets of at least €43m value).

Although subject to the EU Commission's approval under the relevant EU State-aid principles, the new rule should enter into force as of 1 January 2024.

Review of tax residence rules for corporations

Under current rules, companies are considered tax-resident of Italy if they alternatively meet one of the following requirements for the most part of the FY: (i) have a registered office in Italy, (ii) have an administrative office in Italy, or (iii) have a principal activity in the territory of the Italian state.

According to the new provisions, the first requirement, (i.e., (i) the registered office) is confirmed, while the second and third requirements are replaced respectively by (ii) the place of effective management and (iii) the place of day-by-day management.

The above amendment aims at providing a higher degree of legal certainty by also aligning the Italian provision to international practice and double-tax-treaty principles about tax residency. The "registered office" is a formal prerequisite that remains unchanged by assuring continuity with the current law. In contrast, the place of "effective management" and the place of "day-by-day management" are innovative substantial criteria that refer, respectively, to the place where strategic decisions are made and where the management activity is carried out in practice.

The new rule should become effective 1 January 2024.


For additional information with respect to this alert, please contact the following:

Studio Legale Tributario, Milan

Studio Legale Tributario, Rome

Studio Legale Tributario, Bologna

Studio Legale Tributario, Florence

Studio Legale Tributario, Torino

Studio Legale Tributario, Treviso

Studio Legale Tributario, Verona

Ernst & Young LLP (United Kingdom), Italian Tax Desk, London

Ernst & Young LLP (United States), Italian Tax Desk, New York

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor



1 See EY Global Tax Alert, Italy approves framework for major tax reform, including BEPS Pillar Two principles, dated 25 August 2023.

2 See EY Global Tax Alert, Italy | Overview of recent tax developments including BEPS Pillar Two provisions, dated 27 November 2023.

3 See EY Global Tax Alert, Italy launches BEPS 2.0 Pillar Two draft law for public consultation, dated 13 September 2023.

4 See EY Global Tax Alert, Italy | Overview of recent tax developments including BEPS Pillar Two provisions, dated 27 November 2023.