Executive summary

On 31 December 2024, the Italian Budget law for 2025 (Law n. 207 of 30 December 2024) was published in the Official Gazette (Budget Law). The Budget Law is effective as of 1 January 2025.

Among other tax measures, the Budget Law introduces a corporate income tax (CIT) rate levied, under certain conditions, at 20% as an alternative to the standard 24% CIT (Imposta sul Reddito delle Società or IRES) only for fiscal year (FY) 2025 (Mini-IRES). Prerequisites to apply the Mini-IRES include setting aside at least 80% of FY 2024 earnings to a special equity reserve for at least two years and investing a certain amount (the higher of 30% of the 2024 retained earnings or 24% of 2023 overall earnings) in qualifying assets by October 2026 for calendar-year companies. Taxpayers must also increase certain levels of employment. Recapture mechanisms apply if distributions are made out of the 2024 retained earnings within two years or if the invested assets are dismissed within five years.

Mini-IRES measure

The framework law for a comprehensive reform of the Italian tax system (Law n. 111 dated 9 August 2023, Article 6.1.a) provides, among other things, for the introduction of a reduced CIT rate for companies that refrain from distributing their annual earnings and carry out qualifying investments (Dual CIT Rate System).¹ Pending implementation of a permanent Dual CIT Rate System, the Budget Law has introduced an alternative reduced CIT rate only for FY 2025 by providing for a 4% cut of the standard 24% CIT rate (i.e., from 24% to 20%). This measure applies to Italian-resident companies and Italian permanent establishments of nonresident companies.

The 20% rate is available only for FY 2025 income and is applicable based on the following conditions:

• 80% of the taxpayer's 2024 earnings must not be distributed. Taxpayers must set aside, in a specifically labeled equity reserve, at least 80% of the earnings derived in the FY ongoing on 31 December 2024, i.e., 2024 earnings for calendar year companies (2024 Retained Earnings).
• The higher of (i) 30% of 2024 Retained Earnings or (ii) 24% of 2023 overall earnings must be invested in the business. An amount equal to at least 30% of the 2024 Retained Earnings (i.e., 30% of at least 80% of the 2024 overall earnings) or, if higher, an amount equal to at least 24% of the 2023 overall earnings, must be used for qualifying investments (see below). The invested amount cannot be lower than €20,000 in total.
• Qualifying investments must be made in Industry 4.0 and 5.0 assets. Investments must relate to the purchase (even by way of financial lease agreements) of new tangible or intangible assets qualifying under the Italian Industry 4.0 and 5.0 industrial policies (e.g., qualifying high-technology assets, including software as well as energy-efficient and environment-friendly assets), which are aimed at digitizing the country and making the business more sustainable (Qualifying Assets). While official clarifications are expected, this condition does not seem to require that the taxpayer must at the same time qualify for Industry 4.0² and Industry 5.0³ tax credits (i.e., a company should be able to purchase the Qualifying Assets and benefit from the Mini-IRES even absent other specific conditions to benefit from the mentioned tax credits).
• Investments are required by October 2026. The qualifying investments must not have started prior to 1 January 2025 and must be completed by the deadline for the filing of the tax return for the FY after the one ongoing on 31 December 2024, which means that, for calendar-year taxpayers, the investments must be completed by 31 October 2026 (i.e., the deadline for the filing of the FY 2025 tax return).
• Number of employees and new hires must meet certain level. In addition to the above, the FY after the one ongoing on 31 December 2024 (i.e., FY 2025 for calendar-year companies) must show a number of full-time employees not lower than the average of the prior three FYs (i.e., 2022, 2023 and 2024) and at least a 1% increase in new hires with a qualifying permanent employment contract compared to the previous FY. Also, the taxpayer must not have applied for specific payroll subsidies on the FY ongoing on 31 December 2024 and the following one.
• Recapture mechanisms can apply. The 20% Mini-IRES benefit will be recaptured if the taxpayer (i) distributes any amount out of the 2024 Retained Earnings reserve within two FYs after the one ongoing on 31 December 2024 or (ii) disposes of any of the Qualifying Assets within five FYs after the FY of the investment (this includes moving the asset to nonbusiness use, as well as the selling to third parties or even transferring the asset to a taxpayer's site outside of Italy).
• Exclusion provided for companies under liquidation procedures. Entities subject to legal liquidation or insolvency proceedings in the FY following the one ongoing on 31 December 2024 are excluded from the benefit. Companies subject to lump-sum income computation regimes are also excluded.
• Tax consolidation required. Taxpayers who are members of tax groups will surrender the respective income amount qualifying for the Mini-IRES to the head of the group, who will use it to compute the group's overall net tax liability for FY 2025.
• Implementing measures to be issued. Implementing measures will be issued by the Ministry of Economy and Finance to coordinate the Mini-IRES provision with other provisions of the Italian CIT system as well as to better specify the functioning of the recapture mechanisms.

Implications

Multinationals with Italian presence should immediately begin considering the potential impact of the Mini-IRES measure in view of the upcoming 2024 financials approvals and prior to making decisions about distributing 2024 earnings. The relevant analysis should also be based on forecasts for 2025 and the potential for carrying out the required investments by October 2026 (for calendar-year entities). Pending the announced implementing measures, there are reasons to believe that the Mini-IRES benefit could add up to the Industry 4.0 and 5.0 tax credits as well as to special employment tax credits.⁴