58th UIA CONGRESS

Florence / Italy

29 October – 2 November 2014

FOREIGN INVESTMENT

COMMISSION

Thursday, 30 October 2014

“IS MY COUNTRY ATTRACTIVE FOR

FOREIGN INVESTMENTS?”

REPORT FOR ITALY

CARLO MASTELLONE and GIACOMO PAILLI (Studio Legale Mastellone)

Via Gustavo Modena, 23 – 50121 Florence (Italy)

Tel. +39.055.4620040; Fax +39.055.475854

c.mastellone@studiomastellone.it

g.pailli@studiomastellone.it

www.studiomastellone.it

in co-operation with

Dr. PIETRO MASTELLONE, LL.M. (Tax lawyer – Cordeiro Guerra & Ass.)

pmastellone@cordeiroguerra.it

© UIA 2014

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SUMMARY: 1. Introduction. FDI in Italy – an economic overview. – 1.1. Reasons for the relatively low attractiveness of Italy

for FDI. – 1.2. Good reasons for investing in Italy. – 2. Favourable corporate forms. Setting up a company. General

overview and choice of corporate structure. – 2.1. Società per Azioni (S.p.A.). – 2.2. Società a responsabilità limitata

(S.r.l.). – 2.3. Choice of structure: S.p.A. vs. S.r.l. – 2.4. Conditions and steps to be taken to establish a subsidiary

company in Italy. – 2.5. Registrations. – 3. Italian legislation on corporate groups. The concept of “management” and

“co-ordination of companies”. – 4. Civil liability. – 4.1. Civil liability of individuals such as directors/managers, and

of legal entities such as the parent company (e.g. corporate responsibility including directors and/or parent company

accounting principles; concept of “trust” and “reliance on parent company”). – 4.2. “Piercing the corporate veil”. –

4.3. No liability threshold. – 4.4. The use of “comfort letters”. – 5. Criminal and administrative liability. – 5.1.

Statutory criminal offences of legal entities of which a parent company has to be aware when doing business in Italy.

– 5.2. Directors, management, auditors and/or other advisors (e.g. lawyers) can be held liable for criminal offences. –

6. Branch office (sede secondaria) of foreign company. – 6.1. Description and Pros. & Cons. – 6.2. Steps to be taken

to register a branch office. – 7. Representative office (ufficio di rappresentanza) of foreign company. – 7.1.

Description and Pros. & Cons. – 7.2. Steps to be taken to register a representative office. – 8. Italy’s immigration

regime and the new special VISA for “innovative” start-up companies. – 9. Labour regulations. – 10. International

tax issues and tax incentives for investments. – 10.1. Transfer pricing. – 10.2. Controlled foreign companies (CFC). –

10.3. Tax incentives for investments in Italy. – 11. Initiatives from the Government. – Appendix I.

1. Introduction. FDI in Italy – an economic overview.

Italy is a complex country. On one side, the eighth country for GDP is world-renown for its

historical, cultural and artistic heritage, as well as for the skills and ability of its artisans who rendered

‘made in Italy’ a unique and successful brand in a number of different areas. On the other side, it

cannot be forgotten that abroad ‘made in Italy’ also evokes red tape, a remarkably slow judicial

machine and a general feeling of unreliability.1

This might help explaining why Italy ranks seventh for export but only eighteenth for inward

direct investment.

The task of this paper is to assess which of these two faces of Italy better describes the current

situation, and, perhaps even more importantly, whether the wind seems to be changing in the right

direction.

In trying to cope with such a challenging goal, we will try to provide the essential features of

the system and trace the most recent developments (whether already passed into law or still in the

Government’s agenda) that could answer the, only apparently, simple question posed, «Is my country

attractive for foreign investment?».

1.1. Reasons for the relatively low attractiveness of Italy for FDI

Historically, the attractiveness of the Italian economy for foreign direct investment (FDI) has

been limited, compared to that of most other European countries and to its own potential. Italy’s

inward FDI (IFDI) performance was particularly poor in 1990-2000, when cumulative IFDI flows in

the country were only 13% of those in the United Kingdom, 17% of those in Germany, 21% of those

in France, and 35% of those in Spain.2 Since 2000, Italy’s IFDI stock has almost tripled – a growth

1 WORLD BANK – IFC, Ease of doing business in Italy, available at

www.doingbusiness.org/data/exploreeconomies/italy (last visited on 21 September 2014), marks as weakness high and

complex taxes, the delay in obtaining a construction permit, the difficulty of accessing credit and of enforcing contracts (both

given the delay of judicial proceedings of debt recovery and enforcement), with an overall ranking of 65 out of 189

economies – well below Italy’s potential. 2 UNCTAD, World Investment Report 2011. Non-equity modes of international production and development, (New

York and Geneva: United Nations) 2010, available at http://unctad.org/en/docs/wir2011_embargoed_en.pdf (last visited on

21 September 2014). See also M. MUTINELLI – L. PISCITELLO, Inward FDI in Italy and its policy context, Columbia FDI

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rate similar to that of FDI stock in the European Union (EU) as a whole – reaching US$ 364 billion in

2009, before falling to US$ 337 billion in 2010.

Notwithstanding the relatively low level of IFDI stock, foreign majority-owned affiliates play

an important role in the Italian economy.3 As in other European countries (e.g. Germany), the growth

of IFDI in the last decade was driven by privatisation and liberalisation in telecommunications and

particularly in the electricity, gas and water supply industries. Between 2000 and 2009, the share of

energy products – a category that includes petroleum extraction and related industries as well as

electricity, gas and water supply services – in total IFDI stock rose from 2% to 13% mainly due to an

increase in the IFDI stock in those services, where IFDI had been negligible in 2000. The relatively

low attractiveness of Italy for FDI can be attributed to a number of factors:

1) the lack of adequate infrastructure;

2) the burdensome red tape and inefficient bureaucracy;

3) the limited competition in many service industries;

4) the high costs of energy;

5) the high level of corruption and organized crime;4

6) the extent of the black economy;

7) the number of overlapping regulatory public authorities each acting independently from

one another;

8) the uncertainty (volatility) of the legal framework; and

9) the inadequate assurance of the efficient enforcement of property rights.5

Additional obstacles to IFDI stem from some of the characteristics of the Italian industrial

system, such as:

1) the limited number of publicly traded companies; and

2) the relative lack of information that limit substantially the scope for cross-border merger

and acquisition (M&A) activity.

The weaknesses of the national innovation system, the paucity and the uncertainty of public

research grants (that could constitute an important incentive for MNEs to locate their research and

innovation centres), and the modest international competitiveness of a large part of high-tech

industries have led to a contraction of the activity of foreign affiliates in those industries. The

financial market is underdeveloped, compared to other industrialized economies, with very few truly

public companies listed on the Italian stock market.

Profiles, Country profiles of inward and outward foreign direct investment issued, Vale Columbia Center on Sustainable

International Investment, 2 December 2011, available at

http://academiccommons.columbia.edu/download/fedora_content/download/ac:142674/CONTENT/Italy_IFDI.pdf (last

visited on 21 September 2014). 3 At the end of 2008, almost 1,266,000 workers (7% of the total workforce) were employed in 14,375 foreign-

controlled enterprises established in Italy; the turnover of these companies amounted to € 489.3 billion (16% of total

turnover) and their value added to € 89 billion (12% of total value added). Between 2003 and 2008, the number of workers in

foreign majority-owned affiliates increased by about 200,000. The contribution of foreign-controlled enterprises is even more

crucial for research and development (R&D) expenditures (25% of the total) and for foreign trade of goods and services

(22% of total exports and 37% of total imports). Source: ISTAT, “Struttura e competitività delle imprese a controllo estero,

Anno 2008”, Statistiche in breve, Rome, 20 December 2010. 4 See V. DANIELE – U. MARANI, Organized crime and foreign direct investment: the Italian case, in Trends in

Organized Crime, vol. 11, no. 3/2008, p. 296 et seq. 5 For a recent empirical analysis showing that the relatively limited attraction of Italian regions vs. other European

regions is due to a so-called Country effect, see R. BASILE – L. BENFRATELLO – D. CASTELLANI, Attracting foreign direct

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According to a study carried out by the Italian economic and legal newspaper IlSole24Ore, the

weaknesses of Italy are:

1) High national debt and tax evasion rate;

2) Loss of export market share;

3) Low productivity;

4) Inadequacy of research and higher education;

5) Government inefficiency, large number of civil servants;

6) Banking sector weakened by exposure to Italy’s sovereign debt;

7) Backwardness of the South.

1.2. Good reasons for investing in Italy

Despite these factors, there are still many good reasons to invest in Italy:6

1) The first is Italy’s GDP, ranking fourth in Europe and tenth worldwide (more than US$ 1.9

trillion in 2010);

2) The second is the importance of the domestic market, which is the main reason for IFDI to

Italy, related to its size (almost 60 million consumers) and potential growth rates. The

country is acknowledged to be a “trend setter” for major consumer products (e.g. food,

fashion and design, mobile phones);

3) Moreover, Italy is centrally located in the heart of the Mediterranean and is (or should be)

a crucial crossroads for trade through land, sea and air routes linking the North and the

South of Europe;

4) In addition, the country has a diversified industrial economy. Italian manufacturing

industry ranks second in terms of value-added and exports in Europe, behind Germany;

5) “Made in Italy” represents excellence and creativity all over the world;

6) Italy also offers a skilled workforce at relatively low cost compared to other advanced

economies;

7) The Italian economy is characterized by a unique system of high-quality small and

medium-sized enterprises (SMEs), often located in clusters of excellence that provide

major external economies for specialist producers and thus offer significant opportunities

for MNEs. Italian SMEs can be either very demanding customers that cooperate with their

suppliers of machinery and intermediate goods for the development of advanced products

(e.g. chemistry for the textile and leather industries, tiles, furniture, textiles and clothing,

electronics and industrial machine tools) or efficient suppliers of specialized machinery

and original technological solutions, thanks to their well-known design and engineering

investments in Europe: are Italian regions doomed?, in Rivista di Politica Economica, vol. 95, no. 1-2/2005, p. 319 et seq. 6 See M. MUTINELLI – L. PISCITELLO, Inward FDI in Italy and its policy context, Columbia FDI Profiles, Country

profiles of inward and outward foreign direct investment issued, Vale Columbia Center on Sustainable International

Investment, 2 December 2011, available at

http://academiccommons.columbia.edu/download/fedora_content/download/ac:142674/CONTENT/Italy_IFDI.pdf; R.

PIANO, Economia verde e periferie: le mie sfide da senatore a vita, in La Repubblica, 14 September 2013, p. 9: «There is no

country better equipped than Italy to handle a future of sustainable economy. Italy is the most beautiful country of the world,

and beauty is today a researched good. We have enormous cultural “fields”, a unique mix of natural beauties built over the

centuries, a central position in the Mediterranean, a climatic situation ideal for producing clean energy, with sun, water,

wind». [authors’ translation]

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capabilities, or even flexible and efficient partners for the outsourcing of production

processes;7

8) The presence of strong local SMEs provides MNEs with an opportunity to take over

specialized firms endowed with complementary resources and know-how;

9) Finally, Italy offers a high quality of life.8

According to Il Sole 24 Ore, the following are the strengths of Italy:

1) Strong tourism potential;

2) Still important role of industry;

3) Improved product range and highly profitable niches (e.g. luxury clothing, household

appliances, foodstuffs, machinery);

4) Low household debt and strong saving capacity;

5) Government debt predominantly held by residents.

Invitalia, Italy’s new agency to assist inward investments, gives the following ten reasons:

1) A strategic position in Europe and in the Mediterranean Sea. Located in the heart of the

Mediterranean Sea, Italy is the main crossroads linking southern Europe to the rest of the

continent;

2) Innovative clusters. Italy ranks 2nd in the world for business innovation- oriented clusters;

3) Manufacturing industry. Italy is the 5th manufacturing economy worldwide and 2nd in

Europe;

4) Market size. Italy is the 10th largest market in the world, with significant economies of

scale;

5) International dimension. Italy ranks 12th worldwide on FDI ranking by source and it is one

of the world’s 10th leading exporting nation with almost € 500 billion of export;

6) Value chain. Italy produces goods high on the value chain with export-oriented companies

present along all the chain;

7) Nature of competitive advantage. 11th in terms of unique products;

8) Business culture. More than 4 million entrepreneurs;

9) Good position on sector. High growth potential Fashion, home furnishings, capital goods,

aerospace, robotics, pharma and biotech;

10) Cultural heritage. First worldwide for UNESCO World Heritage sites.

From a legal standpoint, Italy has signed 93 bilateral investment treaties (BITs), 71 of which

have been ratified.9 The first BIT was signed with Chad in 1969, but most of Italy’s BITs were

concluded in the 1990s (50) and in the 2000s (28). Italy has also signed double taxation treaties

(DTTs) with 93 countries, within and outside the EU, to avoid double taxation on income and

7 See I. PANICCIA, Industrial Districts: Evolution and Competitiveness in Italians Firms, (Cheltenham: Edward Elgar

Publishing) 2002. 8 According to the latest report on the 2011 Quality of Life Index, available at

www1.internationalliving.com/qofl2011/ (last visited on 21 September 2014). 9 The traditional favorable Italian attitude toward IFDI appears not to be under discussion. Foreign firms may freely

repatriate profits, dividends and capital, subject only to reporting requirements. Italian law guarantees the convertibility, at

prevailing exchange rates, of profits and capital from duly registered investments. Government grants are equally awarded to

both Italian and foreign affiliates (with some exceptions in the film industry and the shipping industry).

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property.10 Draft agreements with additional countries are at the discussion stages. Furthermore, there

are forms drawn up unilaterally by the tax authorities that can also be used to facilitate FDI.

FDI performance of the economy lags behind that of most other economies in Europe.

A relatively low attractiveness of IFDI in Italy for IFDI is reflected in the UNCTAD survey of

several prominent international companies and institutions.11 Moreover, invariably, the most

important international rankings that measure the health and competitiveness of nations, including the

World Competitiveness Scoreboard and the Competitiveness Index, assign lower positions on the list

to Italy, which is not only the last in the club of small and large advanced economies, but sometimes

even behind many emerging markets. Italy ranks only 40th in the ranking on the World

Competitiveness Scoreboard 2010 of the IMD 12 and 48th in the ranking by the Competitiveness Index

2010- 2011 of the World Economic Forum.13

However, the potential of Italy as a host for IFDI is much higher than that indicated by the

country’s IFDI performance thus far. The current difficulties of the country, the Eurozone crisis and

the recent OECD downward revision of growth forecasts certainly do not encourage a recovery in the

short term of IFDI in Italy; but if the reforms that the Monti and Letta Governments were able to

introduce and that the Renzi Government has introduced and the further reforms that it is planning,

achieve the objective of fiscal consolidation and at least partially mitigate the well-known

inefficiencies of the country (e.g. energy cost, infrastructure, legislation, and bureaucracy), favouring

the recovery of Italy’s international credibility and competitiveness, foreign enterprises as well as

Italian ones could increase their presence in the country by fully developing the growth potential

stemming from the strengths of the Italian industrial system.

Figure 1 – Italy’s 2014 doing business overview

The World Bank - IFC publication Doing Business 2013,14 and its 2014 update, shed light on

how easy or difficult it is for a local entrepreneur to open and run a small to medium-size business

when complying with relevant regulations: it measures and tracks changes in regulations affecting 11

areas in the life cycle of a business:

1) Starting a business;

2) Dealing with construction permits;

10 For more information, see

www.finanze.it/export/finanze/Per_conoscere_il_fisco/fiscalita_Comunitaria_Internazionale/convenzioni_e_accordi/convenz

ioni_stipulate.htm (last visited on 21 September 2014). 11 UNCTAD, World Investment Prospects Survey 2010-2012, (New York and Geneva: United Nations) 2010,

available at http://unctad.org/en/docs/diaeia20104_en.pdf (last visited on 21 September 2014). 12 Available at www.imd.org/research/publications/wcy/upload/scoreboard.pdf (last visited on 21 September 2014). 13 Available at www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2010-11.pdf (last visited on 21

September 2014). 14 WORLD BANK – IFC, Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises,

Economic Profile: Italy, Washington, 2013.

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3) Getting electricity;

4) Registering property;

5) Getting credit;

6) Protecting investors;

7) Paying taxes;

8) Trading across borders;

9) Enforcing contracts;

10) Resolving insolvency; and

11) Employing workers.

The “indicators” used refer to a specific type of business, generally a local limited liability

company operating in the largest business city. Other areas important to business – such as an

economy‘s proximity to large markets, the quality of its infrastructure services (other than those

related to trading across borders and getting electricity), the security of property from theft and

looting, the transparency of government procurement, macroeconomic conditions or the underlying

strength of institutions – are not directly studied by Doing Business.

Figure 2 – Italy’s 2014 Doing Business indicators and rank

On the background of these important and meaningful indicators, we will provide an overview

of setting up a company in Italy, VISA regulations and opportunities, labour principles and tax

regime, in order to assess whether investing in Italy might represent an opportunity or a risk for a

prospective investor.

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2. Favourable corporate forms. Setting up a company. General overview and choice of

corporate structure

Starting an activity is fairly easy. An investor can choose whether to entertain the activity as an

individual business or whether to set-up a more complex structure. The latter could take the form of

either a partnership, a limited liability company or a corporation based on shares. As a rule of thumb,

only the two last vehicles guarantee the privilege of limited liability, i.e. the segregation of the

company’s assets from the shareholder’s and the shielding of investors from any outstanding liability

that the company may face.

Setting up a partnership, an LLC (S.r.l.) or a public company/stock company (S.p.A.) requires

the services of a notary public, still an important figure of Italy’s corporate law, who is to give ‘public

faith’ to the articles of incorporation, and enrolling in the Companies Registry (Registro Imprese).

The costs of setting up range around € 3.500,15 while ordinary annual costs of keeping up the

partnership/company are in the figure of € 3.000 for a partnership and €5-6.000 for a company,

including registration and estimated accounting fees.

The regulation of partnerships and corporations is contained in the Italian Civil Code and in a

special statute. The entire area has been deeply reformed a decade ago with the Legislative Decree of

17 January 2003, No. 6, which purported to renew Italy’s company law and deal with the challenges

of the new millennium, mainly by replacing older rules and conceding freedom to the shareholders to

determine the content of bylaws and the rules to be observed by the company.

Simple partnerships are, as in other countries, characterized by the unlimited joint and several

liability of partners for partnership’s obligations, the power of each partner to act on behalf of the

company (which can be limited in the articles of partnership) and the non-transferability of the partner

status without the consent of the other partners.

As to LLC and public companies/stock companies, the two enjoy legal personality, acquiring

upon incorporation the status of juridical person (persona ficta), a subject of law autonomous from its

shareholders. This is mainly the theoretical premise of limited liability and of the separation between

property of shares and management of the company. Furthermore, shares and LLC quotas are in

general freely transferable.16 The minimum capital to set up a limited liability company (S.r.l.) is €

10.000, while for a public company/stock company (S.p.A.) at least € 120.000 must be underwritten.

In both cases, only 25% of the capital must be actually paid in upon incorporation, except where there

is a sole shareholder, who should pay the entire capital.17

Quite recently, Law Decree No. 76/2013 introduced the possibility for LLCs to have a capital

of less than € 10.000, provided that the capital is paid in full and that a fifth of profits is kept as a

reserve for purposes of transformation into capital or to cover losses until capital and reserves

together reach the threshold of € 10.000.18

15 WORLD BANK – IFC, Doing business 2014. Economy profile: Italy, available at

www.doingbusiness.org/data/exploreeconomies/italy/~/media/giawb/doing%20business/documents/profiles/country/ITA.pdf

?ver=2 (last visited on 21 September 2014), p. 21. 16 To give a few numbers, according to the annual report of Union of the Italian Chambers of Commerce, in 2013

there were 1.443.732 companies, 1.111.735 partnership and over 3.000.000 individual enterprises. See UNIONCAMERE,

Rapporto Italia 2014. L’economia reale dal punto di vista delle Camere di Commercio, Rome, 2014, available at

www.starnet.unioncamere.it/Rapporto-Italia-2014_5A45 (last visited on 21 September 2014). 17 At least 25% of the capital must be actually paid in by the shareholders. 18 In 2012 a special type of ‘simplified’ LLC with reduced capital was introduced. In its first version this model was

designed only for persons under the age of 35 years, to help them starting up a business. Later, in 2013, an ‘over 35’ LLC

with reduced capital was also introduced and later the two ‘new’ models were merged together, essentially removing the age

limit to the first. Art. 2463-bis CC, thus, gives the possibility for one or more individuals (only natural persons) to set up an

LLC with a capital of less than € 10.000, and to get rid of any setting up duties such as Notary and Registry of Companies

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As far as public companies/stock companies are involved, Art. 74, Presidential Decree of 29

September 1973, No. 600, mandates that all shares must be nominal, excluding, thus, the possibility of

having a société anonyme in Italy.

Simplification of procedures has taken place throughout the years, reducing the number of

applications and filings necessary and establishing a unique online procedure (Comunicazione unica)

that issues the new company’s tax identification number, VAT number, and ensures registration of the

company with the Social Security Administration (INPS) and Accident Insurance Office (INAIL).

Filing can be made directly by the company or by the Notary public. In principle, all communications

to a company, including any communication by public bodies, should take place through the

company’s certified email address, which can also be used to serve process on the company.

The preceding considerations apply to any partnership or company to be set up in Italy. When a

foreign company or individual wishes to do business in Italy, additional rules apply. ‘Foreign’ here

means outside the European Union, while for intra-Union investments and activities the principle of

free circulation applies.19

The first element that a foreign investors has to ascertain when considering doing business in

Italy is whether the ‘reciprocity’ requirement is satisfied. Foreigners are, in fact, allowed to enjoy

civil and economic rights in Italy only if Italians would enjoy an equivalent status in the country

considered – a requirement which is easily satisfied when the foreign citizen belongs to a country

holding a specific international agreement with Italy on trade or investment.20

Foreign investment in Italy may take several forms, such as:

a company established in Italy by natural persons or foreign legal persons;

foreign company’s secondary registered office or branch office;21

one-man enterprises established by a foreign investor;

foreign company’s representative office.

While for the first two a registration in the Companies Registry is needed, the others only

require to be registered with the competent Economic and Administrative Index (Repertorio

Economico Amministrativo, REA).

The Government is trying to rationalise and unify all agencies involved in promoting

investments in Italy, focusing all resources in a new agency named “INVITALIA”. Invitalia is

entrusted with the task of supporting foreign companies wishing to invest in Italy, providing a number

of services and resources.

Three last elements should be highlighted as part of this general overview. The first is that, as

in many other countries, in certain instances it is possible for claimants to pierce the corporate veil

fees. The counter part, however, is that the simplified LLC must adopt the model bylaws approved by the Government and

that the correspondence of the company has to specify the amount of the capital and that the LLC is ‘simplified’. Given that,

later in 2013, the Legislator has allowed ordinary LLC also to have a capital of less than € 10.000, without the need of

adopting the Government approved bylaws and without the limit to natural persons, it is likely that the ordinary LLC model

will be used, instead of the ‘simplified’ one. 19 Other exemptions refer to citizens of one of the States of the European Economic Area (Iceland, Liechtenstein, and

Norway) and persons with refugee or stateless status. 20 The Ministry of Foreign Affairs maintains a list of Countries that can be viewed (in Italian) at

www.esteri.it/MAE/IT/Ministero/Servizi/Stranieri/Elenco_Paesi.htm (last visited on 21 September 2014). 21 There is a distinction between branch and secondary registered offices, in that the first is managed directly by the

foreign company and needs only to be registered in the Register of Economic Activities, while the second is managed by a

representative with power of attorney and must be registered with the Registry of Companies. In practice, however, the

difference is minimal.

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and overcome limited liability, holding directors and shareholders liable for the company’s debts

(especially for torts).

Secondly, a young but promising feature of the Italian system, which is relatively unheard of in

other countries, is the establishment of networks between enterprises. These are contractual or even

more stable forms of aggregation that allow SMEs to easily get together to pursue a specific and

common programme, such as participating to a public procurement bid, make an R&D investment,

rationalize the chain of supply or be more competitive on the export market. The interest of these new

forms of aggregation is paramount, especially because they allow structurally small Italian companies

to achieve bigger targets, and because it is one of the focus of the next seven year of European Union

FSE funding.

The last element is that in Italy, since the Legislative Decree No. 231/2001 (the Italian anti-

corruption statute), legal persons may be directly liable for any listed crimes committed by

individuals who represent or manage a company (or any relevant autonomous business unit), or de

facto manage and control a company (“Top Management” – “Soggetti in posizione apicale), or

individuals who are subject to the direction and supervision of the Top Management (“Individuals

under Top Management’s Control” – “Soggetti sottoposti all’altrui direzione”), if any of the listed

crimes relevant for 231 purposes have been committed, either in Italy or abroad, in the company’s

interest or for the company’s benefit (“Company’s liability”). Such crimes include: crimes against

public authorities and/or public faith (fraud, corruption, embezzlement, etc.), so-called corporate

crimes, anti-money laundering, privacy, safety on workplaces, etc.; unless an “Organisation,

Management and Control Model” is adopted by the company and effectively monitored by a Board of

surveillance. Sanctions range from fines, to suspension of activities for a period of time, and in most

serious cases to dissolution of the company.

In the end, Italy’s company law and business environment may be regarded as flexible and well

developed both from a legal and a practical point of view, making it fairly easy for foreign investors

to set up and run a business. Further simplification of procedures is likely to take place in the near

future, while a reduction of costs, which are mainly professional costs, would prove beneficial.

2.1. Società per Azioni (S.p.A.)

The minimum capital for an S.p.A. is of € 120.000, with a higher minimum for banking,

insurance and mutual funds. An S.p.A. may have a single shareholder, but the capital must be fully

paid up.

The contributions of each participant are represented by shares.

In the event of contributions in kind (property in kind or credits), a sworn expert’s valuation (by

a court-appointed expert) of such contributions is required.

Members of an S.p.A. are not permitted to contribute undertakings to supply personal activities

or services in favour of the company.

The company may be managed by a sole director (amministratore unico) or by a Board of

directors (Consiglio di Amministrazione) appointed by the shareholders meeting (“ordinary”

governance structure), which also appoints statutory Board of auditors (Collegio sindacale),

consisting of three (or five) effective and two substitute members (sindaci).

Alternatively the management may be entrusted to a management board (Consiglio di gestione)

of at least two members, appointed by a Supervisory control committee (Consiglio di sorveglianza) of

at least three members, which is responsible for the functions of the Board of statutory auditors and

with those functions reserved in the traditional model to the shareholders meeting: the members of the

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supervisory board are appointed by the shareholders meeting (“dualistic” governance structure, two-

tier model).

A further governance alternative is the so-called “monistic” model (once-tier model) with a

Board of directors responsible for management and control, appointed by the shareholders meeting,

and a supervisory control committee elected internally from amongst the members of the Board of

Directors itself.

Neither the monistic nor the dualistic models include a statutory board of auditors, and the

accounting controls are carried out by an audit firm.

If the company has recourse to the market of risk capital and is required to draw up

consolidated accounts, the control of the accounts is reserved to an auditing firm enrolled in the

registry held by the Ministry for Justice.

2.2. Società a responsabilità limitata (S.r.l.)

The minimum capital of an S.r.l. is € 10.000 and the minimum paid in capital requirement is

25%. Therefore, at incorporation 25% of the company’s capital must be paid and deposited in a bank

account, but the payment shall also be replaced by an insurance policy or by a bank guarantee.

The contributions of each participant are represented by “quotas” and not by shares (hence the

term “quotaholder” in lieu of “shareholder”).

In lieu of the contributions in cash, members are permitted to submit an insurance policy or a

bank guarantee.

In the event of contributions in kind (property in kind or credits), a sworn expert’s valuation of

such contributions is required.

Members of an S.r.l. are also permitted to contribute undertakings to supply personal activities

or services in favour of the company, that must be secured, at the time of setting up, by an insurance

policy or a bank guarantee for their entire value; the articles of association may allow security by

means of a deposit of the corresponding value in cash.

The company may be managed by a sole director (amministratore unico) or by a Board of

directors (Consiglio di amministrazione).

The company is required to appoint a statutory board of auditors if the capital is of € 120.000 or

more or if, although having a lower capital, in two consecutive financial years, two of the following

limits are exceeded:

a) the value of the assets in the balance sheet is of € 3.125.000;

b) the revenue from sales and services is of € 6.250.000;

c) the average number of employees is 50 persons during the financial year.

2.3. Choice of structure: S.p.A. vs. S.r.l.

Foreign investors who decide to set up a subsidiary company in Italy generally prefer a Società

a responsabilità limitata (S.r.l.), i.e. a private limited liability company, which is suitable for

companies with a sole “quotaholder” (or few “quotaholders”) and for larger operations a Società per

Azioni (S.p.A.), i.e. a limited liability public company/stock company.

In both types of company the liability of the shareholders (in an S.r.l.: “quotaholders”) is

limited to the par value of their shares (in an S.r.l.: “quotas”).

The S.r.l. is by far the more popular type of limited company in Italy. An S.r.l. cannot be listed

on the stock exchange. With the Italian Act on Company Law (Legislative Decree of 17 January 2003,

12

No. 6), in force from 1st January 2004, the personal character of the S.r.l. has been reinforced, together

with the large degree of freedom given to its members to agree the terms and conditions to govern the

company. The SRL places itself midway between a limited liability partnership (società di persone)

and a public company.

An S.r.l. has simpler rules for passing shareholders resolutions (without holding a formal

meeting); the transfer of quotas may be subject to the approval (gradimento) of all members (Art.

2469, para. 2, Italian Civil Code, hereinafter CC); it is possible to exclude a member for just cause

(Art. 2473-bis CC).

An S.r.l. may issue bonds (so-called “titles of debit” – titoli di debito) that however may be

subscribed only by professional investors (Art. 2483 CC).

Certain activities may only be conducted by an S.p.A.

An S.p.A. may issue bonds and other “financial instruments” carrying patrimonial rights but

with no voting rights at the shareholders meeting (Art. 2346, last para., CC) in return for contributions

(by shareholders or third persons) of cash, receivables or other assets, including contributions in kind

such as work or services or other assets (e.g. know-how).

An S.p.A. can issue special categories of shares, such as: azioni di godimento (issued to owners

of reimbursed shares), connected shares (azioni correlate) that grant rights connected to the results of

the corporate activities in a given sector (Art. 2350, para. 2, CC), savings shares (azioni di risparmio,

if the company is listed; this is the only category where bearer shares are permitted), redeemable

shares (azioni riscattabili, Art. 2437-sexies CC), shares in favour of employees (azioni a favore dei

prestatori di lavoro, Art. 2349, para. 1, CC).

Bonds (obbligazioni, Art. 2411 CC) and other participating financial instruments (strumenti

finanziari partecipativi, Art. 2346, no. 6), CC) carrying patrimonial rights or also administrative rights

(for example: duty of the Board to report periodically on status of the investment, right to appoint a

member of the Board), but only limited voting rights (Art. 2351, no. 5), CC) in return for the

contribution (apporto) by shareholders or third persons, of works, services or other assets (e.g. cash,

goods, receivables, know-how, etc.), such contributions are not recorded as capital contributions.

Furthermore an S.p.A. can set up separate funds reserved for a specific transaction (Art. 2447-

bis CC) having a value not exceeding 10% of the net assets of the company.

Special care must be taken when choosing the type of company, especially where there will be

minority shareholders in the company.

In such cases it is advisable to choose the Società per Azioni (public limited company/stock

company) rather than the Società a responsabilità limitata (private limited liability company), for the

reasons given hereafter on the protection afforded to minority shareholders (“quotaholders”) in the

S.r.l.

The form of the parent company is irrelevant to the choice of company type.

As regards the regulatory restrictions, to proceed with the setting up of a company it is

necessary, inter alia, for the company to have authorisation from the competent authority where it

intends to carry out determined types of business.

In the case of banking activity, for example, authorisation is required from the Bank of Italy.

Also in the case of insurance businesses, authorisation is required from the Minister of Trade and

Industry. Professional sports clubs must also be registered on the Companies’ Register and to do so

must demonstrate that they have obtained affiliation approval from the CONI Federation.

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2.4. Conditions and steps to be taken to establish a subsidiary company in Italy

The following are the conditions required to establish an Italian company:

- before a company can be formed, the corporate capital must be fully subscribed (although

not fully paid up);

- both individuals and corporate entities may become shareholders of an S.r.l. or an S.p.A.;

- in case of a company with a single founding member, 100% of the contributions in cash

must be fully paid up at the time of setting up the company; when the founding members

are two or more, at least 25% of the contributions in cash must be paid up;

- in case of contributions in kind or contributions of receivables a sworn appraisal report

must be submitted;

- the directors need not be shareholders nor Italian nationals, and not even residents of Italy;

only individuals (and not companies) may be appointed as directors of a company in Italy.

The steps to be taken to establish a company are as follows:

- the founding member or members are required to appear before a notary public to sign a

memorandum and articles of association (atto costitutivo e statuto) in the form of a public

deed (atto pubblico);

- the memorandum of association and the articles of association (statuto) are filed with the

Register of Enterprises (Registro delle imprese). Upon enrolment in the Register of

Enterprises the company becomes a separate legal entity.

2.5. Registrations

Since 1st April 2010, it is mandatory that the applicant electronically file a single notice

(Comunicazione Unica) with the Register of Enterprises. This includes issuance of the tax

identification number (codice fiscale), VAT number, and registration with the Social Security

Administration (INPS) and Accident Insurance Office (INAIL). The applicant must attach the forms

requested by (i) the Registry of Enterprises for the registration, (ii) the Italian Tax Authorities for

immediate starting of business, and (iii) by INPS and INAIL for the registration with these

Administrations.

Under Law Decree No. 185/2008, converted by Law of 28 January 2009, No. 2, companies are

now required to provide a certified email address on the Registry of Enterprises registration form.

After the single notice is filed, the enterprise receives all the documents within 7 days. All notices,

communications and receipts of filing are sent to the Company’s certified email address. In detail:

• the Company receives immediately a reference number for the registration procedure as

well as the receipt of the filing of the Single Notice with the Register of Enterprises;

• immediately the tax identification number and the VAT number;

• within 5 business days, the Registration with the Register of Enterprises;

• within 7 days INAIL documentation;

• within 7 days INPS documentation.

Furthermore, Law No. 296/2006 provides that the newly established company, before

employing personnel, must notify the Provincial Labour Office (Direzione Provinciale del Lavoro)

one day before from the start of the employment relationship.

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Further registrations are required as follows:

- if the company is engaged in the sale and distribution of merchandise, whether as wholesaler

or retailer, the company, its director having legal representation and the sales director must

be enrolled in the special registry for trade operators (Registro Esercenti Commercio – the

so-called R.E.C.) held at the Chamber of Commerce;

- if the company performs business as a commercial agent the company and the director

having legal representation must be enrolled in the special register of trade agents (Ruolo

degli Agenti e Rappresentanti di Commercio) held at the Chamber of Commerce.

3. Italian legislation on corporate groups. The concept of “management” and “co-ordination

of companies”

Italian law does not provide a definition of “group of companies”, preferring to emphasize the

notion of “management and co-ordination of companies” by others.

According to Arts. 2497-septies and 2497-sexies CC, management and co-ordination is

presumed when it is exercised by a company that controls another, which happens (Art. 2359 CC)

when:

1) a company has a majority of the equity in another company;

2) a company has enough votes to be able to exercise a dominant influence over the ordinary

general meeting of another company;

3) a company exercises a dominant influence over another company by virtue of binding

contractual conditions.

The management and co-ordination in question may also derive from a contract between two

companies or by articles in their company by-laws.

What is important therefore is the fact that a company manages and co-ordinates another

company or companies. From an economic point of view these companies are considered a group, but

the “group” is not a legal person as such with significant and specific autonomous rights from a

judicial standpoint. Legal theory, on the other hand, traditionally makes a distinction between two

types of group, a “horizontal” group with a joint or unitary policy that derives from contractual

agreements between several companies that are not subordinate one to the other, and a “vertical”

group in which the unitary direction is achieved by means of one company exerting its control over

others. Only the so-called vertical group is a true group for these purposes and only where there is a

unitary management (presumed when there is control, unless the contrary is demonstrated) does law

in question apply.

As regards the consequences for a company that exercises its powers of management and co-

ordination over the other, and specific liability, the matter is dealt with by Art. 2497 CC: «Companies

which, when exercising management and co-ordination over a company or companies, act in their

own or another's business interest in violation of the principle of correct company and business

management of the companies concerned, are directly responsible to the shareholders of these for any

prejudice to the profitability of the companies and to the value of the shareholdings, as well as

towards the companies' creditors for any damage to the integrity of their assets. There is no liability

where there is no such damage in the light of the overall result of the management and co-ordination

work, or where it is wholly remedied by corrective measures taken.

15

Anyone who has taken part in the damaging fact or event is jointly liable, up to the limit of the

advantage obtained, where a wilful advantage has in fact been gained.

The shareholder and the company creditor may act against the company or other corporation

that exercises such management and co-ordination, only if they have not been satisfied by the

company subject to said management and co-ordination activity. In the cases of bankruptcy,

involuntary winding up or extraordinary administration of the company being managed or co-

ordinated by others, its creditors' action is exercised by the receiver or liquidator».

In short, it is possible to bring legal actions against the company that exercises such

management and co-ordination activity if the following circumstances apply:

a) there has been management and co-ordination activity, or it can be presumed there has

been such activity;

b) the company has acted in its own business interest or that of others;

c) there has been an infringement of the principles of correct company and business

management;

d) the infringement of the aforementioned principles has been prejudicial to the company

shareholders and/or creditors of the company subject to the management and co-ordination

activity.

4. Civil liability

4.1. Civil liability of individuals such as directors/managers, and of legal entities such as the

parent company (e.g. corporate responsibility including directors and/or parent company

accounting principles; concept of “trust” and “reliance on parent company”)

A distinction is made by Italian Civil Code, between the civil liability of directors to the

company, to creditors of the company and to individual shareholders or third parties; the rules set

forth apply both to members of the Board of directors and general directors.

As regards liability to the company, Art. 2392 CC states that directors:

a) must carry out the duties imposed on them by the law and by the articles of association

with the diligence that would be expected of someone in that position with those specific

competences;

b) are jointly liable to the company for damage arising as a result of any failure to fulfil these

duties, unless there are powers specific to the executive committee itself or functions

directly attributed to one or more of the directors.

The directors are jointly liable if being aware of the prejudicial facts, they have failed to take

measures to prevent the event’s occurrence or to prevent or limit the resulting damage; however

liability does not extend to the directors who, without negligence, have recorded their dissent without

delay in the Board meeting minutes book, immediately notifying the chairman of Board of statutory

auditors in writing.

The civil liability action can be brought within five years of the director leaving office and is

decided on by a resolution of the company, with the usual majorities applying.

In an S.p.A., minority shareholders representing at least one fifth of the company’s share capital

have the right to bring a civil liability action (see herabove).

Art. 2394 CC provides that creditors of the company can also bring a civil liability action

where:

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a) there has been a failure on the part of the directors to maintain the integrity of the

company’s assets;

b) the company’s net assets are insufficient to pay the creditors.

The abovementioned civil liability suits (by the company and by the company’s creditors) are a

matter for the court appointed bankruptcy commissioner in the event of bankruptcy of the company:

statistically, the great majority of civil liability actions that have been decided by the courts have been

brought by bankruptcy commissioners.

Finally, an “individual” action can be brought by each shareholder or by a third party, pursuant

to Art. 2395 CC, where they have been damaged by negligent or fraudulent actions of the directors.

Such action which is independent of any damage that may have been suffered by the company and

deals with direct damage caused by the actions of directors to the detriment of shareholders or third

parties.

In the event of actions of the directors that have caused damage to third parties, the third party

would be entitled to institute an action for damages also against the parent company for which the

directors have acted (reference should be made to the liability of the company exercising management

and co-ordination control over another company as per art. 2497 CC, as discussed above), subject to

proof that directions emanating from the parent company were issued in the interest of the latter with

damages resulting in the company subject to the management and co-ordination control.

4.2. “Piercing the corporate veil”

For this issue reference should be made again to Art. 2497 CC, as discussed above, on the issue

of liability of the company exercising co-ordination and management control over another company.

Any loans to a company made by another company exercising coordination and management

control are treated as shareholder loans (see Art. 2497-quinquies CC), hence under art. 2467 CC the

reimbursement of such loans is not permitted unless all the other creditors have been satisfied (and if

the reimbursement has taken place within the year preceding a bankruptcy order of the company, it

will have to be returned) – the restriction laid down by art. 2497-quinquies CC overrides any different

agreements made between the parties.

According to Italian law the group is not an actionable entity; each company that belongs to the

group may therefore be deemed a separate legal person from each of the others.

4.3. No liability threshold

No liability threshold exists under Italian law.

Any third party that considers itself damaged by the company, may claim compensation for

damages without limitation. Of course, limitations of liability may be inserted into contracts between

the company and third parties, nevertheless under the Civil Code any limitations of liability for

intentional wrongdoing or gross negligence are void.

A peculiarity of Italian law is that in the case of a standard contract of one of the parties, the

limitation of liability in favour of the party that has presented the standard contract is only effective

against the other if the clause in question has been specifically approved and signed. The subject is

covered by Art. 1341 CC.

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4.4. The use of “comfort letters”

Banking practice includes the use of what are commonly referred to as lettres de patronage (or

comfort letters), consisting of a document signed by a “patron”, generally made out to a bank, to

secure the bank’s consent in maintaining or extending the opening of a line of credit in favour of the

sponsored party (patrocinato), that is connected with the former, generally the patron is a majority

shareholder of the sponsored party.

The patron thus remains outside of the contractual relationship established between the bank

and the sponsored party that benefits of the credit line.

Legal theory and court rulings have made a distinction between two different types of letter:

weak letters, with which the patron informs the bank of the control and influence that it

exercises over the sponsored party, generally accompanied by an obligation to inform the

financial institution of any changes that might occur in the relationship between the

controlling and controlled parties;

strong letters, in which the patron undertakes to reimburse the loan should the controlled

company become insolvent;

As regards the nature of the obligations that arise under the provisions of these letters, it has

been held that letters that are merely informative in their content come within the area of what is

referred in Italian law as “pre-contractual liability”, with the resulting obligation to observe the

general principles of good faith and correct conduct. The patron enters into the negotiations between

the bank or other financial institution and the controlled company for the purpose of facilitating the

positive outcome of the negotiations, hence creating reasonable expectations that this will in fact

occur.

The so-called strong letters fall within the category of unilateral contracts governed by Art.

1333 CC (Contract with obligations binding only on the offeror) and thus lead to potential exposure

to strict contractual liability.

5. Criminal and administrative liability

5.1. Statutory criminal offences of legal entities of which a parent company has to be aware

when doing business in Italy

Before the approval of Legislative Decree of 8 June 2001, No. 231, an ancient legal principle

applied in Italy that was expressed in Latin as societas delinquere non potest – criminal liability was,

therefore, exclusively the realm of individuals and hence individual directors, auditors, etc.

Legislative Decree of 8 June 2001, No. 231 changed direction on this and laid down provisions for

holding legal entities liable criminally for unlawful administrative acts, and established (Art. 5) that

«the entity is liable for criminal actions committed in its interest or to its advantage, by persons who

represent, administer or manage the entity or one of its organisational units with financial and

functional autonomy, as well as by persons exercise, officially or “de facto”, management or control

18

functions over the company or persons subject to management or supervision of the above-referred-to

persons».22

Nevertheless the entity is not liable if the individual who commits the crime acts exclusively in

his or her own interest or of a third party. The legal entity shall exclude liability if it can prove that

(Art. 6):

a) the company’s governance body has adopted and efficiently implemented an

“organisational and management model” suitable to prevent crimes of the kind that have in

fact occurred;

b) the task of monitoring the effectiveness and compliance with the model and to update the

model has been entrusted to the Supervising body (Organismo di Vigilanza) with

independent powers of initiative and control;

c) the individuals have committed the crime while fraudulently breaching the organisational

and management model;

d) there has been no omission of or insufficient supervision on the part of the Supervising

body.

In practice if the entity establishes for itself a self-regulation code and if this code is effectively

applied and implemented in the company, the entity can argue that it should not be liable for a crime

committed by an individual who has acted in breach of its self-regulation code.

5.2. Directors, management, auditors and/or other advisors (e.g. lawyers) can be held liable

for criminal offences

Directors, managers, auditors and other advisors can be deemed criminally liable for actions

that they have carried out on behalf of a determined company.

Their liability result from the breach of criminal laws that expressly provide for crimes that can

be committed by directors, auditors and general directors of the company, or by “concurrence” where

a person concurs, i.e. with the director or auditor in the commission of the crime.

From this point of view consultants, including lawyers, may be considered criminally liable to

the extent that it can be shown that they have concurred in, i.e. “ provided assistance”, in committing

the criminal offence.

Through the laws governing “concourse” the criminal liability may also be declared of de facto

directors, i.e. those who do not appear in the official list of directors but do in practice manage the

company.

What has been said up to this point generally applies to all companies, i.e. there is no specific

law applicable only to groups. The director of the parent company may however be criminally liable if

he has “concurred” in the commission of the crime.

One particular case of liability of company directors who are part of the same group is

envisaged by Legislative Decree of 8 July 1999, No. 270 dealing with the subject of «extraordinary

administration of large companies in a state of insolvency».

This is a complex law that regulates the insolvency of large businesses.

To summarise the position, where there is a single management of a particular group of

companies, the directors of the companies that have misused that management are jointly liable, with

22 Authors’ translation.

19

the company that has been declared insolvent, for any damage caused to the company itself as a

consequence of the instructions imparted.

6. Branch office (sede secondaria) of foreign company

6.1. Description and Pros. & Cons.

A foreign company has the right to establish one or more branch offices in Italy (Art. 2508 CC).

The Italian branch office of the foreign corporation does not have separate legal personality, in that it

is an extension of the foreign entity and depends on its headquarters, it uses the same name and legal

form of the foreign company, does not have its own internal governing body, but is managed directly

by the governing body of the foreign company which appoints a local permanent legal representative

(preposto or legale rappresentante).

Pros & Cons.:

Pros.:

No need to capitalise;

Freedom as regards transactions with the foreign company;

Free flow of revenues from branch office to parent corporation with no withholding taxes at

source.

Cons.:

Need to file annual balance sheets of both the branch office (in order to prepare the Italian

income tax return) and the foreign corporation;

Liable to pay Italian corporate income taxes etc. on profits;

Difficulty in obtaining local bank finance;

Further, the foreign company is liable for the contractual and other obligations incurred by the

Italian branch office and becomes subject to the jurisdiction of the Italian courts in case of

insolvency of branch.

6.2. Steps to be taken to register a branch office

The setting up procedure involves filing documents with a notary public in Italy and enrolment

in the Companies’ Registry. The following are required:

- notarised and legalised copy of the appropriate governing body under the foreign

applicable law (Board resolution; Shareholders’ resolution) of the foreign company

resolving to set up the Italian branch office;

- notarised and legalised copy of memorandum and articles of association of the foreign

company;

- certificate of existence of the foreign company attesting that it is duly enrolled in the

competent companies’ registry and in good standing.

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7. Representative office (ufficio di rappresentanza) of foreign company

7.1. Description and Pros. & Cons.

The Italian representative of the foreign corporation does not have separate legal personality. It

is administered by a local director (preposto). A representative office may be suitable, for example,

for liaising with Italian suppliers of merchandise, supervising the performance of orders placed by the

foreign company, carrying out inspection and quality control prior to shipment of the merchandise,

and performing follow-up procedures to ensure prompt shipment of the ordered goods (Italian “buying

office” or representative office of the foreign company).

The representative office will be a suitable vehicle on condition that it does not perform any

operational trading activities (i.e. it shall not sell merchandise or provide services to Italian

customers), and that the Italian suppliers will invoice the foreign company. Unlike an operational

Italian resident company or a branch office, the activities carried out by the representative office are

be exempt from liability to income tax based on the OECD Model Tax Treaty (for the avoidance of

double taxation on income).

The Italian tax legislation follows the principle that the business income (reddito di impresa) of

a non-resident company is taxable in Italy only if it is earned through a permanent establishment:

Under Art. 5, letter (d) of the OECD Model Tax Treaty, «the maintenance of a fixed place of business

solely for the purpose of purchasing goods or merchandise, or for collecting information for the

enterprise» shall not be considered as creating a permanent establishment.

Nevertheless a dispute with the Italian tax authorities might still arise on the question as to

whether the particular facts fall within the activities which do not constitute a permanent

establishment under the Treaty, since under the Italian tax system it is not possible to obtain from the

revenue authorities a preliminary ruling to confirm the income tax liability exemption:

Direct taxation. There are no formal book-keeping and tax return filing requirements for

the purpose of income tax for a buying office which satisfies the requirements for being

considered, taxwise, as a fixed place of business which does not constitute a permanent

establishment.

Indirect taxation. The foreign company is not exempt from the payment of all indirect

taxes (e.g. stamp duties, registration tax, value added tax, etc.) levied in Italy in connection

with the performance of the buying office’s activity. For the purpose of receiving and

sending samples to manufacturers and/or suppliers, the office will have to keep a register

of shipping documents (bolle di accompagnamento).

VAT. The company may file an application to obtain reimbursement of the VAT paid in

connection with the purchase of services (e.g. telephone, etc.) and movables (e.g. office

equipment, furniture, etc.) in connection with the operation of the Italian office. In order to

take advantage of this procedure, the Company will have to appoint a “VAT

representative” (generally: the office director) and comply with certain book-keeping

requirements.

Pros & Cons.:

Pros.:

No need to capitalise;

No business income subject to Italian system;

No balance sheet filings.

21

Cons.:

Not an operational vehicle (no sales or services to third parties permitted)

Impossible to obtain local bank finance

7.2. Steps to be taken to register a representative office

The setting up procedure involves appearing before a notary public in Italy and enrolment in the

Companies’ Registrar. The following documents are required:

- notarised and legalised copy of the appropriate governing body under the foreign

applicable law (i.e. Board resolution; Shareholders’ resolution) of the foreign company

resolving to set up the Italian branch office;

- notarised and legalised copy of memorandum and articles of association of the foreign

company;

- certificate of existence of the foreign company attesting that it is duly enrolled in the

competent companies’ registry and in good standing.

8. Italy’s immigration regime and the new special VISA for “innovative” start-up

companies.

Italian immigration law for non-EU nationals is mainly regulated by the Legislative Decree of

25 July 1998, No. 286.23 Non-EU citizens intending to work in Italy must obtain a specific and

nominal permit before entering the country. Such permit is requested by the employer on behalf of the

foreign worker within certain quotas that are set every year by the Ministry of Interiors, divided for

country of origin and category of work. After receiving the permit, prospective workers must apply

for a VISA to the Italian consular mission in their home country, valid to enter Italy within 6 months

from its issuance. No later than 8 days after the foreign national has entered Italy for the first time, he

or she is required to sign the employment contract and apply for a permit to stay at the local office for

immigration.

Special rules apply for certain categories. According to Arts. 27 et seq. of the Immigration law,

certain workers are exempted from annual quotas and are subject to a simplified procedure to obtain

VISAs and stay permits. These include executives and highly-trained personnel of companies with

their headquarters or branches in Italy, university professors and researchers, as well as employees of

foreign companies who are temporarily transferred to work in Italy.

There currently is no special VISA and permit to stay for big investors, such as the EB5

programme in the United States24 and United Kingdom’s “Tier 1” investor programme.25 In the last

months, however, the Italian Government has declared the intention to simplify VISA procedures for

investors. Art. 5, clause 7, of the “Destination, Italy” law,26 for instance, gave mandate to the

Ministries of Interiors and of Labour to develop simplified procedures of VISAs and stay permits for

23 In compliance with EU law principles, EU nationals are not required any VISA to enter the country and no permit

to stay. They are, however, required to register their stay at the local civil registry when staying over three months. 24 Further information are available at www.uscis.gov/working-united-states/permanent-workers/employment-based-

immigration-fifth-preference-eb-5/eb-5-immigrant-investor (last visited on 21 September 2014). 25 Further information are available at www.gov.uk/tier-1-investor/overview (last visited on 21 September 2014).

22

all applications relating to innovative start-ups, relevant investments,27 and for advance education,

research or philanthropy.28 So far, the Ministries have fulfilled the mandate with reference to a special

VISA and stay permit procedure for innovative start-ups, and the other simplification are likely to

follow shortly.

The special VISA procedure for innovative start-ups allows foreign nationals to use a

simplified entry and stay application procedure, provided that certain requirements are met. In the first

place, the prospective start-upper is still subject to the annual quota and should, therefore, secure a

spot within the number specified by the Government, albeit in self-employed individual part of the

quota, which is separate from that of employees and usually has fewer requests and more places

available. Secondly, the individual must give proof of his or her intention to set-up and begin an

innovative business in Italy29 and of the availability of at least € 50.000 for such business (including

by way of venture capital, third-party financing or even crowd-funding). Once these criteria are met,

the foreign national may apply online to a Technical Committee30 at the Ministry for Economic

Development for evaluation of both the start-up project and idea and whether requirements are met.

The Committee itself independently obtains a ‘no impediment’ certificate from Police

authorities in order to verify whether the applicant is eligible. The evaluation should take no longer

than 30 days, after which a certification to apply for a VISA is issued to the applicant. If the start-up

will be hosted in a certified start-up incubator, the certification will be issued following by a simple

declaration and commitment of the incubator, who is entrusted with the task of evaluating the merits

of the project, and proof of financial resources, making the procedure much easier for the prospective

start-upper. Once the certification is issued, the foreign individual must apply to its local Italian

consular mission to obtain an entry VISA and, following entry in the country, a renewable one-year

permit. Up to five VISAs (save exceptional cases) may be granted in connection with a single start-up

project.

9. Labour regulations

26 Law Decree of 23 December 2013, No. 145, converted with modification by Law of 21 February 2014, No. 9. 27 For investments over € 500.000, according to the Government’s plan. Further information are available at

www.slideshare.net/Palazzo_Chigi/destinazione-italia-english-version (last visited on 21 September 2014), p. 32. 28 Where “philanthropy” means a donation in a sector that is relevant for Italy’s economy, such as recovery of artistic

heritage, science, culture and tourism. See, again, www.slideshare.net/Palazzo_Chigi/destinazione-italia-english-version (last

visited on 21 September 2014), p. 32. 29 The definition of “innovative business” is provided by Art. 25, para. 5, Law Decree No. 179/2012: «It must be a

capital company, including a cooperative, under Italian law, or else a Societas Europaea, and must be domiciled in Italy

under Article 73 of Presidential Decree 917 of 22 December 1986. Its shares, or securities representing the capital, may not

be listed on a regulated market or multilateral trading system. The enterprise must: a) have been operating for at least four

years; b) have its head office in Italy; c) have annual sales of less than 5 million euros; d) not distribute profits; e) be

engaged solely or primarily in technological innovation; f) not have been created from a corporate merger or division or

following the divestment of a company or line of business; g) meet at least one of the following additional criteria: a. devote

at least 15% of its expenditure to Research and Development (R&D) activity; b. have at least one third of its team composed

of PhD students or graduates, or of personnel who have been working in research for at least 3 years; alternatively, at least

two thirds should hold a master’s degree; c. be the owner, filer or licensee of a patent, industrial property right, or original

software registered with the Società Italiana degli Autori ed Editori [Italian Society of Authors and Publishers – SIAE,

N.d.A.]». Italy Start-up Visa Guidelines, available at

www.esteri.it/MAE/Visti/Linee%20Guida%20Italia%20Startup%20Visa%20EN.pdf (last visited on 21 September 2014). 30 The committee includes the Chair of the venture capital committee of the Italian Private Equity and Venture

Capital Association (AIFI); the Chair of the Association of Italian Science and Technology Parks (APSTI); the Chair of the

Italian Business Angels Network Association (IBAN); the Chair of the Network for the Exploitation of University Research

(NETVAL); the Chair of the Association of Incubators and Italian Academic Business Plan Competitions (PNICube); a

representative of the Ministry of Economic Development, who coordinates and organises the Committee secretariat.

23

In Italy, employment is a highly regulated area of law: by certain provisions contained in the

Constitution (e.g. right to strike, right to union, right to a fair wage) and by ordinary law, such as by

the Civil Code, by the so-called “Workers’ Bill of Rights”,31 and other statutes, as well as by

ministerial decrees. All these sources, which have been gradually complemented by the jurisprudence

of the employment courts, form a developed and articulated regulation of the labour market.

Furthermore, employment terms and conditions are also periodically fixed by collective labour

agreements within the various professional categories, and at different levels of bargaining, from

national to individual company’s agreement.

Traditionally, the Italian labour market was known for the many guarantees granted to

employees, such as the right for wrongfully terminated employees in companies employing more than

15 workers to be reinstated in their position pursuant to a court order in case of unjustified

termination. From time to time, these guarantees have been described as an element of rigidity of the

Italian labour market, and as something that would discourage rather than encourage foreign inward

investment. Recently, the labour market has been the focus of many of the Government’s efforts to

stimulate domestic economy and foreign investments, and this has also meant a reshaping of the

labour market to make it more competitive vis-à-vis the challenges of a modern transnational

marketplace. Some of these changes have been introduced by Law of 28 June 2012, No. 92, others are

incorporated in the Renzi Government so-called “Jobs Act” (now before Parliament).

Law No. 92/2012 purported to act in three main directions. First, by making a choice toward

apprenticeship instead of fixed-term employment, as a means to encourage hiring of young and not yet

experienced workers, with a view of facilitating a later stabilization of the worker once he or she

gained relevant experience. Secondly, by changing the remedies available in case of termination of the

employment relationship, and especially replacing the right to be reinstated in the job with monetary

compensation (except in case of serious violations or discriminatory termination). This has been seen

as necessary to cope with the current economic and global situation. Third, by enhancing social safety

system, in an attempt to make active labour market policies more efficient, coherent and equal.

Overall, Italy seems to be gradually going toward a system of more flexibility and coherence of the

labour market, coupled with a net of social security and assistance for those workers that have

temporarily lost their job and are seeking new employment.

Furthermore fixed-term employment is now permitted, i.e. hiring an employee on a temporary

basis pursuant to a very recent Act of the Renzi Government - Decree Law No. 34 of March 20, 2014

converted into Law No. 78/2014 of May 16, 2014 (published in the Official Gazette of the Republic

of Italy of May 19, 2014) laying down urgent measures in favour of relaunching occupation: unlike in

the past when this form of employment in Italy was limited to exceptional situations, an enterprise is

now entitled to hire an employee on a temporary basis without any special justification and for a

duration of up to 36 months in the aggregate, for the performance of any kind of position. The

minimum duration is 4 months and the employment can be extended up to 8 times until it reaches a

maximum of 36 months in the aggregate. The only limitation laid down by law is that the temporary

(short term) employees cannot exceed 20% of the aggregate number of employees hired under

employment contracts for an indefinite term.

It should be noted that the employment will be automatically transformed into an employment

for an indefinite term should it continue after the 36 months. Temporary employees do not necessarily

have to be first-time employees, and it is therefore possible to hire a former employee, previously

been hired by the same employer.

31 Law of 20 May 1970, No. 300.

24

Few features should be mentioned here, as they are quite relevant to foreign investors.

Regardless of the changes that took place at the legislative level, it should be noted that employees

still enjoy a fair level of protection by the courts and by labour judges. This is especially the case

when the de facto relationship between the employer and the employee developed in a different way

than it was declared in the work agreement. For instance, abuse of fixed-term agreement may result in

an action by the employee for recognition of the permanent nature of the employment relation. Again,

when an employee belonging to a certain level of collective bargaining is de facto performing

activities that relate to a higher level, the worker is entitled to resort to court to claim the differences

in wage and benefits pertaining to the higher category. Third, statute of limitation only starts to run at

the termination of the work relationship when the employee is not protected by the right to be

reinstated in his or her job place for wrongful termination (i.e. when the company employ less than 15

workers). Fourth, a part of the employee salary is kept by the company as a means of compulsory

savings, to be paid to the employee at the moment of termination (for any cause, including for

employee’s fault) as severance payment. Finally, companies employing 15 or more employees are

required to recruit personnel from “protected categories”, such as widows, orphans, refugees, and

disabled persons.

The right strike and the right to union are guaranteed by the Constitution and by the law, and

these rights might be enforced against the employer, including by means of criminal law provisions.

The average working week is 40 hours, with 8 working hours per day, while the maximum working

week consists of 48 hours (including overtime). Rules on overtime are set by collective agreements. If

not specified otherwise, overtime cannot exceed 250 hours per year. Employees are entitled to a

weekly rest period (usually Sunday) and an annual vacation period of 4 weeks, in addition to 11

national holiday days.

Legislative Decree No. 81/2008, and few other statutes, regulates measures that the employer

has to take to guarantee workplace health and safety. These depends by the specific features of job

and workplace, but in any case employers are requested to carry out dedicated risk assessments and

accordingly ensure adequate prevention and protection systems with the final goal of preserving the

psycho-physical integrity of employees. Employees and their union representatives are entitled to

verify whether the implemented measures are effective.

Pursuant to the Italian code of intellectual property, any invention created by an employee

belongs in principle to the employer as long as the invention relates to the tasks defined in the

employment contract and either a specific compensation for invention is part of the worker’s salary or

a fair compensation is paid to employee.

10. International tax issues and tax incentives for investments

10.1. Transfer pricing

Art. 110, para. 7, Presidential Decree of 22 December 1986, No. 917 (Income Tax Consolidated

Act, ITCA) provides that «the income components deriving from transactions with companies not

resident in the territory of the State, which directly or indirectly control the taxpayer, are controlled

by the taxpayer or are controlled by the same company controlling the taxpayer, are measured at the

normal value of the goods sold, services supplied and goods and services received, determined

according to paragraph 2, if there is an income increase; the same provision applies also if there is

an income decrease, but only in executing agreements concluded with the competent authorities of

foreign states in force under special “mutual agreement procedures” provided by international

25

double taxation agreements. This provision also applies to the goods sold and services supplied by

companies not resident in the territory of the state on behalf of which the taxpayer undertakes an

activity of sale or supply of raw materials or goods or an activity of manufacturing or processing».32

Such regulation provides for a set of possible solutions to be selected from, based on:

- the market in the specific field;

- the relationship between the parties;

- other circumstances pertaining as between the parties.

According to this rule, tax authorities shall argue that the price of infra-group transactions is

lower than the “normal value”. This power shall be exercised if the following conditions are met:

- there must be a domestic and a foreign company, being excluded from the application of

the rule all other enterprises (imprese) not having the form of a company;

- the domestic company must control or be controlled by the foreign company (either

directly or indirectly). In some cases it will be possible for tax authorities to consider a

relationship of control as existing irrespective of the formal legal relationships (so-called

substance-over-form principle).

The “control” is determined according to Art. 2359 CC, which provides that “controlled

companies” are:

1. companies in which another company has a majority of the votes exercisable at a regular

meeting;

2. companies in which another company has sufficient votes to exercise a dominant influence

at a regular meeting;

3. companies which are under the dominant influence of another company by virtue of

particular contractual bonds with it.

The “control” is presumed by the tax authorities when:

- both the Italian and the foreign partner are controlled by the same third company;

- the Italian company, on behalf of the foreign company, carries out an activity of sale of

raw materials or products or a manufacturing activity;

- the Italian company participates to cartels or consortia aimed at fixing the prices;

- the Italian company cannot operate without capitals, products or cooperation of the foreign

company;

- the foreign company has the right to appoint the Board of Directors or the management

bodies of the Italian company;

- the member of the Board of Directors of the Italian company and of the foreign one are the

same.

In relation to the “normal value” (valore normale), the determination is made with two

categories of methods:33

1) Basic methods:

- Comparable Uncontrolled Price method (CUP);

- Resale Price method (RP);

- Cost Plus method (CP);

32 Authors’ translation.

26

2) Alternative methods:

- Comparable profits;

- Distribution of profits;

- Gross margins of the economic sector;

- Profitability of the invested capital;

- Resale Price method (RP).

The rationale of this specific anti-avoidance regime is to minimize a reduction to the tax burden

through the manipulation of profits, by using group companies placed in tax-privileged jurisdictions.

The onus to demonstrate the existence of such tax avoidance is on the tax authorities to the

extent that they intend on making adjustments. In this respect, the Italian Supreme Court (ISC) held

that, «the taxpayer is not required to prove the correctness of the transfer prices applied, if the tax

authority did not prove prima facie the infringement of the normal value principle».34 In doing so it

recalled its longstanding case law in the field of specific anti-avoidance provisions.35 Since the

purpose of the transfer pricing provisions is to avoid a situation where, within a group of companies,

the profits are transferred for less than the normal price of the goods sold, with the specific aim of

avoiding Italian taxation thereon in favour of foreign more advantageous tax regimes, the ISC believes

that Art. 110, para. 7, ITCA represents «an anti-avoidance clause rooted […] in the EU principles of

abuse of law».36 The burden to prove the existence of the requirements of the transfer pricing

provision is on the tax authorities and the taxpayer only has to prove the correctness of the prices

applied after the tax authorities have prima facie established a divergence from the arm’s length

principle.

Art. 26, Law Decree of 31 May 2010, No. 78 (converted by Law of 30 July 2010, No. 122)

substantially amended the transfer pricing regime by introducing a “safe harbour” provision in regard

to tax administrative sanctions for taxpayers that previously prepared pre-determined documents

proving the transfer prices applied. This legislative amendment aims at aligning the Italian rules with

the relevant OECD Directives and defines administrative penalty profiles in regard to infringement

cases.

The regime provides that in circumstances where a transfer price adjustment is made by the tax

authorities that results in higher tax or a credit difference, the penalty for tax return errors (from 100%

to 200% of the higher tax or lower credit ascertained) shall not apply if:

a) during the access, inspection or tax examination, the taxpayer supplies to the tax officers

the Transfer Pricing Documentation (TPD) that has been identified in a Decision of the

Chief Commissioner of the Italian tax authorities, which is aimed at verifying compliance

of transfer prices with the normal value; and

b) the taxpayer had already informed the tax authorities that it held such documentation.

The Decision of the Chief Commissioner of the Italian tax authorities was enacted on 29

September 2010 (Protocol No. 137654/2010) and specifies the TPD that is required to enable tax

officers to confirm whether or not the transfer prices are consistent with the normal value. Any

33 See MINISTRY OF FINANCE, Circular Letter of 22 September 1980, No. 32/9/2267. 34 ISC, Tax Chamber, 13 October 2006, No. 22023 [authors’ translation]; ISC, Tax Chamber, 16 May 2007, No.

11226; Tax Court of Second Instance of Rome, Section I, 9 December 2010, No. 643; Tax Court of First Instance of Milan,

Section XXXI, 13 March 2009, No. 87; Tax Court of Second Instance of Milan, Section IV, 18 January 2007, No. 88. 35 ISC, Tax Chamber, 25 March 2003, No. 4317. 36 ISC, Tax Chamber, 13 October 2006, No. 22023. [authors’ translation]

27

discrepancies would, thus, justify administrative sanctions. In compliance with the EU Code of

Conduct and the OECD Transfer Pricing Guidelines, the TPD must be:

– suitable and necessary to comply with the arm’s length principle;

– sufficient to prove “reasonable effort” and the absence of disproportionate costs in regard

to the specific transaction;

– complete in terms of all information that is reasonably available at the time of the

transaction; and

– in line with the prudent business management principle.

The amendment enables the tax authorities to verify whether or not the prices used in intra-

group transactions correspond with those used in a free market context by relying on a pre-defined

standard of documentary evidence.37 The new provision provides that the taxpayer shall:

1) keep the Masterfile and the Country-specific documentation for intra-group transactions;

and

2) inform periodically the tax authorities of the existence of the TPD, in order to allow the

tax officers to rapidly obtain the available TPD in the event of an examination.

The Masterfile, which is kept by the holding company, contains all the relevant information of

the company group and the economic characteristics of the intercompany transactions to be

monitored. According to the EU Code of Conduct, the Masterfile «should follow the economic reality

of the business and provide a ‘blueprint’ of the MNE group and its transfer pricing system that would

be relevant and available to all EU Member States concerned».

More precisely, the Masterfile shall contain:

a) a general description of the multinational group;

b) an outline of the structure of the group:

– organization, list, legal form of the members and their shares; and

– operative structure;

c) the general commercial strategy of the group;

d) the transactions carried out (described in a data flow diagram);

e) the intra-group transactions:

– sale of material or immaterial goods;

– supply of services;

– supply of financial services;

– services necessary to carry out the intra-group activity; and

– agreements regarding the distribution of costs;

f) the company’s functions, assets and risks;

g) intangible goods, royalties, etc.;

h) the company’s transfer pricing policy and reasons why it complies with the arm’s length

principle; and

37 On this issue, see R. CORDEIRO GUERRA, La disciplina del “transfer price” nell’ordinamento italiano, in Rivista di

Diritto Tributario, vol. 9, no. 4/2000, Part I, p. 421 et seq. For an in-depth analysis of the new Italian tax regime on transfer

pricing, see P. MASTELLONE, Italy. The shift in the burden of proof in regard to transfer pricing, in European Taxation, vol.

51, no. 5/2011, p. 211 et seq. For the recent international developments on transfer pricing documentation duties, see

OECD/G-20 BASE EROSION AND PROFIT SHIFTING PROJECT, Guidance on transfer pricing documentation and Country-by-

Country reporting. Action 13: 2014 Deliverable, Paris, 16 September 2014, available at www.keepeek.com/Digital-Asset-

Management/oecd/taxation/guidance-on-transfer-pricing-documentation-and-country-by-country-

reporting_9789264219236-en#page1 (last visited on 21 September 2014).

28

i) an outline of its relationships with the tax authorities of other Member States regarding

Advance Pricing Arrangements (APAs) and rulings on transfer pricing.

The Country-specific documentation, which contains the information specifically related to the

resident company involved in intra-group transactions, has the function of adapting the general

description of the information provided in the Masterfile to the economic reality of the resident

company. This document shall contain:

a) a general description of the company;

b) an outline of the areas of its business activity;

c) the operative structure of the company and of its business units;

d) general strategies of the company and changes from the previous business year;

e) intra-group transactions, including:

– a description of the entities of the group with which the transactions are conducted;

– a comparability analysis;

– an indication of the transfer pricing method adopted;

– application criteria in respect of that method; and

– the results of the method adopted; and

f) the intra-group agreement for the distribution of costs.

In the event of an assessment, the tax authorities (knowing that the taxpayer has the TPD) shall

ask the taxpayer to produce the TPD within 10 days. This term is shorter than the general one (15

days) and it is justified on the basis that the documents required are – in theory – available. However,

the consequences of not meeting this deadline appear to be disproportionate in terms of the

administrative sanctions that apply.

The Italian discipline on transfer pricing shall now be applied in line with the recently issued

OECD Guidance on transfer pricing aspects of intangibles, which is Action 8 of the BEPS (Base

Erosion and Profit Shifting) project.38

10.2. Controlled foreign companies (CFC)

Art. 167 ITCA provides a specific anti-avoidance regime, according to which the income of a

company, an enterprise (impresa) or another legal person resident or anyway established in a State or

territory with a “privileged tax system” and controlled, directly or indirectly (also through a trust

company), by an Italian resident taxpayer, shall be imputed to the latter in proportion to the shares

held (so-called transparency taxation).39

The “control” is determined according to Art. 2359 CC, as already explained supra at

paragraph 2.5.1. The tax regime implies that the whole income produced by the CFC (impresa estera

controllata) is imputed in Italy as if it was of the controller and taxed as business income.

38 OECD/G-20 BASE EROSION AND PROFIT SHIFTING PROJECT, Guidance on transfer pricing aspects of intangibles.

Action 8: 2014 Deliverable, Paris, 16 September 2014, available at www.keepeek.com/Digital-Asset-

Management/oecd/taxation/guidance-on-transfer-pricing-aspects-of-intangibles_9789264219212-en#page1 (last visited on

21 September 2014). 39 In literature, see R. CORDEIRO GUERRA, Riflessioni critiche e spunti sistematici sulla introducenda disciplina delle

controlled foreign companies (art. 127 bis del Tuir), in Rassegna Tributaria, vol. 43, no. 5/2000, p. 1399 et seq.; R.

CORDEIRO GUERRA, La nuova definizione di regime fiscale privilegiato nell’ambito della disciplina in tema di controlled

29

The resident controlling taxpayer shall declare in a specific section of its annual tax return

(quadro FC) the income produced in the tax year by CFC determined from the profit and loss account

according to the rules of the foreign State, to which the Italian resident controlling taxpayer shall

make all the relevant adjustments (variazioni fiscali) as provided by Italian law.

Since the CFC discipline provides a relative presumption of tax avoidance, the resident

controlling taxpayer shall pre-emptively make a written question to the tax authorities in order to

demonstrate the existent of certain conditions that justify the disapplication of the CFC discipline (so-

called interpello disapplicativo). This written question shall be delivered to the tax authorities at least

120 days before the term provided for submitting the annual tax return.

The disapplication may be obtained only if the taxpayer demonstrates at least one of the

following circumstances:

1) effective establishment of the CFC in the foreign country. From the documentation

provided by the taxpayer it clearly emerges that the CFC carries out an effective

industrial or commercial activity in the market of the State where it is established. In

order to proof this condition, the taxpayer shall provide (for example): profit and loss

account, rental agreement for real estates, employees contracts, copy of the insurance

contracts, evidence of working bank accounts, copy of the invoices for consumptions

(e.g. electricity, water, telephone, etc.), etc.;

2) adequate level of effective taxation. The taxpayer shall prove that the ownership of

shares in CFC established in certain countries does not imply an unduly loss of revenue

for the Italian Republic. Consequently, the taxpayer shall provide all the accounting and

fiscal documentation able to demonstrate that the income received from the shares of

the CFC are taxed not below the 75% of the regular level of taxation in force in

“ordinary tax jurisdictions”.

In 2009 the CFC discipline and the consequent taxation for transparency has been extended to

the cases where the controlled is established in a State or territory different from those having a

“privileged tax regime”,40 if the following two requirements are met:

a) the CFC receives more than 50% of its income from activities that generate passive

income;

b) the CFC is subject to an effective taxation lower than 50% to the one applicable if it was

resident in Italy.

Art. 168 ITCA extends the CFC discipline also to “foreign connected companies” (imprese

estere collegate), i.e. those legal persons established in States or territories with a privileged tax

regime whose at least 20% of the shares (or 10% if the shares are listed in the stock market) is owned

by an Italian resident taxpayer.41

foreign companies e di componenti negative derivanti da operazioni con imprese estere, in Rassegna Tributaria, vol. 43, no.

6/2000, p. 1788 et seq. 40 See Art. 167, para. 5-bis, ITCA, introduced by Art. 13, para. 1, letter b), Law Decree of 1st July 2009, No. 78,

converted, with amendments, by Law of 3 August 2009, No. 102, in force from 5 August 2009.

30

10.3. Tax incentives for investments in Italy

According to the World Bank, in 2013 Italy stood at 131 in the ranking of 185 economies on

the ease of paying taxes: in fact, the effective tax pressure over Italian enterprises is 68,3% and, on

average, an enterprise spends 269 hours a year filing, preparing and paying taxes (so-called

compliance costs).42 With the new Renzi Government the effective tax pressure is now 65,8%.43

Foreign companies benefit from a great variety of incentives, which shall nevertheless comply

with EU competition law. Incentives may consist in capital grants, easy-term loans or tax credits:

some of them are granted automatically provided that the applicant meets the requirements and some

other are granted after a specific evaluation process.

The most used incentives are those granted for investments in new and existing facilities, the

revitalisation of production areas, local development, R&D, etc.

Usually these tax incentives are granted through tax credits, regulated by a specific decree published

in the Official Gazette and subject to two requirements:

a) preliminary communication of the applicant;

b) yearly limit of use provided for all credits to be listed in the RU column of the annual tax

return.

In relation to point b), the tax credit granted from 1st January 2008 shall never exceed €

250.000,00: consequently, what exceeds such amount may be compensated from the following third

tax year.44

A) Tax credit for investments in “disadvantaged areas”.45 Tax credits may also be granted for

investments in disadvantaged areas made by investments in the South Regions of Abruzzo,

Basilicata, Calabria, Campania, Molise, Puglia, Sicily and Sardinia. According to Art. 107,

para. 3, letters a) and c) of the TFEU (former Art. 87 EC Treaty), these Regions are

“disadvantaged areas” (aids aimed at facilitating «the development of certain economic

activities or of certain economic areas, where such aid does not adversely affect trading

conditions to an extent contrary to the common interest»).46 These tax credits cannot be

granted to enterprises operating in certain specific fields: iron and steel, synthetic fibres,

carbon industry, credit, finance and insurance.

B) Tax credit for R&D investments.47 All enterprises carrying out investments for R&D are

eligible for a tax credit equal to 90% of the amount of R&D investments exceeding the

average of the investments themselves in the triennium 2008-2010.

41 For comments, see R. CORDEIRO GUERRA, Le imprese estere controllate e collegate, in F. TESAURO (ed.), Imposta

sul reddito delle società (IRES), (Bologna: Zanichelli) 2007, p. 961 et seq. 42 WORLD BANK – PWC, Paying taxes 2013. The Global Picture, available at

www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2013.pdf (last

visited on 21 September 2014). 43 WORLD BANK – PWC, Paying taxes 2014. The Global Picture, available at

www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Special-Reports/Paying-Taxes-2014.pdf (last

visited on 21 September 2014), p. 157. 44 See Art. 1, para. 53, Law No. 244/2007; MINISTRY OF FINANCE, Resolution of 3 April 2008, No. 9/DF; ITALIAN TAX

AUTHORITIES, Resolution of 23 June 2008, No. 259/E. 45 See Art. 1, paras. 271-279, Law No. 296/2006. 46 See EUROPEAN COMMISSION, Carta degli aiuti di Stato a finalità regionale 2007-2013, C(2007)5618 def. cor.,

Brussells, 28 Novembre 2007, available at http://ec.europa.eu/eu_law/state_aids/comp-2007/n324-07-cor.pdf. 47 See Art. 1, Law Decree No. 70/2011, converted by Law No. 106/2007; CHIEF COMMISSIONER OF THE ITALIAN TAX

31

C) Tax credit for “innovative” start-up companies.48 Newly established capital companies

that carry out “innovative activities” and that hold certain requirements, benefit from tax

exemptions and procedural simplifications. In the original discipline (Art. 25, Law Decree

No. 179/2012, as amended by Law No. 221/2012) it was necessary that for the first 24

months the control of the start-up company was in the hands of physical persons. With a

recent amendment made in 2013,49 these companies benefit of such favourable regime for

the first four years from their incorporation and it is applicable also to existent companies

(incorporated not more than 48 months from 19.12.2012). In order to benefit from this tax

regime, the following requirements shall be met:

- Form the applicant must be an Italian or EU capital company with residence or

main seat of its business in Italy;

- Object development, production and commercialisation of innovative products and

services with a high technological content;

- Distribution of profits prohibition of distribution.

Innovative start-up companies must apply to be enrolled in the Register of Enterprises

without paying the relevant costs nor the stamp duty tax (imposta di bollo).

The company is not allowed to benefit anymore of this favourable tax regime if:

- loses one of the requirements during the start-up period;

- from the second business year the value of the annual production exceeds €

5.000.000,00 according to the last approved profit and loss account;

- it does not deposit the annual self-certification.

Every year the S.r.l. shall pay a government grant tax (Tassa annuale di concessione

governativa) of € 309,87 (or € 516,46 if the company’s capital is equal or more than €

516.456,90).

Innovative start-up companies receive a tax credit of 35% of the cost of hired highly-

qualified personnel (Ph.D. or employees with a bachelor degree in technical or scientific

disciplines) for a maximum of € 200.000,00, provided by the new employees maintained

their job for at least 3 years (or 2, in case of small and medium-sized enterprises).

For 2013, 2014 and 2015, subjects (physical or legal persons) investing in the capital of

start-up companies benefit from a deductions from income tax purposes as follows:

- taxpayers subject to income tax:

a) 19% reduction from the gross personal income tax for investments in one or

more innovative start-up companies;

b) 25% reduction from the gross personal income tax for investments in one or

more “socially useful” start-up companies or start-up companies active in the

energy sector;

The maximum reduction from the gross personal income tax is € 500.000,00.

- taxpayers subject to corporation tax:

a) 20% reduction from the gross business income tax base on investments in one or

more innovative start-up companies;

AUTHORITIES, Decision of 9 September 2011, No. 2011/130237. 48 See Art. 25, Law Decree No. 179/2012, as amended by Law No. 221/2012. 49 See Art. 9, para. 16, Law Decree of 28 June 2013, No. 76.

32

b) 27% reduction from the gross business income tax base on investments in in one

or more “socially useful” start-up companies or start-up companies active in the

energy sector;

The maximum reduction from the gross business income tax base is € 1.800.000,00.

All these tax incentives have been enforced by the Ministry of Economy and Finance

on 30 January 2014.50

The Italian tax authorities have recently remarked that companies with characteristics

that qualify them as “innovative” start-up companies, are not subject to the specific

anti-avoidance discipline on shell companies (società di comodo):51 from the tax

period following the one in which the company has lost such characteristics, the latter

will enter in the three-year period of “observation” provided by the discipline of shell

companies.52

D) Networks of enterprises (Reti d’impresa). Enterprises entering in a network agreement

are allowed to store in a specific tax-exempt reserve (riserva in sospensione d’imposta)

part of the profits realised in the tax period in course until 2012. If such reserve is used

for a purpose different from covering losses or if the enterprise exits from the business

network agreement, the reserve itself concur to the tax base.

11. Initiatives from the Government.

The Renzi Government is actively working to reform many areas of the legal and economic

system. It is too early to assess their impact on the easiness of doing business or on the attractiveness

for foreign investments, but it is likely that they will seek to make the country more efficient, with a

quicker and simpler administrative and judicial machine. The aim is to empower national and foreign

individuals and companies to allow them to develop and realise their ideas and business with the

support (and not with the obstruction) from the State and other public bodies.

While it would be too complex to report all these actions here in detail, and many of must still

be implemented by means of a statute, we enclose an appendix laying out the many measures of the

“Destination Italy” plan of the end of 2013, some of which have been replaced or modified by the

“Unblock Italy” plan that the current Government is devising.

Among the various measures, however, we would like to underline three here: the first is the

focus on the 2015 World Expo in Milan, which is expected to bring to Italy a number of potential

investors and is an important chance that should not be missed, both by Italy and by foreign investors.

The second, is a much awaited plan for the protection of the Made in Italy brand, perhaps one of

Italy’s most valuable assets, and against so-called “Italian sounding” under the name “Italian

original”. Finally, a set of initiative to encourage exports and inward investments, aiming at rising the

current figures to € 50mld of exports and € 20mld inward investments in the next years.

50 See MINISTRY OF ECONOMY AND FINANCE, Decree of 30 January 2014. 51 See Art. 30, Law No. 724/1994 and Art. 2, paras. 36-decies and 35-undecies, Law Decree No. 138/2011, converted

by Law No. 148/2011. 52 See ITALIAN TAX AUTHORITIES, Circular Letter of 11 June 2014, No. 16/E.

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APPENDIX I

The Italian Government Destinazione Italia plan (September 19, 2013)

The Destinazione Italia plan illustrates why a foreign investor should invest in Italy, on the basis that Italy is one

of the first time exporting countries in the world, it is competitive and sometime a leader in sectors with a high

potential growth – such as fashion, household, automotive, instrumental assets, robotics, agro food,

biopharmaceuticals, naval industry defence and security. Typically Italy is small and medium enterprises are set

up in production clusters capable of handling a production characterised by: sustainability, uniqueness of the

product, capability of adapting production on a handicraft bases to every request.

The government indicates in the plan that certain reforms have already been implemented relating to pensions,

the labour market, civil justice and bankruptcy rules, the liberalisation of bonds, the electrical and gas markets,

the introduction of measures for access to credit or small and medium enterprises, a policy for innovative startup

companies, a legislation to combat corruption.

It is a fact that the share of foreign investment held by Italy today is dramatically low equal only to 1.6% of world

stock of foreign investment.

Out of the 50 measures listed in the Destinazione Italia plan, the following are relevant for a potential foreign

investor:

Measure No. 1 a close a collaboration between the tax office and foreign investments

Tax agreements (for investments in excess of a given threshold for which the investing enterprise and the tax

authority agreed in advance on a non-modifiable manner the tax conditions for a given period (for example the

first five years) and dedicated Desk (dedicated to foreign investments).

Measure No. 2 the “conference of services” to be reformed

This entity was created as a means for simplification to put around a table for local administrations and the

central state administration.

Measure No. 3 standard procedures and models for licences and authorisations to commence a productive

activity

Measure No. 4: to adapt the rules on employment contracts to the specificity of new investments

Measure No. 5: Consolidated text on employment law

Measure No. 6: Reducing the time element in employment court proceedings

Measure No. 9: redefining tax penalties

at present the principle of proportionality is frustrated and certain penalties amount to a criminal offence rather

than to an administrative penalty. In principle, the sanctions need to be reduced.

Measure No. 10: revising litigation with the tax office

Measure No. 11: revisiting the rules on the “BLACK LIST” countries

excessive limitations as regards cross-border activities amount to a frustration in the process of

internationalization of enterprises.

Rules governing cross-border transactions, in particular the regime of withholding taxes and deductibility of costs

of commercial transactions sustained in respect of suppliers localised in black list Countries, the regime of

dividends coming from countries with low tax regimes and the rules to determine the revenue of permanent

establishments.

Measure No. 12: implement a national energy strategy to reduce the price of electricity and gas

To fully integrate the Italian market with the European market (so-called market coupling); increase and

progressively rationalise the National electricity transmission grid; award concessions through competitive

tenders.

Oil: complete liberalisation in the distribution.

Gas: build strategic infrastructures (pipelines, terminals and warehouses).

Measure No. 13: to reinforce the Commercial tribunal (Tribunale delle Imprese)

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The Italian civil justice system is a disaster is located at the 160th place worldwide on a total of 185 for the

resolution of commercial disputes with an average duration of debt collection proceedings of 1210 days with a

cost in terms of legal fees equal to 30% of the credit payable.

Extending the competence of the Commercial tribunal to all controversies on commercial transactions, and

concentrating on three tribunals (Milan, Rome and Naples) the disputes falling within the competence of the

commercial tribunals which involve a company with registered office abroad, even if this company has a

permanent establishments in Italy.

Measure No. 14: reduce the number and length of civil proceedings

Limiting the possibilities of filing appeals, increasing the competence by value of the justice of peace, reinforcing

incentives for whoever uses mediation, reinforcing the digitalisation of civil proceedings.

Measure No. 15: increasing the legal rate of interest on late payment

Measure No. 16: favouring a more efficient import - export cycle

The so-called “Single Window”, project commenced by the customs agency.

Measure No. 17: give value to state-owned corporations and prepare a plan of privatisation and sales

Measure No. 18: not only banks - enlarge the spectrum of sources of financing small and medium

enterprises

For example extending the possibility for small and medium enterprises to issue bonds.

Measure No. 19: revitalise the stock market

Tax incentives for investing in stock or shares of small medium companies listed on the stock exchange.

Council taxes on capital gains for investors who invest in Small Caps and keep such investments for at least 3 to

5 years.

Measure No. 20: investments to sustain the “ Made in Italy” micro, small and medium enterprises

Set up a fund “Invest in Made in Italy” for the investment in equity of micro enterprises.

Measure No. 21: attract capital and competence to increase start-up companies

To reinforce the market of investors in start-up (venture capitalist and business angel).

Measure No. 22: invest and take the global opportunities offered by tourism

Stimulate the growth of enterprises engaged in tourism and attract tourism developments.

Measure No. 23: adding value to the cultural heritage of Italy

The artistic and cultural heritage represents a natural competitive advantage of Italy.

To favour the setting up of funds sourced from private donations dedicated to large cultural institutions.

To lay down forms of strong de-taxation of the so-called cultural patronage.

Consider the possibility of entrusting to private entities and to non-profit organisations the management of

cultural property.

To use the property stocked in the museum warehouses to build initiatives of research, enhancing and promoting

Italian art and culture in the world.

Measure No. 24: to enhance the state-owned property (BENI DEMANIALI)

Open up to competition , provide for public tenders hence attracting international investors.

Measure No. 25: to enhance unused real property

Measure No. 26: to liberalise the market of major leases other than residential use

Measure No. 27: encourage the change of destination of use of real property

Measure No. 28: facilitate real property investments by developing listed real property investment

companies

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Measure No. 29: tax credits for research and development

Measure No. 30: encourage spin-offs of university and research

Measure No. 31: internationalise the education system

Measure No. 32: internationalise research

Measure No. 33: Digitilisation of the public administration and of citizens

Measure No. 34: create a mechanism of rapid reaction to deal with the financial crisis of enterprises

Measure No. 36: to involve private capital in the carrying out of major infrastructural projects

Measure No. 37: develop Public Private Partnerships (PPPs) in the field of small and medium

infrastructures

Measure No. 38: to reform harbours

Governance of ports.

Reducing red tape.

Incentives for investments in technological upgrading, logistics and access networks.

Measure No. 39: a plan for airports

Making the Italian airport system competitive.

Measure No. 40: Attracting investments that will benefit the territory, generating growth and increasing

the standard of living of the local citizens

Measure No. 43: To attract investments in the green sectors (green economy): renewable energies

Measure No. 44: Visas as a means of attraction

Fast-track for specific categories, start-up visas.

Visa for whoever makes a significant investment or a makes a substantial gift in the sectors of interest for the

Italian economy (culture, tourism, recovery of cultural heritage, science, etc.).

visas for students and researchers of selected institutions.

Attracting highly qualified non-EEC staff.

Measure No. 45: to educate the investors of the future

Measure No. 48: build a better reputation worldwide

Develop a national country branding strategy also with reference to the contents of the EXPO 2015.

To establish at the ministry for foreign affairs a permanent Forum of the international reputation of Italy.

Measure No. 49: to mobilise the global Italians

Italians who work, teach and study abroad are the first ambassadors of Italy in the world, and as such may

contribute to give a news story of Italy abroad and to efficiently implement a branding strategy of the Country.