We are very pleased to continue reporting on tax news in this second issue of Studio Santoro Newsletter. The tax system renewal is one of the main items on the Italian Ministry of Finance's agenda, as it has been considered absolutely necessary if Italy wants to play a role at an international level. Previous governments have already made the first steps towards such renewal, but unfortunately with no success given their short duration. The present Government, headed by Mr. Lamberto Dini, has tried to follow the path towards the harmonization of the Italian tax system with other EU neighbour countries' and the Minister of Finance, Mr. Augusto Fantozzi, is at present working hard in this direction, even though under many aspects his policy is absolutely in contrast with that of his predecessor.

Many new tax regulations which have been recently proposed aim at opening the Italian economic system to foreign business, by improving the efficiency of the State tax and administrative organisation and through specific incentives for foreign investors. Therefore, it seems to us that the analysis of these tax proposals in further detail may be useful, specially if we consider their innovative content, as far as the Italian tax system is concerned.

One of the recent proposals that have been presented, which may be very interesting for foreign investors, is the introduction of the Holding company into the Italian corporate law, following the example of other European countries such as Belgium, France, Luxembourg and The Netherlands. This type of company structure may be used by multinational companies.

The main objective of this proposal is to offer foreign companies the possibility to establish their headquarters in Italy, being able from our territory to establish manufacture industries in other countries of the Mediterranean Basin. In order to achieve this goal, it would be necessary to review some of the international tax treaties signed between Italy and the countries of the Mediterranean Basin, to make them the most advantageous. It would also be necessary to begin negotiations to sign tax treaties to avoid double taxation with those countries in the area with which Italy has not signed any tax treaty.

According to the Italian Minister of Finance's opinion, the new tax system should be complemented by concepts which exist in the tax systems of most of the industrialized countries' in order to ensure its international application, such as those regulating the "transfer pricing" or the "thin capitalization". For this last one, in particular, it is intended to use the German law as an exemple, which fixes the limit to deduce the financial burdens in an amount to be determined between the credit capital and the company capital.

The Minister of Finance has also declared his intention to generalize the use of the "tax-ruling". This practice has been limited up to now to a very restricted number of specific cases. The tax-ruling will simplify the approach of foreign investors towards the Italian tax system, and therefore, will make it more competitive than its principal competitors. However, the tax-ruling "Italian style" will have different characteristics from other countries', where normally this instrument allows a direct dialogue between tax-payer and tax administration.

On the contrary, in Italy, according to the Minister's proposal, the tax-ruling may only be used as a consultation with the Tax Authorities by which an enterprise project proposal or economic transaction is presented to the Tax Authorities and these will examine the project, ascertaining that its implementation does not present elements which may be considered tax-avoidance.

Apart from these proposals, mainly addressed to foreign investors, others should also be mentioned, which are directed to:

- harmonize the Italian tax system with the other European countries', specially as far as the relation between tax administration and tax-payer is concerned, which should become simpler and more direct;

- speed up the VAT reimboursement to exporters or, in alternative, consent them to carry out purchase without tax burden;

- allow the tax credit transfers to the tax administration to third parties;

- create new tax incentives for companies, in particular for those operating in the research and development sector;

To all these proposals and declarations of intentions, we should add that it has been already implemented a concrete action consisting in the Senate's approval of an agenda by which the Government is encouraged to extend the tax benefit provided to those companies reinvesting their benefits in company assets for one year (Decree Law n. 357/94, please see issue n. 1 of this newsletter). Otherwise, such tax benefit would expire at the end of 1995.