ITALY: TAX INCENTIVES

For some time one of the elements characterising Italy, compared to most of its European partners, has been the existence of a large number of tax and financial incentives, largely used as an instrument for promoting the development of the Mezzogiorno (southern Italy) and for encouraging the development of specific business activities which are considered strategic. Particularly in recent years, the entire incentive system has undergone profound changes with regard to both financial incentives, which are currently almost always from the European Community, and tax incentives, which it has been necessary to adapt to the related European directives.
The European Union's policy with regard to State aid is, in fact, particularly restrictive, with precise clauses for safeguarding the principles of free competition and non-discrimination among national and foreign companies. To this must be added the fact that with the adoption of the code of conduct regarding the business taxation system, a specific regulation has been created, aiming to avoid distortions of competition stemming from tax benefits which may be harmful to it.

In particular, fiscal measures which contribute to reducing the current expenses of businesses without being specifically tied to new investments or employment are usually considered forms of State aid. On the other hand, tax benefits which are tied to investments in an assisted region under the provisions on State aid, which do not contribute "transparently" to supporting investments in this region, are considered fiscally distorting.
On the basis of these premises Mario Monti, the Commissioner on Competition with the renewed European Commission, has immediately crushed from the start the hypothesis of new generalized tax incentives for businesses located in southern Italy, a hypothesis which was first solicited by the Parliament during the approval of the Economic and Financial Planning Document and later relaunched, in the form of a possible new negotiation with Brussels, by the Italian Prime Minister himself.

In reality, Monti's answer was a dual one: the first time, on 14 September, together with the outgoing Commissioner Karel Van Miert, in a letter to the Italian Minister of Finance, who had contacted the Commission in a follow-up to the Parliamentary resolution passed at the same time as the Economic and Financial Planning Document; and a second time the following week, by then fully in power, to confirm the absolute impossibility of deviating from the general principles regarding State aid expressed in the previous message.
This does not mean that exceptions are impossible, especially if they serve to foster regional development or environmental protection; nevertheless, in order to be accepted, the incentives must be limited in both time and territorial extent - conditions which, particularly with regard to the second aspect, are certainly not met by incentives in favour of the entire south of Italy.
Having finished this introductory part, we shall move on to analyse the characteristics of the tax benefits in force in Italy today and how they work; in almost all cases, they are addressed exclusively to small and medium-sized enterprises. Common to most of these benefit systems are the manners of application which, unlike in the past, no longer provide for a reduced tax rate or a period of tax exemption, but rather the granting of a tax credit which varies according to the benefit considered. However this uniformity in tax incentives was recently upset by the coming into force of a new set of tax benefit regulations, the so-called Visco Act (Law 133/99), which provides for tax benefit procedures which are substantially different from those which were in effect up to today.
This law also marks the triumphant return of incentives of a general nature, i.e. those incentives which can be enjoyed by all enterprises, of any size or location, with the only limit being the length of the benefit system, limited to two years, 1999 and 2000. As already mentioned previously, the tax incentive proposed, i.e. taxation with the lower rate of 19% instead of the ordinary IRPEG (Corporate Income Tax) or IRPEF (Personal Income Tax) rate, differs from the other tax benefit systems in effect today.
In this case the reduced rate can, however, be interpreted as the Internal Revenue's desire to "try out", even if for a limited period and taking into account the obligations and restrictions required for being entitled to these benefits, the practical functioning of a tax rate which is reduced in terms of overall tax revenue and a greater propensity of taxpayers to meet their tax obligations without letting themselves be tempted by evasive practices.

The uncertainty with regard to the tax revenue results has, however, led the Internal Revenue to provide for the possibility of increasing the lower rate from 19% to 28% if the appropriation envisaged for this incentive should prove insufficient. In particular, the reduced rate of 19% may be used for the part of the declared net total income corresponding to the lower of the amounts represented by:
- the investments in new capital goods in conformity with articles 67 and 68 of Presidential Decree 917/86 made in the fiscal years 1999 and 2000;
- the cash allotments and allocations of profits to reserves made during the same tax periods.
In completion of this new taxation system, it is foreseen for the tax benefit to be transmissible also to the receivers of the income paid by the company which has received the benefit, who may in this way benefit from a specific virtual tax credit.
These very recently introduced incentives are joined by numerous others, also of a fiscal nature, aiming to foster the development of a certain part of the territory, promote the installation of small and medium-sized enterprises, support the commercial and tourism sector, and develop the research and development activities.

As already mentioned previously, common elements in these benefits are the operating procedures which consist of the attribution of a tax credit, which is of an extremely variable amount depending on both the activity carried on and the location of the business within the national territory. Another common element in these incentives is the desire to privilege the small and medium-sized enterprises, as classified by the Ministerial Decree of 18 September 1997 (see Table A).

Lastly, in order to have access to the benefits it is asked that the beneficiary business be "independent"; this is a condition which is considered to be met when at least 25% of the capital or voting rights is not held by a single company, or in any case by several companies, which are not classifiable as small or medium-sized enterprises. The tax credit obtained, proportional to the investments actually made, may thus be used for the payment of the taxes owed during the year using the tax account of the beneficiary company.
The laws of reference for the current tax benefit system for depressed areas are Law 488/92, which delimits the areas which can have access to the incentives for development, and Law 341/95, which instead defined the procedures for benefiting from these incentives. Under the provisions of Law 133/99, the incentives specified in Law 341/95 can also be used for the investments connected with territorial agreements, area contracts, and program contracts regarding specific areas of the Italian territory.
As for the amount of the credit actually granted, this may range from a maximum of 65% for small enterprises which invest in the less developed zones to 7.5% for medium-sized enterprises which establish themselves in the areas qualified as Objective 2, where no tax benefits are granted for large enterprises. Specifically intended for small and medium-sized enterprises, also defined as indicated in the attached Table A, are the benefits under Law 266/97, the application of which is also governed by Law 341/95. In this case the amount of the credit may range from 7.5% for medium-sized enterprises to 15% for small ones.

Article 11 of Law 499/97 provides, on the other hand, for specific benefits for promoting the requalification of the distribution network of small and medium-sized commercial businesses; in this case the tax credit which may be obtained will be equal to 20% of the cost of the assets.
As for the support of research and development activities of industrial enterprises, the point of reference is Law 266/97 which, in addition to having extended the obtainable benefits, provides, like the other regulations on the subject, for the amount of the benefit to be inversely proportional to the size of the beneficiary company. The amount of the credit may thus range from a minimum of 10% to a maximum of 30% of the research expenditure incurred. One fact emerges clearly, in any case, from this review: Italy can still offer a considerable number of tax benefits connected with new investments throughout the national territory.
For the future, the attempt to relaunch the economic development of our country by encouraging the presence of foreign companies will certainly not be able to do without tax incentives, for which it will nevertheless be indispensable to focus on a greater spreading, especially among foreign investors, of the information on the subject, also pointing out the just as numerous opportunities which make it possible to benefit from considerable soft loans from the European Community.

e-mail: studiosantoro@santoro.it