Italy introduces a new tax on undistributed profits for subsidiary companies.

Italy has implemented new tax measures affecting subsidiary companies benefiting from a special tax regime. The Ministry of Economy and Finance issued a directive on June 26, 2023, regarding the introduction of a replacement tax on undistributed profits.

This new tax was introduced in accordance with Law No. 197 of December 29, 2022, which is included in the 2023 state budget.

The replacement tax applies to profits that do not qualify for exemption and can be declared in the tax return for the year 2022.

The tax rate for qualified undistributed profits is 9% (and 30% for individuals). However, for parent companies, the rate is reduced by 3 percentage points to 6%.

To benefit from the incentives, companies must repatriate the profits before the deadline for paying the remaining income tax balance for the tax period following December 31, 2022. Additionally, the received profits must be reserved in a special equity reserve for a minimum of two years.

The implementation directive provides additional information on definitions, eligible individuals for option grants, profits/reserves eligible for option grants, the use of options, determination and payment of the replacement tax, and other relevant matters.