Italy allows horizontal tax consolidation between sister companies

Sister companies resident in Italy are now allowed to exercise the group taxation option and act as the consolidating company.

According to the tax consolidation regime previously in force, a non-resident taxable company (corporate income tax - IRES) was allowed to exercise the group taxation option in its capacity as parent company only if it had a stable organisation in Italy, whose equity comprised the stakes held in each subsidiary company (Article 117 (2), Consolidated Law on Income Tax – TUIR).

Article 6, Legislative Decree 147/2015 relating to national consolidation has overcome this restriction, allowing “sister” companies to exercise the group taxation option and to act as the consolidating company. These sister companies can be resident in Italy or stable organizations (the entities referred to in Article 73 (1) d)) of companies resident in EU member states, or in the states that provide an exchange of information according to the Agreement on the European Economic Area (EEA).

This new so-called “horizontal” consolidation or consolidation between sister companies (referred to in Article 117 (2-bis), TUIR) is granted on instructions by the non-resident entity to the “designated” subsidiary to exercise the group taxation, which in this way becomes the consolidating entity. The designated subsidiary cannot consolidate companies that in turn control it (Article 2359, Italian Civil Code, and Article 120, TUIR).

This option on designation of the foreign entity can be exercised using a proper form (to be filed electronically to the Revenues Agency) and produces the following effects:

  • the designated subsidiary, in its capacity as consolidating company, acquires all the rights, obligations and duties set out in the laws on consolidation (Article 117-127, TUIR) for the parent companies or entities
  • the control requirements must be verified in regard to the non-resident parent entity
  • the effectiveness of the option is subject to the condition that the non-resident parent entity designates the resident subsidiary taking on, subordinately, the responsibilities set out by the law (in particular, Article 127, TUIR – for parent companies or entities). 

If the tax consolidation regime ceases before the end of the three-year period of effectiveness or is not renewed on expiry, the tax losses indicated in the consolidation statement (Article 122, TUIR) – when the allocation criterion has not been specified – shall be allocated proportionally to the subsidiaries that have generated them; net of the used ones, towards which the control requirement ceases according to the consolidation agreement.

Moreover, if the control requirement towards the designated subsidiary ceases on any ground, before the end of the three-year period, the non-resident parent company may designate, among the subsidiaries belonging to the same consolidation, another resident subsidiary without interrupting the group taxation regime. The newly designated subsidiary takes on the responsibilities set out by the law for the parent companies or entities, relative to the previous tax years during which the group taxation regime was in force, jointly and severally with the designated company, towards which the control requirement ceases to exist. For all the periods of validity of the consolidation, the subsidiary responsibility of the non-resident parent company remains.

All the provisions mentioned so far are applicable as from the beginning of the relevant tax period as at 7 October 2015 (the date that Legislative Decree 147/2015 came into force), or from 1 January 2015 for the companies whose tax year coincides with the solar year. To this purpose, both the designation by the EU parent company and the adhesion by the “sister” subsidiary companies had to be done by 31 March 2016 or, for the tax years ending after 1 January 2016, this option is to be indicated in the Italian Tax Return 2017 (Modello Unico).

The provisions of the aforementioned decree have been adopted by order of the Director of the Revenues Agency of 6 November 2015.

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