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A new international advance payment agreement introduces a new mechanism in Italy whereby companies with international businesses can commence a procedure allowing for issues relating to the taxation of transfer prices, interest, dividends and royalties to be settled by execution of an agreement between the competent revenue office and the taxpayer.

Reforms to the Italian taxation system which became effective on January 1 2004 introduce consolidated taxation for Italian corporate groups. Groups are now taxed by adding up the taxable bases of all member companies which have opted for consolidated taxation.

Foreign, non-resident corporations and entrepreneurs can now register directly for value added tax (VAT) purposes in Italy without having to appoint a VAT representative, unless they transact with Italian consumers. The tax administration has also issued rulings on the controlled foreign company rules in order to avoid double taxation.

As part of its reform of the Italian tax system, the government has drafted new tax rules providing for the introduction of a thin capitalization rule, which aims to limit the interest tax deduction from the taxable income of Italian companies.

Under the Italian controlled foreign company rules, profits realized by a foreign company which is based in a blacklisted country, but controlled by an Italian company, are considered part of the taxable income of the controlling Italian company. Consequently, dividends originating from such profits are not taxable when cashed by the Italian company.

A new Italian law allows taxpayers to benefit from a tax amnesty for value added tax and income tax (both corporate and personal) incurred during the fiscal period from 1997 to 2001. In order to benefit from the amnesty, a small percentage of the outstanding tax must be paid.

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