Author: Simone Martini Annual meeting AITC September 4th and 5th 2009 Florence, Italy

1. ITALIAN TAX SYSTEM: GENERAL OVERVIEW AND RECENT ANTI-CRISIS MEASURES Author: Simone Martini Annual meeting AITC September 4th and 5th 2009 Florence, Italy

2. Introduction The following report is aimed to give a synthetic picture of the Italian Tax System and how non resident companies or individuals could set up a business organization in Italy, ending with recent tax measures introduced by Italian government.

3. Company law: a 60 years leap forward in companies organisation AITC ANNUAL MEETING 2009 3

4. COMPANY LAW REFORM Since 2004-2005, Italy has rewritten the rules for company start up, organization and administration. This reform has brought Italian company law into line with that of other most advanced countries, introducing simplifications and greater flexibility for corporate decision-making. The new rules have replaced those in place for 60 years. Previously, government interests were at the centre of company regulations, now the company itself, as a producer of wealth, plays a central role. 4

5. COMPANY LAW REFORM The key element of the reform is self-regulation, which allows companies vast powers to establish specific rules in their memorandum and articles of incorporation, without too many strict, pre-defined obligations. Other examples of flexibility can be found in the many financial tools available as well as in many corporate governance forms. Italy has commenced profound regulatory changes even with regard to companies in crisis. The bankruptcy law reform has as its primary objective the rescue of companies in crisis (sometimes only temporarily) rather than punishment of the entrepreneur. Greater weight is therefore given to agreements with creditors and judicial intervention is more institutional, to avoid direct interference in company management. 5

6. Simplification of company start up The simplification of the rules begins with company start up, which can be instigated through the straightforward involvement of a notary. Companies can be established with a single partner and with or without a predetermined duration. In the latter case, each partner has the right to withdraw at any time merely by giving notice of their wish to do so. Public limited companies must have a minimum share capital of EUR 120,000, in line with that of the new Societas Europeae. A nominal value for shares is not necessary. If there is no nominal value, the size of a stake will be equal to the number of shares held as a proportion of the total number of shares issued. 6

7. Simplification of company start up Shareholders can contribute assets in kind and credits to help provide useful elements for running the company and to ensure the provision of sufficient capital. Also labour and services can be added to the company assets with the issue of financial instruments carrying rights of ownership or management (not including voting rights at shareholder meetings). The company´s memorandum and articles of incorporation can avoid a direct proportionality of rights between the value of the conferment and number of shares granted to partners. 7

8. Joint stock or limited liability company When choosing what type of company to establish, there are two main alternatives, each with their own ability to adapt to different demands. A joint stock company is the usual choice for large concerns. It normally seeks to open its capital to public investors through a listing on the stock market. Italian joint stock companies have greater means at their disposal than before to raise market capital, and can offer innovative financial instruments to Italian and foreign investors, with specific, individual rights of ownership and participation. 8

9. Joint stock or limited liability company Limited liability companies are more appropriate for small- and medium-size companies with a restricted ownership base in which the shareholders are usually also managers and employees of the company. Until recently, limited liability companies were unattractive to large international investors. However, following the reforms, they have become an important commercial option for the small- and medium-size foreign entrepreneurs. By giving a central role to the shareholder´s personal interests, the new limited liability company has been transformed from a legal entity distinct from the shareholders into their own effective operating tool. 9

10. Three models for corporate governance When establishing a joint stock company in Italy, there are three different models of corporate governance from which to choose. As well as the traditional model, with an administrative body and a board of auditors, there are "single" and "dual" systems which follow the Anglo-Saxon and German examples respectively. In the single model, company management is the responsibility of a board of directors appointed by the shareholders, whereas legal control is granted to the management control committee, appointed by the board of directors. The circulation of information between the board and the controlling body, all of which saves time and money, is central to this model. 10

11. Three models for corporate governance In the dual model, a management board and a supervisory board operate together. The supervisory board controls the activities of the directors and has the power of appointing or dismissing directors, together with ensuring that they are responsible for their actions and approving the budget. This system seeks to achieve easier and quicker decision-making procedures, shifting traditional shareholder duties to the two boards. This system of governance makes separation of ownership and control of company bodies more efficient. 11

12. Three models for corporate governance Whatever model is chosen, the company´s functioning is ensured by rules which combine the need to avoid interference in the decision-making process (such quorums for establishing responsibility actions promoted by minority groups) with the need to avoid too much damage to the company when directors act improperly. In this respect, the new regulations on conflicts of interest are important: managers must declare from the outset any personal interest in planned transactions. On the other hand, managers are protected by the elimination of controls in the general running of affairs, which are replaced by specific obligations. In this way, it is possible to avoid an excessive extension of their responsibility, which sometimes ended up becoming objective, by freedom from specific situations. 12

13. Shareholders´ agreements With the reform, shareholders´ agreements have officially become part of company regulations. Whereas, in the past, the voting trust (to limit the transfer of shares to an uninvolved third party) was considered a mere gentlemen´s agreement, it has now been expressively included in the Italian Civil Code, with effect from 1 January 2004 in order to achieve transparency in the real centers of company power and control. There is no obligation to render public those shareholders´ agreements drawn up with reference to companies that do not use risk capital. However, in the case of companies that do use risk capital, the company must be informed of the shareholders´ agreements and they must be mentioned in the minutes of the Annual General Meeting filed with the official register of companies. 13

14. Limited liability companies The model for limited liability companies has been thoroughly reviewed by the reform in order to especially satisfy the requirements of small and medium enterprises. Limited liability companies are no longer considered small joint stock companies; rather, they have taken on their own physiognomy, with distinct elasticity and a central role for their shareholders. Limited liability companies thus function like a company formed by more than one individual and offer the benefit of limited liability of shareholders without the rigidity of a joint stock company. 14

15. Limited liability companies This simplification is evident from the moment of establishment of a limited liability company, which is possible even without objectively certifiable values. The payment of capital can be substituted by an insurance policy or a bank fidejussion guarantee of execution. The same mechanism is applicable with regard to granting works or services. However, with regard to allotment in kind, such evaluation does not require court appointment of an expert (as was previously the case). The memorandum and articles of association may attribute particular rights and privileges to individual shareholders, with regard to their powers within the company and their participation in the profits. With respect for the distinctly personal nature of the limited liability company, limits may be introduced on the circulation of shares. 15

16. Limited liability companies In the case of collective administration, decisions can be adopted without specific meetings being necessary. The determination and division of responsibilities between shareholders and directors is always governed by the memorandum and articles, except for the exclusive assignment to shareholders of decisions regarding modifications to the memorandum and articles of association and the approval of the annual accounts. The most recent legislation on financing is particularly innovative and also allows for bond issues. However, in order to protect savers, these issues may only be purchased by qualified investors, who can sell the securities on only if they assume joint responsibility for the company´s solvency. 16

17. Changes in bankruptcy legislation The new legislation seeks, in the first instance, to save those firms which are in crisis (sometimes only temporary), rather than punishing the entrepreneur responsible. In line with rules adopted by most of the EU Countries, the solution of liquidation of the company´s assets has given way to their conservation, in order to attempt recovery. Greater space is allowed to agreements between the parties, between creditors and debtors. After discussions with the creditors involved, the official receiver shall decide, on the basis of applications received, if a sale should be requested according to this procedure. The obligation of residence for those individuals subject to bankruptcy proceedings is no longer necessary, in order to meet the travel needs of the firm´s owner, especially abroad. 17

18. How to set up business in Italy: main types of business organizations AITC ANNUAL MEETING 2009 18

19. MAIN TYPES OF BUSINESSENTITIES UNDER ITALIAN LAW • PARTNERSHIPS: • Società in nome collettivo (S.n.c.) • Società in accomandita semplice (S.a.s.) • Società in accomandita per azioni (S.a.p.a.) • LIMITED LIABILITY COMPANIES: • Società per azioni (S.p.A.) • Società a responsabilità limitata (S.r.l.)

20. PARTNERSHIPS • S.n.c. – ‘Societa` in nome collettivo’ (Unlimited Partnership) • This type of business entity is a partnership whose partners have unlimited liability for all the acts and transactions entered into by the partnership. All or any of the partners may be appointed as directors of the partnership. Italian law generally restricts the transfer of a partner's interest in the partnership. 20

21. PARTNERSHIPS • S.a.s. - 'Societa` in accomandita semplice' (Limited Partnership) • This entity has a combination of limited and unlimited liability. There are two categories of partners: general partners who have unlimited liability, and special partners who are liable only to the extent of their capital contributions to the partnership. Only general partners may be appointed as directors of the partnership. 21

22. PARTNERSHIPS S.a.s. - 'Societa` in accomandita per azioni' (Partnership Limited by Shares) • The structure and characteristics of this type of business entity are similar to a limited partnership, except that the capital contribution of the partners is represented by shares; and generally, the law relating to limited liability companies will apply. 22

23. LIMITED COMPANIES • S.r.l. - 'Societa` a responsabilita` limitata' (Limited Liability Company) • This type of business entity (usually indicated as "S.r.l.") is equivalent to a private limited company in which the capital participation of the members is represented by quotas instead of shares. Shares are physically represented by certificates but quotas are only registered in the quotaholders book maintained by the company. The company's articles of association may restrict the transfer of quotas. The minimum capital requirement is Euro 10.000,00. 23

24. LIMITED COMPANIES • S.p.a. - 'Societa` per azioni' (Public Corporation) • This type of company is the equivalent of a public limited company (usually indicated as "S.p.A."). There is a minimum capital requirement of Euro 120.000,00. The interests of shareholders in the share capital of an S.p.A. are represented by shares. An S.p.A. can issue different classes of shares with different rights attached to each class. For example, not all classes of shares issued to the shareholder give the right to vote at company meetings. 24

25. LIMITED COMPANIES Only S.p.A. and S.r.l. entities confer limited liability on all their members, subject to certain conditions. They are the most common business organizations used by investors to conduct business in Italy. A subsidiary of a non-Italian parent company may be set up as either an S.p.A. or an S.r.l. 25

26. Incorporation of a joint stock company (S.p.A. or S.r.l.) The S.p.A. is the legal entity preferred by large enterprises. Most of the regulations which apply to S.p.A.'s also apply to S.r.l.'s. Government authorization is normally not required for the establishment of an S.p.A. except in specific cases. For example, the incorporation of a bank requires prior authorization by the Bank of Italy. Incorporation occurs by a 'public deed' which is drafted by a notary public. The promoters can be either individuals or corporations. They may appear personally or by proxy to execute the deed of incorporation, approve the company's memorandum and articles of association and appoint the company director(s). 26

27. Incorporation of a joint stock company (S.p.A. or S.r.l.) At incorporation there must be at least two shareholders. After incorporation, all shares may be held by a single shareholder. In the event of insolvency, a single shareholder will have unlimited liability for all acts and transactions undertaken by the company during his period of ownership. Through Legislative Decree 88, enacted March 3, 1993, the Government adopted EC Directive 89/667. The Directive provides for the recognition of limited liability companies (S.r.l.) with only one shareholder under the company law system of the E.U. Member States. Formerly, Italian limited liability companies (S.r.l.) could only be incorporated with at least two shareholders. After incorporation, the company may begin to trade. 27

28. Management of the company An S.p.A. can be tipically managed* by a board of directors or by a sole director. If the company is managed by a board of directors, but the articles of association specify only a minimum and maximum number of board members, the exact number of members may be determined at a shareholders' meeting. Directors need not be Italian citizens or residents. The articles of association of a company determine the powers of the sole director and the board of directors. The board may delegate, within legal limits and within the company's articles, some of its powers to an executive committee composed of board members, or to one or more managing directors. The day to day management of the company may be delegated by the board or by the sole director to general managers, managers, and other executives. *(see also above ‘single’ and ‘dual’ corporate governance systems) 28

29. Management of the company Directors have the power to represent the company and perform all acts delegated to them by the company. The power of representation granted to directors may be limited by the articles of association or by a resolution of a shareholders' meeting. However, these limitations cannot be used against third parties acting in good faith unless it is proven that they participated in a breach of duty by a director. Directors have a general fiduciary duty to the company. They cannot become partners with unlimited liability in competing companies for their own account, or for the accounts of third parties which may be in competition with the company's activities, without specific authorization at a shareholders' meeting. In the case of a breach of this duty, directors may be removed from office and may be liable for damages caused to the company. 29

30. Statutory Auditors An S.p.A. must have a board of statutory auditors. The main functions of the board of statutory auditors are to supervise the management of the company, to ensure compliance with the law, to ensure compliance with the memorandum and articles of association and to verify company accounts. The board of statutory auditors does not audit the company. Company financial audits are performed by independent accounting firms. The auditors board has the right to request information from directors with regard to the company's general business or specific transactions. The board may also, at any time, inspect the company's accounts. Statutory auditors are required to inspect the company's accounts quarterly and report on the company's financial statement at the shareholders' meeting. 30

31. IRES: a European-style Corporate Tax AITC ANNUAL MEETING 2009 31

32. IRES Corporate Tax Since 2004-2005 years, Italy has abandoned its previous taxation system introduced in the 1970s and established IRES, the new corporate tax as outlined in the tax reform. This is a radical change. Italy has chosen to follow the same route as other advanced countries, by using its taxation regime to support resident businesses in increasing their competitiveness. The corporate tax rate is now reduced to a uniform 27,5%. Unlike before, company profits are now taxed rather than shareholders´ profits, and capital gains from participations in companies are no longer included in the taxable base and, consequently, taxed. Profits and losses can be offset both within Italian and international company groups by consolidation of the taxable income. In so doing Italian Parliament has demonstrated its foremost objectives of simplifying the tax system and bringing it into line with current developments in other countries. 32

33. Single 27,5% rate IRES is applicable with a single rate of 27,5%. This brings to an end the previous system of the Dual income tax, which made the average tax rate actually collected different for every firm. The substitute taxation regime for capital gains on company reorganizations (mergers, de-mergers, transfer of assets, etc.) will no longer exist. 33

34. Partial exemption for dividends With the Tax Reform, Italy has abolished the "imputation" system of taxation on corporate income, which considered the tax on companies only as an advance payment of the personal tax owed by shareholders upon receipt of dividends and which consequently involved a tax credit system associated with the distribution of profits. In line with the current developments in all European countries, Italy has now also opted for a partial exemption system for dividends. On dividends distributed by a company to another company, there is a 95% exemption since the costs related to managing the participation shares are totally deductible. 34

35. Partial exemption for dividends Dividends distributed to individualsare taxed differently according to the percentage of their shareholding ("qualified or non-qualified") and according to the context in which they are received (in their business capacity or outside of it). The exemption is 50,28% if the dividend is paid to an entrepreneur who holds the participation in a business capacity, or to any individual with a "qualified" shareholding (i.e., greater than 2% of the voting rights or 5% of the share capital in the case of listed securities; or greater than 20% of voting rights or 25% of the share capital of non-listed securities). In all other cases (non-qualified shareholdings or shareholdings belonging to entrepreneurs but not associated with their business activity), instead of the partial exemption system, a final withholding tax at source on all the dividend applies, with a fixed rate of 12,5%, after which the dividend is excluded from income tax. 35

36. Participation Exemption area Capital gains derived from the sale of shareholdings are relevant at 95% for companies and at 50,28% for individuals. Capital gains and capital losses have opposite but proportional effect on the taxable base, in compliance with the principle of the "participation exemption", which is one of the pillars of the IRES corporate tax. In order to benefit from the "participation exemption system", shareholdings must have certain features: they must be held by the company for at least a year; they must be included among the financial fixed assets; and they must be holdings in companies which actually carry on a business activity and are not resident in a country with a preferential tax regime. 36

37. Tax credits and debits can beoffset within groups Italy allows companies belonging to the same group to benefit from the consolidation of taxable income. Basically, each company determines its taxable base separately, but before calculating the tax at the 27,5% rate, the taxable income of each company is aggregated within only one of the companies, which then files a consolidated tax return and makes a single tax payment for all the companies of the group. In this way, profits and losses of the individual companies are added together and the tax credits of loss-making companies immediately offset the debts of the money-making ones. The consolidation system is optional and its rules are different for national and international consolidation. 37

38. Investment and possibilities in Italy for non-resident entities AITC ANNUAL MEETING 2009 38

39. Definition of "Permanent establishment" in Italy With the Ires reform, the notion of permanent establishment has also been clarified, so that foreign companies which base themselves in the Italian territory can know for sure if they are subject to Italian tax law or not. The definition is based on the OECD Model Convention for the Avoidance of Double Taxation. In Italian law, a permanent establishment means a fixed place of business, through which the business of the non-resident enterprise in the country is wholly or partly carried on. There are included: a place of management, a branch, an office, a factory, a workshop, a laboratory, a building site, etc. 39

40. Representative office The simplest business structure available to a foreign company is the 'representative office‘. It is often used by foreign companies to research the market before deciding to establish a branch or a subsidiary. A representative office does not allow a foreign investor to handle commercial or financial transactions of any kind, nor can it act as an agent or distributor of a foreign company. Failure to comply with such rules may create a permanent establishment resulting in income generated by the activities or services rendered by the representative office deemed fully taxable income in Italy. In summary, a representative office serves mainly as a marketing tool with no tax implications, as long as the structure is kept within the strict limitations referred to above. 40

41. Branch Foreign investors who do not want to incorporate an Italian subsidiary may conduct their business in Italy through a registered branch. The formation of a branch is often advisable when the foreign company is likely to incur losses during the initial year which can be offset against profits earned from other activities. It may also be advisable to form a branch when there is no double taxation treaty between Italy and the country of origin of the foreign investor. The financing of the branch may be carried out through a specific loan agreement with the parent company. There is no requirement for statutory auditors to be appointed. Profits earned in Italy by the branch are subject to Italian corporate tax. The branch is considered a permanent establishment and must file its own corporate income tax return together with an annual financial statement of the parent company including profit and loss accounts. The branch must keep proper books and file VAT returns. 41

42. Latest fiscal measures AITC ANNUAL MEETING 2009 42

43. Anti-crisis measures The Italian Government has recently approved a new anti-crisis urgent decree in which, among other provisions, has stated tax cuts for firms that reinvest profits and re-hire suspended workers. To help Italy’s struggling manufacturing sector, the cabinet has approved a reduction of 50 percent in taxes on company profits if they are re-invested in machinery. This measure (so-called “Tremonti-Ter”) is a more limited version of an initiative already adopted twice for limited periods. It will run until June 30, 2010. The cabinet has also imposed limits on fees that banks currently charge clients who exceed agreed overdraft facilities. 43

44. New Tax Amnesty As an amendment to the anti-crisis fiscal package, Italian government has introduced a new tax amnesty (or so-called “tax shield”) to encourage the repatriation of undeclared funds held by Italians abroad. Hopefully, it could provide a welcome injection against the current recession of Italian economy. The amendment introduces an extraordinary tax on all assets held abroad and undeclared to the Italian authorities. The anonymity of the taxpayers is to be guaranteed, and the repatriation or declaration will not be able to be used in any way against them. 44

45. Taxpayers Services AITC ANNUAL MEETING 2009 45

46. Taxpayers Services The Italian Revenue Agency has taken stock of Taxpayers services in 2008, and the outcome is definitely encouraging, in particular about online services, front office and call center.The number of taxpayers that use online services increases year after year in Italy. In particular, on 2008 the online tax returns have been more than 37 millions (+3,7% compared to 2007), web tax payments have reach the amount of 30 millions (+9% compared to 2007) and the taxpayers that have looked up their own fiscal situation on “cassetto fiscale” – a kind of tax information postbox available online – have been almost 7 millions, more than 75% compared to 2007. 46

47. Taxpayers Services More than 9 millions of services have been provided by local offices located all over the Country, +7% compared to the previous year, and have mostly regarded assistance about communications of irregularity and notices of payment, support in filling out tax returns and their online submission.  Moreover, in 2008 more than 1 million of  taxpayers have used the special service to fix an appointment with a tax officer to solve their specific problems, on the rise compared to 2007.  Almost 2 millions of taxpayers have also shown to prefer stay in touch with the Italian Revenue Agency using  call canter, emails and sms, to ask information or resolve tax issues. In 2009, the Tax Administration is improving efficiency of its call center  system through the use of Voip technology that allows to accelerate response time and reduce operating costs. 47

48. Thanks for Your attention E-mail address:simone.martini@studiobgs.com