Branch exemption and the recapture of losses

With the measure n. 165138 issued on August 28th, 2017, the Italian Revenue Agency approved the implementing provisions of the branch exemption regime, which has been introduced by the so-called “Internationalization Decree” and regulated by article 168 ter of the Italian Consolidated Tax Text (CITT).
The Branch Exemption regime applies to resident companies operating in a foreign country through a permanent establishment and includes the exemption of profits and losses of the branch itself resulting from the financial statement drawn up in accordance with article 152 of the CITT.
The option must be adopted in the first income tax return following the creation of the PE. In case of PEs already established before October 7th, 2015, the parent company can decide to opt for the exemption within the second tax year following the year the new regime entered into force (2015): in other words, within the deadline for the submission of the income tax return related to fiscal year 2017 (to be filed in 2018).
The new Revenue Agency’s measure regulates the “recapture” of the PE’s losses achieved in the five years before the application of the option.
Substantially, income generated by the branch is included in the determination of the parent company’s taxable income up to the amount of net tax losses produced by the branch itself over the period. If, during the five years before the application of the regime, both PE and the parent company have incurred losses, the latter’s ones are the those to be first used, in accordance to a priority principle.
It is also specified that only losses actually used are relevant for “recapture” purposes, whereas their exceeding amount won’t be relevant and not even carried forward by the parent company.
In addition to that, recapture is not calculated on a global basis, as previously stated in the measure draft. The calculation, instead, is made State by State, considering the presence of a single PE in each country, even if there are several territorial dislocations.
Potential abusive behaviors, such as the anticipation of losses before the exercise of the option or the postponement of profits, will be examined according to article 10bis of the Italian Law no. 212/2000.
Furthermore, this measure explains that the branch exemption option remains in force together with the neutrality principle in case of extraordinary operations, if the successor in title opted for the exemption or decides to opt for it within the submission of the income tax return related to the fiscal year the operation becomes legally effective. Assets and liabilities of the PE maintain the same fiscal value they had previously.
The recapture remains in force too, even though the buyer decides to opt for the exemption in the tax return following the fiscal year when the extraordinary operation becomes legally effective. The capital gain or loss coming from the PE transfer is included into the remaining in force recapture, provided that the successor in title has the residence in Italy and opts for the branch exemption.
The aforementioned measure also specifies that if the resident company distributes to its shareholders profits arising from an exempt PE located in “black list” countries which are not subject to Cfc rules, then these profits will be included in the resident company’s taxable income and not in the shareholders’ one. Profits and losses not belonging to this class of PE (black list and no Cfc) won’t be included in the resident company’s taxable income.
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