Name of Author

VITO D’AMBRA
Studio D’Ambra e Associati

Corresponding state

ITALY

In the corresponding state, is real estate property preferably acquired directly (asset deal) or indirectly (share deal)?
From a tax point of view, what are the advantages / disadvantages of an acquisition of real estate by way of an asset deal or a share deal? Especially, are there any advantages of a share deal regarding inheritance and gift taxes, or with respect to real estate capital gains taxes etc.?

1. Individuals: the majority of purchasers prefer to buy by an asset deal to avoid the maintenance costs of the company and the risk of the previous liabilities of the company; the minority (rich people) prefer a share deal for the following reasons: a) tax planning; b) privacy; c) more defenses in case of personal liabilities.

The sellers prefer a share deal

1. Companies: usually the purchaser prefers an asset deal to capitalize the purchase price and to make tax effective depreciation on the property; but privacy reasons and tax advantages, in case of future sale of the real estate, may persuade the purchaser to prefer a share deal, with the interposition of foreign companies or  domestic trust companies.

The sellers prefer a share deal in virtue of the possible tax advantages (participation exemption etc.) if certain conditions are met.

1. Real Estate Funds: the Italian Laws provide particulars rules regarding the Real Estate Funds (see the article of the scholar Doctor Tommaso Landi in Quadrimestre di Business and Tax, n.1/2007, www.businessandtax.it): these entities are closed-ended funds and may be formed and managed only by an Italian asset management company (SGR).  Real Estate funds are not liable to IRES or IRAP.  Profits distributed by the fund to Italian resident unit-holders are subject to withholding tax . Profits distributed to certain non-resident unit-holders are not subject to a withholding tax.
   The funds usually prefer to acquire directly the asset to avoid the eventual liabilities problems of the seller company; the share deal is selected in few cases in virtue of specific concret reasons.

The recent Government urgent legislative decree n.112/2008 (approved by the Parliament and converted in Law 133/2008 published on the Oficial Gazette 21/08/2008, n.  SO 196/L n. 195, with several amendments) enacted several modifications to the Real Estate Funds tax regime :
On certain real estate funds [the conditions are the following: i) the funds not listed in a Stock Exchange; ii) having assets for less than 400 millions of euro; iii) having  less than 10 participants; iv) the participants have family relationship] are levied a new patrimonial tax at the rate of 1% and a witholding tax of 20% in case of redemption;
b) the general witholding tax rate will continue to be at the rate of 12,50%;
c) the Italian Tax Revenue (Agenzia delle Entrate) will presume as resident in Italy (of course a contrary rebuttal evidence may be provided by the taxpayers) the companies or the entities that invested mainly in shares of ended real investments funds and that are controlled, directly or indirectly, by Italian residents.
The Double Tax Treaties are applicable.

4) The Italian SIIQ (Società di investimento Immobiliare Quotata) is similar to the REITs. The regulation is provided not only by the Law n. 296/2006 (Financial Bill for the year 2007)
, but also by the Ministerial Decree n.174/2007.
The special tax regime therein provided is applicable to the Italian Companies Limited by Shares, if the following conditions are met:

1. shares of the company must be listed on the Stock Exchange;
2. the business of the company must have as prevalent (the 80%) business the leasing of real estates;
3. each shareholder may hold no more than 51% of the voting rights nor than 51% of the earnings;
4. 35% of the shares has to be shared amongst different shareholders that may hold a maximum of 1% of the said elements
5. distribution of the 85% of the net profits of the SIIQ

Income tax is not applicable to the earnings generated by the leasing activity or by dividends distributed by other SIIQ.
Except for the distributions to pension funds, SIIQS, OICM (entities of collettive investments) etc., a witholding tax is levied on the dividends.
Also a capital gain tax may be levied if certain conditions are met.
In virtue of the recent modifications enacted by the Italian Government to the Real Estate Funds tax regime, it is possible that soon also this other Real estate vehicle will be subject to modifications.

1. In order to plan a better taxation for the future Inheritance and Gift Taxes, a share deal is usually preferable and rather than an asset deal.

Different options may be taken in virtue of the different taxable basis:
a) with regard to the assets, the taxable basis is the market value with the minimum of the Catasto value (the value estimated by the Italian public Body named Catasto);
b) with regard to the shares, the taxable basis is the net book capital value of the company; and with regard to the shares of the companies listed in the stock exchange market, the relevant basis of taxation is the average of the stock exchange listing during the last 3 months

Provided that the real estate is held by a company domiciled in the state of location of the real estate, and provided that the company is performing operating activities/ conducting a business, how is the ownership of the assets of the company usually structured?
I.e., are real estate assets separated from the operating business (two separate companies under the same control)?
And, what are the drivers behind such structuring? Civil law (ring fencing) and/ or tax reasons, other reasons?

In virtue of pratical reasons  (ring fencing and facilitating sale) and to realize a better tax planning, normally in Italy real estate assets are separated by the operating business assets, although often the different companies are under the same holding control.

Is there a taxation upon change of ownership in accordance with civil law(asset deal)?

Yes, there are many taxes upon change of ownership: income taxes (on the capital gains); registration transfer tax (imposta di registro); VAT (IVA); gift or inheritance tax; other real estate transfer taxes as cadastral and mortgage taxes (imposte ipotecarie e catastali). The mentioned taxes are applicable at different rates or at a fixed amount depending on the specific circumstances of the different cases.
Of course, not all the taxes are contextually applicable (depending on the different specific circumstances of the different cases).
There is taxation only if the conditions to obtain an exemption regime are not met.

Is there a taxation upon indirect transfer of real estate, in particular in the event of a change of ownership in a real estate company (change of control, share deal)?

Yes, there is a taxation if the conditions to obtain the exemption regime are not met .
The main applicable taxes are income taxes and registration transfer tax

Real estate capital gains tax

Individual and Corporate Income Tax

The taxation on the real estate capital gains may belong to the individual income tax regime (generally if the seller is an individual) or to the corporate tax income (generally if the the sellers are limited companies, other legal entities or a trust).

INDIVIDUAL INCOME TAX:
Exemptions applicable to the capital gain of real estate transferred by individuals: no income tax is due:
a) if a person sells his real estate after five years from the purchase or the building date;
b) in case that the seller received the real estate by inheritance; 
c) if the real estate is the first house where the person is resident and lives;
d) if it is not possible built on the land according to the local zoning regulations
***

CORPORATE INCOME TAX:

1. the participation exemption

In Italy this partial exemption is provided by the art. 87 of Italian Tax Income, contained in Legislative Decree n.917/1986. With regard to Limited Companies and Commercial Entities, 95% of the capital gain is not taxable. The rate of exemption is of 60% with regard to other companies and individual enterprises. The mentioned partial exemptions may be applicable only if the following conditions are met:

1. shareholding has to last more than 12 months;
2. classification of the shareholding, in the balance sheet (it is relevant the first balance sheet during the holding period), in the category of the long term investments (immobilizzazioni finanziarie);
3. residence of the company in a State included in the*White List* that will be provided by the Ministry of Finance Decrees (list that will include the States that allow the exchange of information);

d) the company exercises a commercial (according to the Italian definiton contained in the art. 55 of the Italian Income Taxes Decree n. 917/1986, named TUIR) business.

2) There is no taxation in case of a tax neutral reorganization if certain conditions are met

Real estate transfer taxes

In case of divorce or separation (separazione), the law provides the exemption for the real estate transfer tax (imposta di registro) and for the other transfer taxes

Inheritance and gift tax

Let me point out that although I make reference to the inheritance tax, a similar regulation is provided with regard to the gift tax.

If the heir is son or
belongs to the family of the deceased, there are some exemptions or lower tax rates.
General inheritance tax rate is 8%; if the heir was the son or the father or the mother or the
grandfather or the grandmother, or the husband or the wife, of the deceased, the inheritance tax is
applicable only if the value  of the assets exceeds 1 million of euro (each heir has 1 million euro of exemption. My opinion is supported also by the following Doctrine: FALSITTA, Manuale di diritto tributario, 2007,p.541; DUS, La reintroduzione dell'imposta sulle successioni..., in Il Fisco, 8/2007, 1-1075 e ff.), at the tax rate of 4%; if the heir is the brother or the sister, the inheritance tax is applicable
only if the value (determined as already described above) exceeds 100.000,00 euro, at the tax rate of 6%.
 The general rule: the inheritance tax is applicable to all the goods and rights, of the deceased person, existing in Italy and abroad.
The special rule: if the deceased at the moment of the death (opening of the universal succession) was not resident in Italy, the inheritance tax is due only with regard to the goods and rights existing in
the Italian territory.

Other taxes

The exemption regime is applicable to the cadastral and mortgage taxes in case of transfer of the real estate made in occasion of divorce or of separation (separazione)

What time or what civil act is relevant for the taxation of the acquisition of real estate (time of conclusion (signing), time of completion (closing) or time of registration?

As far as the income taxes, it is relevant the time of the acquisition of the real estate;
 As far as the registration transfer tax, the tax is applicable at the time of the registration with the mentioned Italian Real estate Register (Conservatoria dei Registri Immobiliari)

Depreciation and amortization of real estate.

As far as the business assets, the regulation of depreciation is provided by the art. 102 of the Italian Income Tax Law (the Presidential Decree n.917/1986), that refers to the provisions enacted by the ministerial decrees and to the depreciation rates therein provided
The depreciation is not allowed:

1. with regard to the land;
2. with regard to the houses or to no long term real estate investments

Real estate capital gains taxation (Individual Income Tax and Corporate Income Tax)

 The taxation on the real estate capital gain may belong to the individual income tax regime (generally if the seller is an individual) or to the corporate tax income (generally if the sellers are limited companies, legal entities or atrust).

Limited Companies etc.:
the real estate capital gain taxation (property situated in Italy) is applicable:

A) if the seller is an Italian resident company

B) if the seller is a non resident company with permanent establishment in Italy

C)  if the seller is a non resident company without permanent establishment in Italy, in case that the following conditions are met
 i) if the sale of the property takes place within five years from the acquisition or construction;
 ii) if the real estate is a land on the which, according to the local zoning regulations, it is possible to built.

D) Individuals: the taxation on real estate (situated in Italy) capital gain is applicable 
i) if the sale of the property takes place within five years from the acquisition or construction;
 ii) if the real estate is a land on the which, according to the local zoning regulations, it is possible to built.

As far as exemptions, reference is made to the exemption paragraph , above

Individual Income Tax and  Corporate Income Tax

Individual Income Tax (IRPEF)
The regulation is provided by the Presidential Decree n.917/1986.
.The rates are progressive: 23% (up to 15000 euro of income), 27% (from 15000 euro up to 28000 euro of income), 38% (from 28000 up to 55000), 41% (from 55000 up to 75000), 43 % (income over 75000)

Corporate Income Tax (IRES):
The rate is 27,5%. The regulation is provided by the Presidential Decree n.917/1986.

Besides the capital gains taxation, there is also the ongoing taxation on real estate: rental income or imputed income.

Another tax named IRAP is levied on the business and professional income at the rate of 3,9%. The IRAP taxable basis is different from the IRES  and Irpef basis of taxation.

Real estate transfer taxes

If VAT is due (see below), Real estate transfer tax (imposta di registro) is generally levied at a fixed amount (euro 168).
If the VAT is not due, the Real Estate transfer tax is of course applicable and the rate may vary , (from 1% up to 15%), depending on the specific circumstances of the different cases

Inheritance and gift tax

Recently the inheritance and gift taxes have been reintroduced in Italy by law decree n. 262/2006 converted in law n. 286/2006.
The art. 2 of the mentioned decree provides that the regime of these taxes, except for some new
provisions introduced by the same decree n. 262/2006 (regarding the tax rates: if the heir is son or
belongs to the family of the deceased, there are some exemptions or a lower tax rate), is provided by
the legislative decree n. 346/1990.
General inheritance tax rate is 8%; if the heir was the son or the father or the mother or the
grandfather or the grandmother, or the husband or the wife, of the deceased, the inheritance tax is
applicable only if the value  of the assets exceeds 1 million of euro (each heir has 1 million euro of exemption. My opinion is supported also by the following Doctrine: FALSITTA, Manuale di diritto tributario, 2007,p.541; DUS, La reintroduzione dell'imposta sulle successioni..., in Il Fisco, 8/2007, 1-1075 e ff.), at the tax rate of 4%; if the heir is the brother or the sister, the inheritance tax is applicable
only if the value (determined as already described above) exceeds 100.000,00 euro, at the tax rate of 6%.

The general rule: the inheritance tax is applicable to all the goods and rights, of the deceased person, existing in Italy and abroad.
The special rule: if the deceased at the moment of the death (opening of the universal succession) was not resident in Italy, the inheritance tax is due only with regard to the goods and rights existing in
the Italian territory.

Let me point out that the art. 2 of the legislative decree n. 346/1990 provides the following
presumptions.

The mentioned art. 2 consider existing in Italy, and the inheritance tax is applicable to:

a) the goods and rights (included the life estate) entered into the Italian public records;
b) the shares and the documents of participation in companies or other entities, that have in
Italy the registered office or the residence of the administration or the main place of business;
c) the bonds or other securities emitted by the companies or entities mentioned sub the letter
b;
d) the documents of title to goods existing in Italy;
e) the credits, the claims, the bills of exchange, the promissory notes, the cheques, if the
debtor or the drawee or the issuer is resident in Italy;
f) the credits guaranteed by assets existing in Italy, within the value of the goods, although
the debtor is not resident in Italy;
g) goods travelling abroad with destination to the Italian territory or the goods which are in the temporary export regime.
The goods travelling in Italy are not considered, for the purpose of the tax inheritance, existing in Italy if they have an abroad destination; and the same rule is applied with regard to the goods which are in
the temporary import regime.

As far as income tax, if the heir is resident in Italy, he is owed to pay income tax
on the earned income (for example, the dividends, the interests, the rent). It is applicable for the
residents in Italy the world wide principle (taxation of all the income, generated in Italy or abroad). Of
course, there are rules against the double tax imposition in domestic law and in the Double Imposition Treaty entered into Italy and other States.

If the heir changes (let me point out that the change of residence must be real because
otherwise he will receive an assessment by the Italian Tax Revenue “Agenzia delle Entrate” that will
consider him resident in Italy for income tax purposes) his residence and he will live abroad, he will
pay the income tax only with regard to the goods and rights existing in Italy.

The residence rules are contained in art. 2 of the Income Tax Law provided by the presidential decree n. 917/1986: is resident in Italy the person that spends in Italy more than 183 days or if he has in Italy
his domicile or the residence according the provisions of the Italian civil code.

Let me point out that if the heir will transfer his residence in a State that is not in the “White list” that will be provided by the Ministry of Finance Decrees (list that will include the States that allow the exchange of information),
he must prove in case of assessment that this change of residence is real, providing to the Italian Tax
Revenue (“Agenzia delle Entrate”) all the documents that prove the real change of residence abroad,
also of his family.

Net wealth tax

In Italy, there is no general net wealth tax.

Special tax on immovable property

A local property tax (the local authorities may vary the rate from 0,4 % to 0,7% and the taxable basis is not the market value but the lower „cadastral“ value) named ICI . As far as the first house („prima casa“ the house where an indivual is resident and lives) owned by the individual persons, this tax is not due.

A special wealth tax of 1% applicable to certain real estates funds (reference is made to the real estate funds paragraph above written) has been recently provided by the mentioned Decree n.112/2008

Value added tax (VAT)

The VAT is applicable to the sale of  the real estate located in Italy, if the other conditions provided by the law (Presidential Decree n. 633/1972 etc.) are met. Normally, the VAT is due by the taxpayers that exercise professional or business activities.
The VAT rates may vary from 20% (the standard rate) to 10 and 4%, depending on the specific circumstances of the different cases.

Other taxes

As far as the other transfer taxes (imposte catastali e ipotecarie) , cadastral tax is due generally at the rate of 1% or at the fixed amount of euro 168 (if VAT is applicable); mortgage tax is generally due at the rate of 2% (up to 3%) or at the fixed amount of euro 168 (if VAT is applicable and if certain conditions are met)

The State where the real estate is situated (see for example the D.T.Ts concluded by Italy with Austria, Brazil, China, France, Germany, UK, Greece, India, Ireland, Israel, Luxembourg, Holland, Portugal, Romania, Spain, Switzerland, USA) has the right of taxation

Which State is entitled to levy a net wealth/ net equity tax on immovable property?

The State where the real estate is situated

Which State is entitled to levy a tax on capital gains derived by the alienation of immovable property

The State where the real estate is situated

Case No.

Owner

Type of property

Type of deal

Type of wealth to which properties/ shares belong

1

I

Res

AD

Pr

2

REC

Res

SD

Pr

3

I

Bus

AD

Pr

4

REC

Bus

SD

Pr

5

I

Res

AD

Bus

6

REC

Res

SD

Bus

7

I

Bus

AD

Bus

8

REC

Bus

SD

Bus

9

LE

Res

AD

BLE

10

REC

Res

SD

BLE

11

LE

Bus

AD

BLE

12

REC

Bus

SD

BLE

I. Real estate is part of private wealth of an individual

Case 1

Part A (Your jurisdiction is the country where real estate is located)

Country of taxation

Taxation in the state where the real estate is located

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Real estate capital gains tax (Individual Income Tax and Corporate Income Tax)

It is applicable if the conditions described in the previous paragraph are met

Real estate transfer tax.

Yes, the imposta di registro is applicable

Inheritance and gift tax

Yes, these taxes are applicable if the conditions described in the previous paragraph are met

Other taxes (VAT, etc.)

No VAT; Mortgage and Cadastral Taxes are applicable

Net wealth tax

No

Income taxes: Taxation of rental income, imputed rental value, deductibility of interest

Rental Income or Imputed Income are taxable

Other taxes

A local Property Tax may be applicable (ICI). Reference is made to the Tax Overview

The Italian Tax System is very analytical therefore all the answers may be different in specific circumstances of fact.

Part B

Country of taxation

Taxation in the state of residence of the owner of the real estate

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Real estate capital gains tax (RECGT)

In virtue of DTTs, the right to tax belong to the State where the real estate is located

Income tax

See above: no taxation

Real estate transfer taxes (RETT)

Seeabove: no taxation

Inheritance taxes

See above: no taxation

Gift taxes

There is taxation only by the State where the real estate is located

Other taxes (VAT, etc.)

No taxation

No

Case 2

Part A

Country of taxation

Taxation in the state where the real estate property is located

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The company is domiciled in the state where the real estate is located. Its shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company
Share deal

Real estate capital gains tax: Is there a real estate capital gains tax on the sale of shares of a real estate company?

If so, is the buyer of the shares entitled to claim a step-up in tax basis for a later asset and/ or share deal?

Yes, there is a taxation if the conditions to obtain an exemption regime are not met

Corporate income tax

See supra

Real estate transfer taxes.

Yes, it is due at a fixed amount.

Inheritance and gift tax

Yes, these taxes may be applicable: reference is made to the Tax Overview

Other taxes (VAT, etc.)

No comments

Net wealth tax, net equity taxes

No

Corporate income taxes.

Yes. Reference is made to Tax overview.

Other taxes

Yes, ICI is due

Part B

Country of taxation

Taxation in the state of residence of the (indirect) owner of the real estate property.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal.

No comments

Case 3

Part A

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Reference is made to Case 1

Part B

Reference is made to Case 1

Case 4

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal

Reference is made to Case 2

Part B

No

II. Real estate is a business asset of an individual

Case 5

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

The taxation (if certain specific conditions are met) is the following:
Real Estate Capital Gain Taxation, VAT and/or Real Estate Transfer Tax, other transfer real estate taxes, Gift and Inheritance Taxes
Reference is made also to the Tax Overview and to the previous paragraph

Part B

No

Case 6

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares of the real estate company are part of the business assets of an individual. The company is domiciled in the state where the real estate is located.

Property / Deal

Shares in a real estate company
Share deal

Reference is made to Case 2

Part B

No

Case 7

Country of taxation

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Reference is made to Case 5

Part B

No

Case 8

Classification

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of the business assets of an individual.

Property / Deal

Share property
Share deal

Reference is made to Case 6

Part B

III. Real estate is an asset of a legal entity

Case 9

Classification

Taxation in the state of the real estate property

Type of asset

Residential property

Owner of the real estate

The belongs to a legal entity.

Property / Deal

Asset property
Asset deal

Reference is made to Case 2. Generally, legal entities are taxed in the same way as real estate companies

Part B

No comments

Case 10

Classification

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The company is domiciled in the state where the real estate is located. Its shares belong to a legal entity.

Property / Deal

Share property
Share deal

Reference is made to Case 6

Part B

No

Case 11

Classification

Taxation in the state of the real estate property

Type of asset

Business property

Owner of the real estate

The property belongs to a legal entity.

Property / Deal

Asset property
Asset deal

Reference is made to Case 9

Part B

No

Case 12

Classification

Taxation in the state where the real estate property is located

Type of asset

Business property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares belong to a legal entity.

Property / Deal

Share property
Share deal

Reference is made to Case 10

Part B

No