Subsidiaries and permanent establishments of foreign companies are subject to the applicable tax, civil, labour and commercial law provisions in Italy. Like Italian corporations, Italian permanent establishments are required to keep double-entry bookkeeping in addition to preparing a tax return.
When opening an Italian permanent establishment, both accounting and tax aspects must be taken into account. The profits earned in Italy are also subject to income tax there, whereby the rules of Italian corporations apply here. Therefore, the profits generated by the Italian permanent establishment are also subject to corporate income tax (IRES) at the rate of 24% and trade tax at the rate of 2.68% (if the permanent establishment falls under the jurisdiction of the Autonomous Province of Bolzano).
Preparation of annual financial statements
The annual financial statements are prepared in accordance with Italian law and standards (OIC). The annual financial statement presents the assets, earnings and financial situation of your company as per the balance sheet date. The annual financial statement consists of several documents, which are required in an ordinary or abbreviated form depending on the size of the company. In principle, the balance sheet and the profit and loss account are the essential components of an annual financial statement. In the case of corporations, it is also required to present notes to the financial statements. If the company is a medium-sized or large corporation, the annual financial statements must also be supplemented by a management report. All Italian corporations are obliged to file their annual accounts with the competent Chamber of Commerce and thus to make them public.
Annual income taxes are calculated based on the annual financial statements and the applicable Italian tax laws.
The annual financial statements serve as a source of information and is the starting point for the following matters, among others:
Basis for business decisions
The financial statements not only serve as a source of information for external institutions/stakeholders/individuals, but also represent the financial situation and the success of a company.
Basis for the cash flow statement
If the annual financial statement has to be prepared in an orderly manner, the cash flow statement is part of the annual financial statement. Liquidity is one of the most important criteria for the continuation of a company. The cash flow statement is intended to show the source and application of cash and cash equivalents.
Document for banks
For every financial intermediary, the annual balance sheet is an indispensable document for evaluating and analysing the performance of a company in recent years and provides an indication of its current situation. Among other things, the annual financial statements serve as a basis for the evaluation of loans and overdraft credit lines.
Basis for the tax return
The correct and truthful annual accounts are the basis for the preparation of the various tax returns. The financial statements prepared in accordance with statutory accounting principles form the basis of calculating income taxes for different types of companies. Subsequently, the corporate and business tax return is prepared and sent to the tax office on time.
Preparation of tax returns
Permanent establishments and subsidiaries of foreign companies must comply with the same tax obligations in Italy as domestic Italian companies.
The following is a brief overview of the most important tax returns to be filed by an Italian subsidiary or permanent establishment (see Preparation of tax returns):
Corporate Income Tax Return – “Modello Redditi”
Corporations and permanent establishments are subject to corporate income tax (IRES). The ordinary tax rate is currently 24% and is applied to the total net income. In principle, the calculation of the net result is based on the profit before tax under commercial law. This is corrected by additions and deductions in order to determine the tax base. The income tax return must be prepared annually and transmitted telematically to the tax office.
Business tax return – “Modello IRAP”
In addition to the income tax return, Italian companies and permanent establishments that have an independent organisation must also prepare the business tax return and transmit it telematically to the tax office. Business tax aims to tax the value added of a company, which is why the tax base differs from that of the income tax return.
Annual VAT return
In the annual VAT return, companies and permanent establishments determine the sum of the turnover tax and deductible input tax incurred. The sum of these two amounts results in either a VAT liability or an VAT credit. Any VAT credit can be carried forward to the next year and then offset against other taxes or applied for a refund. Quarterly advance VAT returns must already be prepared during the year and transmitted to the tax office in telematic form.
Reliability Indices – ISA
As of the 2018 financial year, companies and permanent establishments will be assessed by the tax office with the tax reliability indices “ISA” and will receive a rating of 1 to 10 in this respect. If the rating is poor, the probability of an inspection by the tax office increases; if the rating is very good, on the other hand, the taxpayer will be rewarded.
The reliability indices are part of the income tax return and must therefore be completed and submitted to the tax office with the tax return.
We will gladly take over the preparation of the tax return and all tax obligations for your Italian subsidiary and permanent establishment.
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