Italy: Guidance on substance based income exclusion (SBIE) provisions under Pillar Two rules
The decree incorporates clarifications provided in the OECD commentary and December 2023 administrative guidance.
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November 4, 2024
A ministerial decree (published in the official gazette on October 23, 2024) provides guidance on application of substance based income exclusion (SBIE) provisions under the Italian Pillar Two rules.
The decree incorporates clarifications provided in the OECD commentary and December 2023 administrative guidance, including:
- Any excess of SBIE amount over the net global anti-base erosion (GloBE) income for a fiscal year cannot be carried forward or back to reduce the GloBE income of another fiscal year.
- Groups are permitted to annually elect out of the requirement to apply the exclusion on a jurisdiction-by-jurisdiction basis. Groups are also allowed to only partially claim the SBIE (i.e., no requirement to claim the maximum amount) with a view to reduce the administrative burden related to the calculation of the SBIE.
- For income inclusion rule (IIR) and undertaxed profits rule (UTPR) purposes, the SBIE amount is to be computed based on the payroll and tangible asset data as recorded for purposes of preparing the consolidated financial statements at the level of the ultimate parent entity (UPE). For domestic minimum top-up tax (DMTT) purposes, reference is made to the local accounting standard approach that Italy has opted for in accordance with the OECD qualified DMTT (QDMTT) guidance.
- Adjustments to payroll expenses may be required, for example, where expenses are recognized as part of the tangible asset carve-out (i.e., expense capitalized into the carrying value of eligible tangible assets), when expenses are attributable to the income excluded from GloBE income (e.g., shipping income), or when expenses relate to mobile employees who work in different jurisdictions.
- Adjustments to the tangible asset carve-out may be required, for example, when the asset is located in multiple jurisdictions, when property is held for lease (depending on the type and term of the lease), when an asset is acquired or disposed of during the fiscal year, or when an asset is attributable to income excluded from GloBE income (e.g., shipping income).
- The payroll and tangible asset carve-out may also be adjusted in accordance with the special allocation rules for permanent establishments and tax transparent entities.
Read a November 2024 report prepared by KPMG's EU Tax Centre