Italy Issues a Ministerial Decree to Implement Various Aspects of the OECD Administrative Guidance

General

On December 30, 2024, Italy issued a Ministerial Decree related to the implementation of the Pillar 2 GloBE Rules, as provided in Legislative Decree No. 209 of December 27, 2023 (‘Minimum Tax Law’).

The Ministerial Decree of December 20, 2024 published in the Official Gazette on December 30, 2024, provides for a number of miscellaneous, but important aspects of the OECD Administrative Guidance that were not included in the original Minimum Tax Law.

Sovereign Wealth Funds

Article 2 of the Decree implements the Article 1.4 of the February 2023 OECD Administrative Guidance.

It provides that:

(1) A sovereign wealth fund that meets the definition of a state entity cannot be a parent company and cannot be considered to be part of an MNE or domestic group.

2. A sovereign wealth fund is not be deemed to hold a controlling interest in any entity in which it holds a shareholding, and the identification of the parent company is carried out without taking into account the shareholdings held by the sovereign wealth fund.

Meaning of ancillary for Non-Profit Organisations

Article 3 of the Decree implements Article 1.6 of the February 2023 OECD Administrative Guidance.

This relates to Article 1.5.1(c) of the OECD Model Rules that provides that non-profit entities can be Excluded Entities, however, in order for their subsidiaries to qualify their activities need to be ancillary to those carried out by the Non-Profit Organisation.

Article 3 of the Decree (based on the OECD Administrative Guidance) includes a bright-line test to determine the ‘ancillary’ activities of 100% owned subsidiaries of Non-profit Organisations.

The activities of an entity where 100% of the value is owned directly or indirectly by the Non-profit Organisation or by Non-profit Organisations will be deemed to be ancillary if the total revenue of all Group Entities is less than EUR 750 million (adjusted if the Fiscal Year is a period other than 12 months) or 25% of the revenue of the MNE Group (if lower) for the Fiscal Period.

Forex Hedge Election

Article 4 of the Decree implements Article 2.2 of the February 2023 OECD Administrative Guidance.

Gains and losses from the sale of an ownership interest (except a shareholding with ownership of less than 10%) are excluded from GloBE Income under Article 3.2.1(e) of the OECD Model Rules. Similar to the treatment of excluded dividends, many jurisdictions have a participation exemption for gains on group shareholdings.

The Pillar Two GloBE rules seek to replicate this by excluding such gains and losses from Pillar Two GloBE income. However, unlike the rule for excluded dividends, the ownership period is irrelevant.

Article 4 of the Decree provides provisions relevant to hedging instruments for currency risk related to a net investment in a foreign operation.

In particular, a Filing Constituent Entity can make a Five-Year election (Forex Hedge Election) to treat foreign exchange gains or losses reflected in a Constituent Entity’s Financial Accounting Net Income or Loss as an Excluded Equity Gain or Loss where:

• the foreign exchange gains or losses are attributable to hedging instruments that hedge the currency risk in Ownership Interests other than Portfolio Shareholdings;

• the gain or loss is recognised in other comprehensive income at the level of the Consolidated Financial Statements; and

• the hedging instrument is considered an effective hedge under the Authorised Financial Accounting Standard used in the preparation of the Consolidated Financial Statements.

Debt Release Election

Article 5 of the Decree implements Article 2.4 of the February 2023 OECD Administrative Guidance.

The GloBE Rules and Commentary do not include an exemption for debt releases. For financial accounting purposes the release of debt is likely to be treated as income (ie Dr Creditors, Cr P&L). However, in many jurisdictions, a domestic tax exemption. This could therefore push the GloBE ETR down leading to top-up tax.

Article 5 of the Decree provides that certain debt releases under various corporate rescue situations are excluded from GloBE Income subject to an election by the filing constituent entity.

This applies where the relevant procedure is:

• undertaken under statutorily provided insolvency or bankruptcy proceedings, that are supervised by a court or other judicial body in the relevant jurisdiction or where an independent insolvency administrator is appointed. In this case, both Third Party and Related Party Debts cancelled under the same agreement will be excluded from the calculation of the relevant income or loss of the Debtor;

• where the creditor to the debt release is a third-party and it is reasonable to conclude that the debtor would be insolvent within 12 months but for the release of the third-party debts under an arrangement. In this case, both the Third Party debts and the debts of related parties cancelled under the same agreement will be excluded from the calculation of the relevant income or loss of the debtor; or

• where the creditor to the debt release is a third-party and, immediately before the debt release, the debtor’s liabilities are in excess of the fair market value of its assets. Where this is the case and the requirements above are not met, relief will apply to third-party debts but only to the extent of the lesser of (i) the excess of the debtor’s liabilities over the fair market value of its assets (determined immediately before the debt release), or (ii) the reduction in the debtor’s attributes under the tax laws of the debtor’s jurisdiction resulting from the debt release.

Portfolio Shareholding Election

Article 6 of the Decree implements Article 3.5 of the February 2023 OECD Administrative Guidance.

Article 3.2.1(b) of the OECD Model Rules applies a standard exemption for certain dividends similar to a participation exemption.

Dividends excluded are generally dividends (or other distributions on shares) where the MNE group holds 10% or more of the ownership or had held ownership for more than 12 months.

Article 6 of the Decree provides that as a simplification measure, in-scope Groups can for each Constituent Entity elect to include dividends from all their Portfolio Shareholdings (including long-term Portfolio Shareholdings) in their GloBE Income or Loss calculation. This is a Five-Year Election.

Mutual Insurance Companies

Article 7 of the Decree implements Article 3.6 of the February 2023 OECD Administrative Guidance, which extends the application of Tax transparency election to Mutual insurance companies.

Substitute Loss-Carry Forwards

Article 8 of the Decree implements Article 2.8 of the February 2023 OECD Administrative Guidance to provide for Substitute Loss-Carry Forwards.

Article 2.8 of the February 2023 OECD Administrative Guidance provides for the inclusion of deferred tax in the GloBE deferred tax adjustment amount for ‘Substitute Loss Carry Forwards’.

This arises due to the differing tax treatment of foreign source income amongst jurisdictions.

For more information, see: Tax Credits & Substitute Loss Carry Forwards

Currency Conversion

Article 9 of the Decree implements Article 1 of the July 2023 OECD Administrative Guidance to provide for a number of currency conversion rules. It provides that that all calculations required to determine the top-up tax must be carried out in the currency used to prepare the UPE consolidated financial accounts. The conversion rules are the rules in the authorized accounting policy used for the preparation of the consolidated financial statements.

If the currency used by the MNE group for the consolidated financial statements is not the euro, the euro thresholds used in the Global Minimum Tax Law are converted into euros on the basis of the average exchange rate for the month of December of the calendar year immediately preceding the beginning of the MNE group’s financial year.

Blended CFC Regimes

Article 10 of the Decree implements Article 2.10 of the February 2023 OECD Administrative Guidance for the allocation of taxes arising under Blended CFC Tax Regimes.

A blended CFC regime arises when the tax charge under the CFC regime is based on a blend of income or of multiple CFCs. They therefore don’t blend CFC income on a jurisdictional basis but tend to apply globally to all foreign income.

For fiscal years that begin on or before 31 December 2025 but not ending after 30 June 2027, the Administrative Guidance includes a simplified formula to allocate CFC taxes in blended CFC regimes such as GILTI.

For more information, see Blended CFC Regimes.