Corporate income tax (IRPEG)
In extremely broad terms, the total taxable income of a company is in principle equal to the profits resulting from the company profit and loss (P&L) account, adjusted according to the income tax laws.
As a result, corporate expenditure is in principle fully deductible for the same amount charged to the P&L account (unless income tax laws provide for a specific limit to deductibility), and provided that vehicles are used for business purposes and that related expenses are duly documented (complete invoices, agreements, etc).
However, Italian lawmakers appear to consider cars used by Italian businesses as instruments for avoiding taxes, rather than assets for producing income.
It is only by bearing this 'philosophy' in mind that one can try to understand why such a large number of anti-avoidance-style provisions have been created for corporate motoring costs.
In fact, no category of business cost or expenditure in Italy incurs income tax rules as complex as those that apply to car-related expenditure.
For income tax purposes, limits to deductibility of car-related expenses are laid down in article 121-bis of the Italian Income Tax Code.
Car-related expenditure covered by this regulation includes vehicle purchasing costs and, consequently, depreciation allowances; the cost of hiring, renting or leasing; vehicle refuelling costs; spare parts costs; and vehicle usage, custody, maintenance repairs and other services costs, including non-recoverable taxes and insurance.
Cars can be depreciated for tax purposes on a straight-line basis over a period of not less than four years (i.e maximum 25% depreciation allowances) on a year/tax period basis, following the ordinary rules for asset depreciation, including the calculation of accelerated depreciation allowances.
Depreciation allowances need to be levelled for the fraction of year corresponding to the period of ownership.
Cars subject to the above regulation are those defined by the Italian Road Regulations as 'four-wheel motor vehicles (excluding sidecars and motorbikes) used for conveying a maximum of nine people including the driver'.
As per other means of transport (trucks, commercial vans, etc) deductibility is allowed in accordance with the ordinary rules for calculating the taxable income of a company.
More specifically, two factors affect the deductibility of car-related expenses under the discipline set forth by article 121-bis:
i) the activity carried out by the company
ii) the car use.
Full deductibility of car-related expenditure is allowed in the following circumstances:
1) Expenditure related to cars whose use is 'exclusively instrumental' to the entrepreneur's activity (e.g. cars used by car rental companies, driving schools), or that form the main object of the company's business (e.g. car dealers). 'Exclusively instrumental use' means that the business of the company cannot be conducted without the car itself.
2) Expenditure related to cars used for supplying a public transport service (eg taxi).
3) Expenditure related to cars given by a company (whatever its business) to its employees
i) for the major part of the fiscal year
ii) used by them for both business and private purposes (ie so-called 'uso promiscuo').
A) Cars not granted to employees or granted to employees solely for business use
Car-related expenses incurred by a company, which are not allocated to employees or are granted to employees solely for business use, are deductible only up to 50% of the amount relevant for tax purposes.
This percentage grows to 80% for business agents and commercial representatives (hereinafter business agents) (enrolled in business agents' registers held by local chambers of commerce).
The amount relevant for tax purposes is determined as follows (needless to say that any excess amount is not considered for tax purposes):
Car purchase price: up to €18,075.99(€25,822.84 for business agents)
Example 1: Calculation of the ordinary depreciation allowances deductible for income tax purposes (purchase price €20,000). Statutory depreciation allowance (charged to the P&L account): €5,000 (for companies other than business agents).
Depreciation allowance allowed for tax purposes: €18,075.99 x 25% x 50% = €2,259.5 Depreciation allowance not deductible for tax purposes: €2,740.5.
Rental, hire, operating lease expenditure: up to €3,615.2 on a full 12-month basis. In case of a rent, hire, operating lease contract signed in the course of the year and/or lasting for less than one year, the limit shall be reduced in proportion to the corresponding fraction of the year.
Example 2: Car rented on November 12, 2003 to October 26, 2004 (or 350 days: 50 in 2003 and 300 in 2004). Rent charge: €3,500, of which €500 accrued in year 2003 and €3000 in year 2004 (for companies other than business agents).
Amount of rent charge which is relevant for tax purposes in year 2003: €3,615.2 x 50/365 = €495.23
Rent charge deductible in year 2003: €495.23 x 50% = €247.62
Rent charge not deductible in year 2003: €500 – €247.62 = €252,38
Amount of rent charge which is relevant for tax purposes in year 2004: €3,615.2 x 300/365 = €2,971.4 x 50% = €1,485.7.
Rent charge not deductible in year 2004: €3000 - €1,485.7= €1,514.3
Financial leasing instalments: up to the amount corresponding to that portion of the car-purchase price paid by the lessor corresponding to the above €18,075.99 (€25, 822.84 for business agents) limit.
For financial leasing contracts lasting less than half of the ordinary depreciation period (for a car, it is two years), no deduction is allowed.
This limit is calculated on a yearly basis. For a leasing contract signed in the course of the year, the limit shall be reduced in proportion to the corresponding fraction of the year.
Example 3: Leasing contract lasting from July 1, 2003 to June 30, 2007 (or 1,461 days). Total amount of leasing instalments €45,000. Cost sustained by the lessor: €40,000 (for companies other than business agents).
Portion of leasing instalments corresponding to the purchase cost which is relevant for tax purposes: €18,075.99/40,000 = 45%.
Total amount relevant for tax purposes: €45,000 x 45% = €20,250.
Amount levelled to the corresponding fraction of year 2003: €20,250 x 184/1461 = €2,550.31
Leasing charge deductible in year 2003: €2,550.31x 50% = €1,275.16
For full service rent/leasing, the amount of rent charges/leasing instalments subject to these limits is net of the cost of the additional services.
Expenditure incurred for spare parts, maintenance, fuel, insurance, etc, are relevant for tax purposes for an amount equal to the cost incurred. The percentage of deductibility (i.e.:, 100%, 80%, 50%, depending on the activity carried out by the company and on the car use) is then applied to that amount for the determination of the tax deduction.
B) cars granted to employees for both business and private purposes but for less than half of the fiscal year
For company cars driven by employees for both business and private purposes, but for less than half the fiscal year, a full deductibility of related expenses (sustained by the company/employer) is allowed to the extent of the amount regarded as a benefit-in-kind (fringe benefit) upon which an employee is taxed.
In such a case, full deductibility of car-related expenses is allowed as they qualify as labour costs. For any excess amount, deductibility is limited to 50% (80% for business agents) of the amount which is relevant for tax purposes (e.g.: purchase: the amount not exceeding €18,075.99 (or €25,822.84 for business agents).
Example 4: A car granted to an employee for both business and private use, but for less than half a fiscal year. Total amount of car-related expenses sustained by the company/employer €16,000 (€6,000 of expenses plus €10,000 in depreciation allowance) (for companies other than business agents).
Benefit-in-kind to the employee (according to the rules of determination of taxable income in the hands of the employee, see below): €2,582.28.
Amount relevant for tax purposes: €6,000 plus €4,519 (maximum amount of depreciation allowance deductible for tax purposes).
In such a case: €2,582.28 are 100% deductible (as labour cost) while €7,936.72 ( i.e. €10,519 - € 2,582.28) is 50% deductible.
C) cars granted to employees exclusively for private use
For cars awarded to employees exclusively for private use, the related expenses are 100% deductible to the extent of the amount that shall be regarded as a benefit-in-kind (fringe benefit) taxable in the hands of the employees.
In addition, deductibility is allowed because the expenditure is regarded as labour costs. The amount in excess is not deductible.
D) cars granted to managing directors
In the case of cars granted to managing directors the deductibility of related expenses is determined by the use of the cars.
For a car granted to a managing director for his exclusive private use, the related expenditure is 100% deductible to the extent of the amount that shall be regarded as a benefit-in-kind (fringe benefit) taxable in the hands of the directors.
Importantly, deductibility is allowed since the expenditure is regarded as labour costs, because, from January 1, 2001, income deriving from the activity of a managing director is treated as income deriving from employment, for personal income tax and social security purposes. The amount in excess is not deductible.
For a car granted to a managing director for business and private use, the related expenditure is 100% deductible to the extent of the amount that shall be regarded as a benefit-in-kind (fringe benefit) taxable in the hands of the director.
Deductibility is allowed since the expenditure is regarded as labour costs.
For the excess amount, deductibility is limited to 50% (80% for business agents) of the sum relevant for tax purposes (eg purchase: the amount not exceeding €18,075.99 or €25, 822.84 for business agents.
For a car granted to a director solely for business use, up to 50% deductibility is allowed (80% for business agents) of the amount relevant for tax purposes (eg purchase: the amount not exceeding €18,075.99 or €25, 822.84 for business agents). In such a case no benefit-in-kind is deemed granted to the directors.
Local income tax (IRAP)
In addition to corporate income tax, companies located in Italy are also subject to a local income tax (IRAP) ordinarily levied at 4.25%.
In very broad terms, IRAP tax basis is given by the difference between gross revenues from operations (excluding extraordinary income, capital gains, interest received and dividends) and operating expenses, excluding interest expenses and aggregate labour costs.
As for deductibility of car-related expenditure for local income tax purposes, the same rules provided for corporate income tax apply.
Despite that, car expenses constituting labour costs for the company and, for cars acquired through a leasing contract, the portion of leasing charge corresponding to the interest expense are not deductible for local income tax purposes.
Private benefit-in-kind taxation
Generally, under the Italian personal income tax (IRPEF) and social security laws, goods, rights and services received during the tax period by an employee, free of charge or at a price lower than 'fair market value' (so-called 'valore normale'), are regarded as benefits-in-kind (fringe benefits) subject to the employee's personal income tax.
The amount of benefit-in-kind subject to an employee's personal income tax and social contribution is equal to the fair market value of the right, service or good received (net of any amount charged by his employer).
Despite this general rule, the benefit-in-kind received by an employee in connection with a car granted to him is determined according to a specific set of rules related to the use of the car (resulting from proper supporting documentation, such as a specific provision of the employment contract).
For a car granted to an employee for his sole private use, the taxable benefit-in-kind received by the employee follows the general rules being equal to the market value of the goods and services received.
For a car granted to an employee during the fiscal year for both his business and private use ('uso promiscuo'), the taxable benefit-in-kind is computed on a forfeit basis, as 30% of the 'average cost of use' of the car, based on an annual mileage of 15,000 kilometres.
The 'average cost of use' of the car is determined by certain official schedules prepared by a private association of car drivers (ACI) and published annually by the Ministry of Finance. These schedules provide, for each existing car model, an average cost of use (including car depreciation, fuel, oil, tyres, etc) per kilometre.
The resulting amount is calculated on a year/tax period basis. Accordingly, the benefit shall be calculated for the fraction of year corresponding to its period of use.
It is important to note that the use of a company car for the journey to and from the workplace is deemed a 'private use'.
Example 5: Alfa Romeo 156 1.9 JTD granted in 'uso promiscuo' to an employee from February 15, 2003 to October 31, 2003 (corresponding to 258 days).
Average cost of use per km: €0.4146 (resulting from the official ACI schedules supposing 15,000 km per year).
Benefit-in-kind on a year basis: 30% x 15,000 x €0.4146 = - €1,865.7
Taxable benefit-in-kind to the employee: €1,865.7 x 258/365 = €1,318.77
Cars used by employees solely for business purposes, incur no taxable benefit-in-kind.
B) Managing directors
Income from the activity of a managing director is treated as income from employment for personal income tax and social security purposes.
Accordingly, with respect to the calculation of the director's personal income tax and social contribution, the same rules described above for an employee are applicable to the granting of a car by the company.
Value Added Tax
The Italian VAT system operates by requiring each seller in the production to consumption chain to charge VAT on its sales (outputs), while those who have bought the goods or services (inputs) in the course of their business are able to credit the VAT incurred. In this way the supplier only settles to the Government for the net of the tax it has charged (output tax) on its sales less the tax it has incurred on its purchases (input tax).
In spite of these general principles, for certain categories of goods and services the VAT laws provide limits to deductibility of input VAT charged by the suppliers. Cars and other car-related products and services are affected by these rules in the way described below.
VAT charged by suppliers
The ordinary Italian VAT rate is 20%. This VAT rate generally applies on the purchased or imported car price as well as on the various services or goods purchased in connection with the car itself. Car insurance is VAT exempt.
Car leasing (either financial or operating), hiring and/or similar contracts are deemed to be a supply of services. According to the Italian VAT place-of-supply rules, such services are subject to Italian VAT when supplied by an Italian (professional) dealer or lessor, unless the car is used outside the EU, and when supplied by subjects located outside the EU, for cars used in Italy.
VAT Deductibility of car-related expenses for the purchaser
Only business agents are entitled to recover VAT on car-related expenses. As far as other companies are concerned, VAT is generally only partly recoverable (see below) unless the car is exclusively instrumental to the company's business activity (for example cars used by daily rental companies or driving schools), or forms the main object of the company's business activity (e.g. car dealers) or is used for supplying a public transport service, such as taxis.
For costs incurred in car acquiring by means of a outright purchase, import, leasing, hire or similar contract, VAT related to the costs is deductible for all companies, but restricted to 10% of the VAT amount paid. In the case of electric cars, however, 50% VAT deductibility is allowed for all companies (until December 31, 2003)
In case of purchase with only partly recoverable VAT, the subsequent supply is only partly taxable. Also the EC Directive on second-hand goods has been implemented in Italy.
Provincial registration tax
Deeds regarding the transfer of motor vehicle property have to be registered in the provincial public car register (so-called 'Pubblico Registro Automobilistico').
Basically, the person who acts as owner of the car is obliged to register the transfer.
The transfers subject to VAT are subject to a lump sum registration tax of €150.81. In case of transfers not subject to VAT, the tax amount depends on the characteristic and engine power (expressed in kilowatt) of the vehicle to be registered.
As far as cars are concerned, the tax ranges from a minimum lump sum of €150.81(for cars with less than 53kW of engine power). For cars with an engine power above 53kW a progressive charge applies, calculated by multiplying €3,5119 by the total kilowatts.
Regional motor vehicle tax
Motor vehicles registered in Italy are subject to a yearly regional tax calculated on the basis of the engine power expressed in kilowatts (this information is available on the car registration document).
As far as cars are concerned, to determine the amount of tax due, the number of the effective engine power kilowatts must be multiplied by €2.58 for cars fuelled with petrol or eco-diesel and by €7.82 for cars fuelled with non-eco diesel. Electric cars are tax-exempt for their first five years after homologation.
From the perspective of a company acquiring a car, the accounting treatment of car-related expenditure varies in accordance with the underlying contract used.
The purchasing company has to book a fixed asset for the value of the purchase price of the car. This fixed asset shall be depreciated on a straight-line basis, in relation to its economic lifetime (in practice, companies usually refer to the ordinary depreciation period allowed for tax purposes, which for cars is four years).
Hiring, renting leasing contracts
As far as the renter/lessee is concerned, the renter/hiring/leasing (either financial or operating) charges/instalments are treated as operating expenses to be recorded in the P&L account of the lessee on an accrual basis.
The so-called maxicanone, ie the first higher leasing instalment (if any), shall be deferred over the duration of the leasing contract.
It is important to note that, in Italy, it is always the lessor, not the lessee, that books the depreciable fixed asset in his balance sheet. General Italian accounting principles do not conform to international accounting standards, as regards leasing.
Income tax rates
The standard corporate income tax (IRPEG) rate is 34% from 2003. Local income tax rate for commercial companies (special rules apply to banks and insurance companies and holdings) is 4.25% (IRAP). Notably, the local income tax applies to a taxable base (broadly the gross margin), which may be different from the total income to which corporate income tax applies. Consequently, the company's effective tax rate might significantly differ from a flat 38.25% rate.
Individual income tax (IRPEF) is levied at different rates based on income thresholds; the marginal rates range from 23%, for the first €15,000 of income, to 45% for income in excess of €70,000 (in year 2003). Additional Regional and Municipal income taxes (ranging from 0.9 to 1.9%) are levied on the same IRPEF taxable base.
The Italian ordinary VAT rate is 20%. Certain categories of goods benefit from the reduced VAT rates of 4% and 10%.
Date of tax year For corporate and local income tax purposes, the tax year consists of the financial year as fixed by the law or by the company's deed of incorporation. Where the financial year has not been determined or has been fixed at two or more years, the tax year coincides with the calendar year. For VAT and personal income tax purposes, the tax year is the calendar year.
Car - four-wheeled motor vehicles (excluding sidecars and motorbikes) used for conveying a maximum of nine persons including the driver, as defined by article 54, letter a of the Italian Road Regulations (Legislative Decree April 30, 1992, n. 285).
Van - any light commercial vehicle up to 3.5 tonnes.
Outright purchase - an agreement where the customer buys a vehicle.