The penalty protection regime represents an interesting measure for multinationals groups, as it enhances the tax risk management tools available to reduce exposure in case of tax challenges on hybrid mismatches through the non-application of penalties in case of availability of supporting documentation drafted according to specific guidelines, whose details are reflected in the Implementing Decree.
Specifically, according to the Implementing Decree, the documentation should include a description of the transactions that could potentially trigger a hybrid mismatch and provide information on the group entities involved in these transactions. Among the information to be included, the taxpayer shall report the description of the group and the relevant companies belonging to it, the presence of a tax consolidation group, a description of the companies involved in the transaction, as well as the internal process to intercept the potential hybrid mismatch. Moreover, the details of the transaction, including the amount at stake and the relevant tax regime in the countries involved, shall be provided.
Additionally, it is allowed to select transactions on a cherry-picking basis, with the penalty protection regime granted only for the transactions disclosed.
When analysing intra-group transactions directly involving Italian entities, the approach may align with transfer pricing analysis.
In terms of how the Implementing Decree is structured:
- Its Annex A clarifies the "structure" of the documentation, indicating the relevant information that must be included therein, and in particular, clarifies the information to be provided in relation to the multinational group, the taxpayer, the description of the relevant transactions (i.e., transactions that generate or can reasonably generate a significant hybrid mismatch)
- Its Annex B outlines a general internal control framework to capture potential direct and imported hybrid mismatches.
To be valid for penalty protection purposes, the documentation should enable the Tax Authorities to identify the taxpayer's transactions relevant for hybrid mismatch provisions.
The documentation must be drafted in Italian language, digitally signed, and timestamped no later than the filing date of the corporate income tax return for the fiscal year to which it pertains. The documentation is considered timely signed if the timestamp is affixed within 90 days of the tax return filing deadline. In case of an audit, the documentation must be provided to the tax inspectors no later than 20 days from the date it is requested.
Additionally, the Implementing Decree provides a transitional regime for fiscal years from 2020 to 2022. Penalty protection applies in case of no ongoing tax audit and the documentation bears a timestamp dated no later than 30 June 2025.
We recommend that multinational groups with Italian subsidiaries or permanent establishments in Italy conduct yearly reviews to identify any relevant transactions classified as tax-hybrids. Based on this analysis, they should consider preparing the necessary documentation in accordance with the Implementing Decree to be able to benefit from penalty protection in case of challenges by the Italian Tax Authorities.
