This presentation (draft version here) is used for the Conference organized in Opatija (HR) on October 5th 2015 by the University of Rijeka and by the Jean Monnet Interuniversity Center for Excellence. It is thereofre maily aimed at Italy - Croatia business interactions

1. Facilitating Entrepreneurial Financing:
Tax Incentives and EU Law
Marco Greggi
Opatija, October 5th 2015

2. Outline of the Presentation
• Addressing the issue of Financing business while respecting EU (Tax)
law;
• Using Italy as a benchmark and term of comparison for the Croatian
experience:
1. The issue of horizontal integration;
• Network aggregation and horizontal tax compensation.
2. The issue of Debt vs Equity in strengthening Corporations;
• ACE: deduction of imputed passive interests.
3. The issue of R&D and selected investments fields
• IP Patent box.
2

3. EU Position on Business and Finance
• Com(2001)260 : no need for harmonized approach in the
field of direct taxes;
• States are free to adopt and implement tailor-made
solutions for their specific situations in the respect of EU law
principles, including:
• Fundamental freedoms;
• State aid prohibition;
• Non-discrimination;
• …
3

4. Assessing the Business interaction
between Croatia and Italy
• From 2005 to 2015 Italy has been the Croatian first
business partner (2nd in the first semester 2015);
• Overall business interchange in 2014 € 1,985 bn;
• 13,7% of the overall Croatian business interchange (+4,3 %
in last year);
• Italy is the first foreign market for Croatia in terms of
export value (€ 747 mi) (+2,9% in last year);
• Croatia is a remarkable market for Italy ( € 1,238 bn)
(+5,1% in last year) (13,7% of the overall Croatian
imports);
• Italian direct investments in Croatia: € 1,5 bn.
Source: Infomercatiesteri.it
4

5. From Business Districts to Business
Networks
• Business Districts as unique feature of the Italian productive system;
• Strong horizontal business integration;
• Geographical clusters of production, logistics, R&D;
• From 2009 (Law n.33 of 2009) also a legal and fiscal recognition:
horizontally integrated business may enter Network Agreements for
the implementation of a specific businesses;
• Civil regulation of the contract:
• Resources pooling (including Financial and Cash);
• Joint venture agreements;
• …
5

6. Tax Incentives to Pooling and Joint
Business Model
• Integrated business may set aside profits for the implementation of
the joint business (retained earnings) reducing tax liability;
• Retained earnings:
• Consistent with the integration model;
• Coherent with the scope of the network and business district feature;
• Limited in time for the implementation of the model;
• Qualified control of the Tax Administration;
• This measure is not considered a state aid: EU Commission
C(2010)8939 def.
6

7. An Idea for the Future ?
• Cross border Business districts (Croatia – Italy) considering
the strong business integration;
• Possibility to mutually recognize the Network Agreements
(Contracts beyond the borders) in the achievement of
common goals ?
• Making the Horizontal Business integration (Businesses on
equal footing) even more EU compliant and attractive ?
7

8. Strengthening the
Self-financing Option
• Italian tax system makes loans more attractive than self financing or
transfer of assets (including increase of capital);
• Unfavourable impact to debt-equity ratios;
• Decree n. 201 issued in 2011 introduced the Italian A.C.E. (Aid to
Economic Growth):
• Tax deduction of a notional interest that would have been paid if the
company of the case would have entered into a financial load rather than:
• Increase of capital subscribed by shareholders;
• Set aside of profits generated by the business in occasion different from those made
compulsory by the law.
8

9. Financial incentive, clarified
• The capital delta (increase on absolute value) of the corporation is
deemed to generate a tax deductible interest of 4,5% during the
current tax period (4,75% in the next).
A
Capital: € 1000
Transfer of assets: € 2000 capital increase
A
Capital increase of € 2000
Capital: € 3000
Notional interest deductible
for tax purposes: € 90
9

10. ACE and the International Relations
• Incentive applicable also to Italian Permanent Establishments of non
resident companies;
• Perspective changes:
1. Need to prevent possible abuses;
2. Need to strike a balance between this possibility and the limits to
deductibility of interests as per new article 96 Income Tax Act;
• Namely, passive interests are deductible for an amount not exceeding 30% of the EBITDA
(adjusted);
3. Possible extension to cross border group of companies and need to
coordinate this incentive with foreign ones made available elsewhere.
10

11. IP Box, The Italian Way
• Patent Box rule (law n. 190 issued in 2015): a clear example of
harmful tax completion and improper management of International
Tax Law rules;
• Retaliatory approach by Italian Policy Makers;
• IP Box in a Nutshell:
• Extension of the regime to Intellectual Properties in general (thus not only to
patents);
• Necessity to link the benefit for tax purposes to R&D carried on to develop
the intangible of the case;
• Tight ruling procedure to identify taxpayer deserving the advantage.
11

12. Interaction with the Financial Aspects
• Income generated by IP is carved out from the overall
business income and taxed on 50% of the ordinary taxable
base;
• The sale of IPs generates a tax free income (or capital gain) if
it is reinvested in R&D of the company and in further
activities of similar nature;
• Incentivizing R&D through self financing of the Italian
Corporations.
12

13. Concluding Remarks
• Other tailor-made instrument made available to business to
promote financial support by Banks or other Institutions;
• Complex and fragmented system;
• Need to consider a wider territorial scope and adjust tax
incentives consistently with the Croatian ones (and vice-
versa);
• Common policy envisaged in order to address similar
situations in the North Adriatic Region;
• North Adriatic Business Districts of logistics and shipment of goods
?
13

14. Thank you for your attention
marco.greggi@unife.it
14