The Italian 2001 Budget Law

As in the last few preceding years, the 2001 fiscal year will also be the focus of a significant number of new tax provisions which aim at reforming the Italian tax framework. The most meaningful provisions, which have been introduced by Laws No. 342 of November 21, 2000 and No. 388 of December 23, 2000, may be summarized as follows:

The combined effect of the above pieces of legislation has altered the income-tax treatment pertaining to employees who are steadily relocated abroad in order to perform a specific assigned task. Their Italian tax liability will be restricted to a conventional salary set forth every year by a ministerial decree. However, workers who are similarly relocated within areas which border Italy will benefit from a total income-tax exemption with respect to their salaries. Employers, who apply the above arrangements for their workers, will no longer benefit from the related tax credit. Finally, certain new relieves have been introduced for employment income generated abroad.

A further noteworthy provision has qualified the income arising out of collaborations rendered in a coordinated and continuous way (i.e. previously, a type of self-employment income) as employment income.

For the fiscal year 2001, the Corporate Income Tax ("IRPEG") rate of 37% has been dropped one percentage point to 36%. An additional percentage point will be dropped as of fiscal year 2003 reducing the Corporate Income Tax rate to 35%. Consequently, the tax credit which is granted to shareholders in order to compensate the Corporate Income Tax previously paid by the corporation will be equal to 56.25% for dividends declared as of the 2002 fiscal year and 53.85% for dividends declared as of fiscal year 2004 respectively. Certain other related tax measures have also been introduced.

The 2001 Budget Law has also significantly altered the Dual Income Tax treatment by abolishing the restriction setting the minimum tax rate applicable to the aggregate of incentive-benefiting income and ordinary income at 27%.

The Incentive-Granting Tax Legislation, "Visco", has been extended for a further fiscal year. A significant number of tax credits for corporate income tax purposes has also been set forth by the 2001 Budget Law. Specifically, tax credits will be available to corporations which (i) employ new workers from January 1, 2001 to December 31, 2003 by executing a time-indeterminate agreement; (ii) invest in depressed areas which have been selected by the EU; (iii) are engaged in the industrial field. The latter tax credit may not exceed 75% of the increase of the R&D expenses which may be incurred as of the 2001 fiscal year in comparison with the same expenses pertaining to the three preceding fiscal years. The investments must be aimed at financing projects whether within the Italian territory or involving international joint ventures which are carried out under Italian direction.

A special tax credit will also be granted for the promotion and development of e-commerce activities as selected and regulated by Parliamentary Decree no. 114 of March 31, 1998. Eligible expenses include those to be applied for personnel training and in order to provide the Internet equipment for server-installation purposes.

In an effort to minimize the actual income tax arising out of group-reorganization transactions, the Capital Gain Tax ("CGT") rate applicable in the context of the sale of on-going concerns and control interest held for at least three financial years, mergers, de-mergers and spin-offs has been dropped eight percentage points bringing the specific rate from 27% to 19%. Unlike the preceding tax treatment, the CGT cannot be paid in five yearly installments, but in one installment only.

Any corporation, whether or not resident in Italy, may opt for reevaluating its tangible and intangible assets, except for stock on hand, which were recorded in the Balance Sheet relating to the financial year ending on December 31, 1999. The reevaluation which must be executed within the following Balance Sheet (i.e. the balance sheet relating to the financial year ending on December 31, 2000) is subject to the payment of a Substitutive Tax of Corporate Income Tax equal to 19% with respect to depreciable assets and 15% for non-depreciable assets, to be paid in three yearly installments of same value, plus a yearly interest equal to six percent.

Specific Control Foreign Corporation ("CFC") legislation has been enacted. Briefly, it sets forth a presumption whereby income produced by any controlled corporations located in tax havens is considered as produced in Italy and taxable accordingly.

Subject to certain restrictions, the 95% income tax exemption currently applicable to EU-source dividends, which are distributed to Italian parent corporations, will be extended to those distributed by non-European subsidiaries.

Accounting records may be kept on appropriate electronic storage up to the required time for the filing of the relevant tax return, subject to the condition that those records are found duly updated and are printed out immediately upon request by Tax Officers in case of a tax inspection.