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The Italian penalty protection regime for hybrid mismatches

Italy has introduced legislation concerning the set of documentation to be prepared for hybrid mismatch cases. The new rules include a penalty protection regime, under which taxpayers that prepare a specific set of documentation can avoid the application of administrative penalties in the event of tax assessments involving hybrid mismatches. 

Background: Italian anti-hybrid mismatch rules

Hybrid mismatch arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term deferral. These types of arrangement result in a substantial erosion of the taxable bases of the countries concerned. 

In line with the recommendations by the OECD’s initiative against base erosion and profit shifting, Italy introduced anti-hybrid legislation through Legislative Decree 142/2018, which implements ATAD I and ATAD II. The Italian tax authority also issued clarification on the application of the legislation in Circular 2/2022.

In a nutshell, Italian anti-hybrid legislation applies to cross-border operations that involve entities resident in Italy for tax purposes (including individuals) and non-resident entities with a permanent establishment in Italy. The legislation is based on a complex system of definitions and rules to address potential hybrid mismatches that could lead to:

  • double deduction, i.e. more than one deduction for the same payment, expense or loss; or
  • deduction without inclusion, i.e. deduction of a payment without a corresponding inclusion for tax purposes in the payee’s jurisdiction.

Anti-hybrid legislation came into effect starting from 2020, except for the provisions on reverse hybrids, which came into effect in 2022.

The penalty protection regime introduced by Legislative Decree 209/2023 

The penalty protection regime for hybrid mismatches was introduced by Article 61 of Law Decree 209/2023 (the International Tax Decree), which inserted a new paragraph (i.e., para. 6-bis) to Legislative Decree 471/1997 (concerning administrative penalties). 

Under the regime, administrative penalties (ranging from 90% to 180% of the higher tax assessed) do not apply if the taxpayer prepared a specific set of documentation illustrating the analysis performed on the relevant cross-border operations from an anti-hybrid perspective – similar to the penalty protection regime for transfer pricing.

The content and the form of the set of documentation will be detailed in a Ministry of Economy and Finance decree, which should be issued within 60 days from the International Tax Decree coming into effect.

For the moment, Article 61 of the International Tax Decree stipulates that, in order for protection under the regime to apply, taxpayers must check a box in the tax return to disclose possession of the anti-hybrid documentation, which:

  • must be prepared before filing the tax return; and
  • must be date-stamped (the documentation will likely need to be digitally signed and time-stamped by the local entity’s authorised representative, as is the case for the transfer pricing penalty protection regime); and
  • must be made available to the Italian tax authority in the event of an audit.

The first year that can be covered by the hybrid penalty protection regime is 2023: therefore, the set of documentation must be prepared before filing the related tax return (i.e. before 30 September 2024). Furthermore, if no tax audit has been initiated, the taxpayer has also the possibility to extend the penalty protection regime also to the period from 2020 to 2022 by preparing the set of documentation by the deadline for the 2023 tax return (i.e. 30 September 2024).


bonellierede, italian tax, hybrid mismatch