INCOME TAXES

12 Months Ended

Dec. 31, 2023

10. INCOME TAXES

Income tax expense is as follows:


	For the years ended December 31,
	2023	2022	2021
	(€ thousand)
Current tax expense	347,162	269,924	218,540
Deferred tax benefit	(4,541)	(30,178)	(12,001)
Taxes relating to prior years	2,276	(1,274)	2,556
Total income tax expense	344,897	238,472	209,095

The Italian Group’s entities participate in a group Italian tax consolidation under Ferrari N.V.

Income tax expense amounted to €344,897 thousand, €238,472 thousand and €209,095 thousand for the years ended December 31, 2023, 2022 and 2021, respectively.

Income taxes for the years ended December 31, 2023, 2022 and 2021 benefited from the application of the Patent Box tax regime by Article 1, par. 37-45 of Law No. 190 of December 23, 2014, as amended and supplemented from time to time, which provides tax benefits for companies that generate income through the use of intangible assets. Starting in 2020 the Group has implemented the Patent Box tax regime, covering the period from 2020 to the conclusion of this regime in 2024, with the recognition of the associated tax benefit distributed over three equal annual installments.

The Law Decree (Decree) n. 146 enacted by the Italian authorities, effective from October 22, 2021 and as amended by the 2022 Italian budget law, replaces the previous Patent Box tax regime with a new one that provides a 110% “super tax deduction” for certain costs related to eligible intangible assets. The Decree also outlines a transitional procedure for the coexistence of both regimes during their applicable periods.

The table below provides a reconciliation between actual income tax expense and the theoretical income tax expense, calculated on the basis of the applicable corporate tax rate in effect in Italy, which was 24.0 percent for each of the years ended December 31, 2023, 2022 and 2021.


	For the years ended December 31,
	2023		2022		2021
	(€ thousand)
Profit before taxes	1,602,354		1,177,766		1,042,231
Theoretical income tax rate	24.0	%	24.0	%	24.0	%
Theoretical income tax expense	384,565		282,664		250,136
Tax effect on:
Permanent and other differences	(95,836)		(85,736)		(79,267)
Italian Regional Income Tax (IRAP)	48,912		39,446		32,422
Effect of changes in tax rates and tax regulations	961		553		633
Differences between foreign tax rates and the theoretical Italian tax rate and tax holidays	2,156		1,945		2,077
Taxes relating to prior years	2,276		(1,274)		2,556
Withholding tax on earnings	1,863		875		539
Income tax expense	344,897		238,472		209,095

Effective tax rate	21.5	%	20.2	%	20.1	%

The effective tax rate was 21.5 percent, 20.2 percent and 20.1 percent for the years ended December 31, 2023, 2022 and 2021, respectively. The Patent Box benefit relating to 2023, 2022 and 2021 is included within “permanent and other differences” in the tax rate reconciliation above.

Imposta Regionale sulle Attività Produttive (“IRAP”) (current and deferred) in 2023 and 2022 amounted to €48,912 thousand and €39,446 thousand, respectively. IRAP is only applicable to Italian entities and is calculated on a measure of income defined by the Italian Civil Code as the difference between operating revenues and costs, before financial income and expense, and in particular before the cost of fixed-term employees, credit losses and any interest included in lease payments. IRAP is calculated using financial information prepared under Italian accounting standards. IRAP is applied on the tax base at 3.9 percent for each of the years ended December 31, 2023, 2022 and 2021.

The analysis of deferred tax assets and deferred tax liabilities at December 31, 2023 and 2022, is as follows:


	At December 31,
	2023	2022
	(€ thousand)
Deferred tax assets:
To be recovered after 12 months	128,110	107,252
To be recovered within 12 months	89,443	96,130
	217,553	203,382
Deferred tax liabilities:
To be realized after 12 months	(100,865)	(86,160)
To be realized within 12 months	(35,981)	(40,347)
	(136,846)	(126,507)
Net deferred tax assets	80,707	76,875

The movements in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, are as follows:


	At December 31, 2022	Recognized in consolidated income statement	Charged to equity	Translation differences and other changes	At December 31, 2023
	(€ thousand)
Deferred tax assets arising on:
Provisions	120,279	11,121	—	—	131,400
Deferred income	51,635	—	—	—	51,635
Employee benefits	2,665	—	(52)	—	2,613
Foreign currency exchange rate differences	3,439	388	—	—	3,827
Inventory obsolescence	100,835	19,305	—	(220)	119,920
Allowances for doubtful accounts	5,223	(166)	—	3	5,060
Depreciation	17,533	264	—	(15)	17,782
Trademark step-up	85,374	(6,696)	—	—	78,678
Patent box	78,381	15,887	—	—	94,268
Other	14,844	2,149	—	(2,560)	14,433
Total deferred tax assets	480,208	42,252	(52)	(2,792)	519,616
Deferred tax liabilities arising on:
Depreciation	(5,057)	1,507	—	92	(3,458)
Capitalization of development costs	(355,574)	(29,683)	—	—	(385,257)
Employee benefits	(1,510)	26	—	—	(1,484)
Foreign currency exchange rate differences	(1,160)	(1,520)	—	—	(2,680)
Cash flow hedge reserve	(16,171)	—	6,403	—	(9,768)
Tax on undistributed earnings	(10,578)	(8,281)	—	—	(18,859)
Other	(13,283)	240	—	(4,360)	(17,403)
Total deferred tax liabilities	(403,333)	(37,711)	6,403	(4,268)	(438,909)
Total net deferred tax assets/(liabilities)	76,875	4,541	6,351	(7,060)	80,707


	At December 31, 2021	Recognized in consolidated income statement	Charged to equity	Translation differences and other changes	At December 31, 2022
	(€ thousand)
Deferred tax assets arising on:
Provisions	103,981	16,556	—	(258)	120,279
Deferred income	51,635	—	—	—	51,635
Employee benefits	3,041	—	(376)	—	2,665
Foreign currency exchange rate differences	610	2,830	—	(1)	3,439
Cash flow hedge reserve	8,455	—	(8,455)	—	—
Inventory obsolescence	69,107	31,648	—	80	100,835
Allowances for doubtful accounts	5,178	50	—	(5)	5,223
Depreciation	17,555	(15)	—	(7)	17,533
Trademark step-up	84,537	837	—	—	85,374
Patent box	65,693	12,688	—	—	78,381
Other	14,328	575	—	(59)	14,844
Total deferred tax assets	424,120	65,169	(8,831)	(250)	480,208
Deferred tax liabilities arising on:
Depreciation	(6,781)	2,076	—	(352)	(5,057)
Capitalization of development costs	(311,438)	(44,134)	—	(2)	(355,574)
Employee benefits	(1,053)	(457)	—	—	(1,510)
Foreign currency exchange rate differences	(526)	(634)	—	—	(1,160)
Cash flow hedge reserve	—	—	(16,171)	—	(16,171)
Tax on undistributed earnings	(17,404)	6,826	—	—	(10,578)
Other	(14,134)	1,332	—	(481)	(13,283)
Total deferred tax liabilities	(351,336)	(34,991)	(16,171)	(835)	(403,333)
Total net deferred tax assets/(liabilities)	72,784	30,178	(25,002)	(1,085)	76,875

The decision to recognize deferred tax assets is made for each company in the Group by assessing whether the conditions exist for the future recoverability of such assets by taking into account the basis of the most recent forecasts from budgets and business plans.

Deferred taxes on the undistributed earnings of subsidiaries have not been recognized, except in cases where it is probable the distribution will occur in the foreseeable future. At December 31, 2023, the aggregate amount of temporary differences related to remaining distributable earnings of the Group’s subsidiaries where deferred tax liabilities have not been recognized amounted to €251,029 thousand (€268,923 thousand at December 31, 2022).