Current Status of Anti Money Laundering Legislation and Practice In Italy

The EU Directive n. 2015/849 (the "IV Directive") on anti money laundering sets forth new provisions requiring financial institutions and professional individuals to verify their customers or clients by identifying the ultimate "beneficial owner" of an entity, legal arrangement or financial transaction; obtaining and conserving information about their customers and the ultimate beneficial owners, as defined in the Directive, and reporting an extensive amount of information about trusts, foundations and other similar arrangements in a central register held by each Member State. EU Member States have time until June 26, 2017 to traspose the provisions of the Directive into their national laws. 

Unlike EU Regulations that are enacted by the EU Council of Ministers, which have automatically the full force and effect of EU prevail over any non conforming national law regulating the same area, EU Directives proposed by the EU Commission are not self executing. EU Members States are left with some leeway to decide which provisions are to be adopted. EU Directives are usually adopted through a number of legislative procedures depending on the different subject matters. As a result, while the deadline to implement the Directive is still pending, and until a country enacts domestic legislation actually implementing the Directive, the Directive has no immediate effect and cannot be directly applied. 

In Italy, the Italian Parliament by way of Act n. 170 of August 12, 2016 granted legislative authority to the Italian Government to implement the provisions of the IV Directive. Now the Government is working at adopting one or more legislative decrees containing the specific provisions that will traspose the IV Directive into Italy’s national law. The legislative decrees to be issued pursuant to the grant of authority provided by the Parliament need not be approved by the Parliament. Rather, they become law as soon as they are adopted by the Government. 

In light of the above, we can safely say that Italy is well on track to implement the Directive within the June 26, 2017 deadline. If that should not be the case, at that point the Directive would become self executing and could still be applied, for those provisions that are sufficiently detailed and need not be specified or modified by way of national implementing legislation.     

Law n. 170 refers to the definition of beneficial owner that is set forth in the IV Directive. 

The definition of “beneficial owner” in the IV Directive, for corporate entities, is the following (article 3, paragraph 6, letter a)):

(6) ‘beneficial owner’ means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted and includes at least: 

(a) in the case of corporate entities: 

(i) the natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that entity, including through bearer shareholdings, or through control via other means, other than a company listed on a regulated market that is subject to disclosure requirements consistent with Union law or subject to equivalent international standards which ensure adequate transparency of ownership information. A shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a natural person shall be an indication of direct ownershipA shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a corporate entity, which is under the control of a natural person(s), or by multiple corporate entities, which are under the control of the same natural person(s), shall be an indication of indirect ownership. This applies without prejudice to the right of Member States to decide that a lower percentage may be an indication of ownership or control. Control through other means may be determined, inter alia, in accordance with the criteria in Article 22(1) to (5) of Directive 2013/34/EU of the European Parliament and of the Council (3); 

(ii) if, after having exhausted all possible means and provided there are no grounds for suspicion, no person under point (i) is identified, or if there is any doubt that the person(s) identified are the beneficial owner(s), the natural person(s) who hold the position of senior managing official(s), the obliged entities shall keep records of the actions taken in order to identify the beneficial ownership under point (i) and this point.  

Under the definition set forth here above, the beneficial owner is the natural person who ultimately owns or control the tested corporate entity (defined as "customer" in the Directive). 

For the purpose of identifying the natural person who ultimately owns or controls the tested corporate entity, the Directive adopts the “more than 25% shareholding or ownership interest” test, as an indication or presumption of beneficial ownership, and uses both a direct and indirect ownership test. 

Under the direct ownership test, if a natural person directly owns more than 25% of a shareholding or ownership interest in the “tested" corporate entity, that person is presumed to be the beneficial owners of that entity. In case of direct ownership, the analysis stops at the natural person who owns the relevant shareholding interest in the tested corporate entity. Under the indirect ownership rule, a shareholding or ownership interest (of any size) in the “tested" corporate entity, owned by another legal entity (such as another corporate entity, trust, foundation, etc.), is attributed to the beneficial owner(s) of such other legal entity, to determine the ultimate beneficial owner of the “tested” corporate entity.

In case of trust or other similar legal arrangements, "beneficial owner" is defined as follows (article 3, paragraph 6, letter b)):

(6) ‘beneficial owner’ means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted and includes at least: 


(b) in the case of trusts: 

(i) the settlor; 

(ii) the trustee(s); 

(iii) the protector, if any; 

(iv) the beneficiaries, or where the individuals benefiting from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates;

(v) any other natural person exercising ultimate control over the trust by means of direct or indirect ownership or by other means.  

If interpreted literally, the definition of “beneficial owner” in case of trusts, foundations and other similar fiduciary arrangements is extremely broad, and would automatically require to verify and disclose each one of the settlor, trustees, beneficiaries or protectors of a trust, regardless of whether any one of them  actually owns an interest in the trust’s income or property or has any meaningful power with respect to the administration of the trust. Also, the literal definition of "beneficial owner" used in the IV Directive in case of trusts does not make any distinction between an interest in the income of the trust, as opposed to an interest in the corpus of the trust, and does not refer to any minimum ownership requirement such as the 25 percent ownership threshold that applies in case of corporate entities.  

An over broad interpretation of the term "beneficial owner" in case of trusts would put banks, financial institutions, professional individuals and their customers under extreme pressure, potentially dramatically extending the amount of information to collect and creating a friction between the need of a thorough verification of the customer for anti money laundering purposes, and the right to privacy for all individuals involved who do not own any ownership interest of power of administration with respect to the trust.

It would seem more reasonable to limit the definition of "beneficial owner" of a trust, to those individuals or entities, among the settlor, trustee(s) or beneficiaries, who actually have a meaningful interest in corpus of the trust or real powers with respect to the administration of the trust.   

Arguably, sub paragraphs 6(a) and 6(b) of article 3 should apply separately, depending on whether the "customer" to be tested is a corporate entity (in which case, the test of sub paragraph a) should apply) or a trust or other similar arrangement (in which case the test of sub paragraph b) should apply).

However, there is a potential argument for a concurrent application of the two sets of rules, whenever a shareholding or ownership interests in a corporate entity is held through a trust, foundation or other similar legal arrangement. In that case, under the "indirect ownership" rule requiring to find the natural person that ultimately owns the corporate entity, it may be reasonably be argued that the “beneficial owner” of the trust should be verified under the separate rules of sub paragraph b), and he or she would be deemed to indirectly and ultimately own the shareholding or ownership interest which the trust owns in the tested corporate entity.

Under a different interpretation, in the event that a shareholding or ownership interest in a corporate entity is owned through a trust, the analysis should stop at the person or persons who control the entity, under the rules of sub paragraph a), thereby limiting the know your customer verification to the person or persons who act as trustee or trustees for the trust.  

In light of all the potential interpretative challenges, briefly mentioned above, it is important to see how the provisions of the IV Directive are going to be incorporated into the national legislation that will be enacted to transpose the Directive into Italy’s internal law. 

As for the scope of the disclosure mandated by the Directive, it is carried out at two levels. At one level, a bank, financial institution or professional individual that does business with an Italian entity or trust is required to conduct proper customer due diligence, which under article 13, paragraph 1, letter (b) of the Directive, including the following:

(b) identifying the beneficial owner and taking reasonable measures to verify that person's identity so that the obliged entity is satisfied that it knows who the beneficial owner is, including, as regards legal persons, trusts, companies, foundations and similar legal arrangements, taking reasonable measures to understand the ownership and control structure of the customer

At another level, under article 30, paragraph 1 of the Directive, the companies themselves are required to obtain and hold  adequate, accurate and current information on their beneficial ownership, including the details of the beneficial interests held. 

Article 30, paragraph 2 requires that the information of the companies’ beneficial ownership and beneficial interests be held in a way that it is accessible in a timely manner to the tax and financial authorities. 

In addition to the above, article 30, paragraph 4 of the Directive provides that the information on the companies’ beneficial ownership and beneficial interests shall also be held in a central register accessible in all cases to the tax and financial authorities, banks and financial institutions and any other person or organization that can demonstrate a legitimate interest to 

Finally, under the Directive, a separate and independent disclosure regime may apply to trusts. Indeed, article 31, paragraph 1 provides that:

1.Member States shall require that trustees of any express trust governed under their law obtain and hold adequate, accurate and up-to-date information on beneficial ownership regarding the trust. That information shall include the identity of: (a) the settlor; (b) the trustee(s); (c) the protector (if any); (d) the beneficiaries or class of beneficiaries; and (e) any other natural person exercising effective control over the trust.    

Italy does not have any law governing trusts (except that it applies its owns tax rules for the taxation of trusts both for income and gist and estate tax purposes). Trusts are usually established under foreign law, and recognized and enforced in Italy, if necessary, under the Hague Convention on Trusts which has been ratified in Italy by way of Law n. 364 of 1989. Law n. 171 refers is to “trusts governed under law n. 364 of October 16, 1089”, which includes any trust established under foreign law, which is recognized and enforced in Italy pursuant to the Trust Convention.

Furthermore, article 31, paragraph 4 of the Directive provides that

4.Member States shall require that the information referred to in paragraph 1 is held in a central register when the trust generates tax consequences. The central register shall ensure timely and unrestricted access by competent authorities and FIUs, without alerting the parties to the trust concerned. It may also allow timely access by obliged entities, within the framework of customer due diligence in accordance with Chapter II. Member States shall notify to the Commission the characteristics of those national mechanisms. 

The separate disclosure for trusts seems to be triggered whenever a trust is recognized and made effective in Italy pursuant Law n. 389 and the Hague Convention, and when the trust generates tax consequences in Italy.

Finally, it should be noted that on July 5, 2016, the European Commission adopted a proposal to amend the IV Directive on anti money laundering, which would reduce the shareholding test from 25% to 10%. 

Until the IV Directive is actually transposed into Italian law,  the provisions of legislative decree n. 231 of November 21, 2007 still apply.  

Legislative Decree n. 231 treats as “beneficial owner” the natural person or persons who ultimately own or control an entity, by directly or indirectly owing or controlling an adequate shareholding, voting or ownership interest in the entity, with the understanding that a (direct or indirect) shareholding or ownership interest of more than 25% of the entity is sufficient to satisfy the definition of beneficial owner. 

In case of trusts, beneficial owner is any identified beneficiary of the trust, who owns a qualified interest in more than 25% of the trust’s assets. 

The disclosure under Legislative Decree n. 231 is much more limited and restricted, given the narrower definition of beneficial owner that applies when a corporate entity is owned indirectly through a trust. Unlike the IV Directive, which mentions each of the trust’s settler, trustees and beneficiaries as beneficial owners of the trust, and as owning indirectly indirectly any shareholding or ownership interest that the trust holds in the tested entry, the legislative decree n. 231 refers solely to the trust’s identified beneficiaries owning an interest in at least 25% of the trust’s assets. 

In the course of our practice, we have been involved in situations in which banks and other financial  institutions or professional firms adopt a stricter and more balanced approach, by referring to the 25 percent ownership test and, for trusts, by limiting their investigations to beneficiaries holding an interest on more than 25 percent of trust's assets and trustees holding effective power of administration of the trust. In other situations, however, we noted that other banks may want to anticipate the application for the new provisions of the IV Directive, even before its entry into force, and conduct a 360 degree investigation on trusts, requesting information about all of the trust's settlor, trustees and beneficiaries (both actual and contingent) of wither income or corpus of the trust, regardless of the existence of an actual interest in, or power of administration with respect to, the assets of the trust.
In those cases, we have experienced that clients are willing to discuss the matter with their banks to make sure that their legitimate privacy rights are respected, and that anti money laundering, know your client verifications do not go beyond their legitimate, reasonable needs and become unmanageable or drain excessive resources.
In anticipation of the implementation of the IV Directive, clients should make the effort to review their structures, and put together a standard package that should be used with all of the banks, financial intermediaries and professional firms with whom they do business, and who will require information pursuant to anti money laundering legislation, to achieve efficiency and stay in compliance in such a challenging area clearly destined to draw more scrutiny and attention.            

Italy's Supreme Court Denies Treaty Benefits to UK Holding Company Under Beneficial Ownership Clause of UK-Italy Treaty

The Italian Supreme Court with its ruling n. 10792 of May 25, 2016 held that the 5 percent reduced dividend withholding tax provided for under article 10 of UK-Italy Tax Treaty does not apply, when the company that receives the dividends does not prove that it is the "beneficial owner" of the dividend as required under the relevant provision of the applicable tax treaty. For that purpose, according to the Court, the recipient of the dividends must prove that it has the legal and economic control of the dividend. As a result, in the absence of such proof, the Court held that the dividend was subject to the full 27 percent withholding tax rate provided for under Italy's internal tax legislation. 

Under the facts of the case, an Italian company distributed dividends to a UK company, which was  ultimately owned or controlled by a US corporation. At the time of the distribution of the dividend, the Italian company applied the 27 percent withholding tax provided for under article 27 of Presidential Decree n. 600 of 1973. The UK company then filed a request of refund of the difference between the 27 percent dividend withholding tax applied by the payer of the dividend, and the 5 percent reduced dividend withholding tax provided for under article 10 of UK-Italy tax Treaty.

In support of its request of refund, the taxpayer submitted a certificate of tax residency issued by UK taxing authorities, and evidence that the UK company that received the dividends duly reported the dividends as its own income on its income tax returns filed in the UK.

The Tax Court ruled in favor of the taxpayer, and the Regional Tax Court affirmed the Tax Court's ruling. According to the lower courts, "beneficial owner" means the person to whom the payment is attributed for tax purposes, and which reports the payment on its income tax return in its country of residence.

The Supreme Court disagreed, and held that "beneficial ownership" requires that the recipient of the income demonstrate that it has the economic and legal control of the dividend, namely that it receives the dividend for its own economic benefit, and without any legal obligation to pass it on to another person.

According to the Court, the beneficial ownership provision of tax treaties, as it evolved since it first appeared in the 1977 OECD Model Tax Convention, constitutes a general anti treaty shopping clause, which must be given a substantial meaning independent from and going beyond the tax residency requirement, based on an analysis of the facts and circumstances of each case showing that the recipient of the income derives a direct economic benefit from, and has the full dominion and control of, the income subject to withholding tax.

In contrast, the term "beneficial ownership" cannot be interpreted in a formalistic way, according to which beneficial owner is the person who receives the income and reflects it on its income tax return, because in that case it would just overlap with the tax residency requirement and would no longer serve its purpose of stopping treaty abuse.          

The decision is consistent with Italian Supreme Court's case law and provides additional certainty in a complex area of international tax law.

Italy's Supreme Courts Rules On Anti Inversion With Denial of Foreign Tax Credit

The Italian Supreme Court, with its ruling n. 8196 of April 22, 2015 held that a NY corporation, wholly owned by an Italian company, and effectively managed and controlled by its Italian shareholders and directors in Italy, had to be treated as an Italian resident company for Italian tax purposes, and was subject to corporate income tax in Italy on all of its profits, inclusive those arising from sales to US customers in the United States. Unlike the United States, which classifies a corporation as domestic or foreign based on whether it is incorporated in the United States or abroad, Italy applies the "place of administration" test and treats a company as Italian resident whenever it is administered in Italy. The other two tests to determine corporate tax residency are the place of incorporation test and the principle place of business test. The Court concluded that the NY corporation was administered in Italy because the manager was domiciled in Italy, and the corporation's accounting books, commercial contracts, and minutes of meetings of shareholders and directors were all located in Italy. In an additional blow to the taxpayer, the Court ruled that no foreign tax credit for the taxes paid by the NY corporation in the United States could be granted in Italy, because the corporation had failed to file its Italian income tax returns in Italy, whereby it should have reported its foreign income and taxes and computed and claimed the credit, which had then become time barred. Under Italy's tax administrative rules,  in order to obtain a credit for foreign taxes paid on foreign source income, a taxpayer is required to file its tax return, reporting the foreign income and taxes paid and the amount claimed as a credit to offset the Italian taxes on the same income taxed abroad. The taxpayer raised the argument that the credit should have been granted, regardless of the fact that no income tax returns had been filed in Italy, pursuant to the foreign tax credit provisions of the US-Italy tax treaty, which would prevail over Italy's internal tax legislation. The Court however rejected the argument, holding that the way in which the credit is substantiated and claimed through the timely filed true and accurate Italian corporate income tax return in Italy is an administrative matter duly regulated under domestic law, and  not affected by the treaty. The ruling shows that Italian companies with foreign subsidiaries must pay specific attention to Italy's anti inversions rules reclassifying foreign companies as Italian resident companies subject to tax in Italy whenever they are effectively managed and control from Italy. That includes making sure that local managers (with real management responsibilities) are appointed and sit on the board of the company in the Unites States; board meetings are held and resolutions are properly recorded on the company's books in the United States; commercial contracts are negotiated, executed and filed in the company's records the United States, and accounting books and records are kept at the company's offices in the United States. The risk of losing the credit and being subject to double taxation is high and requires a great deal of due diligence and care.                                          

No Gift Tax Upon Gratuitous Transfers of Assets To a Trust

The Regional Tax Commission of Lombardy Region (an appellate level tax court including the city and province of Milan in Northern Italy) with its ruling n. 2846/2016 issued on May 13, 2016 held that a gratuitous transfer of property to a trust is not subject to the gift tax. The court's theory is that the asset transferred to a trust is not immediately available to the beneficiary, who is only entitled to receive it when all the conditions for the final distribution of the trust's property have occurred, and as a result, no enrichment of the beneficiary takes place at the time of the transfer of the property to the trust, which is required for the application of the gift tax.

The decision is in contrast with the Supreme Court's case law, according to which the gift tax applies to any transfer for no consideration, regardless of the fact that the property transferred is immediately available to the recipient, who has an immediate right to enjoy and use it, or is held in trust for a distribution to the recipient at a later stage, with the recipient holding solely a future interest to the property. The most recent decisions of the Supreme Court on the taxation of a gift of property to a trust include rulings n. 3735 and 3737 of February 24, 2015 and n. 5322 of March 18, 2015.        

The different rule applied by the Regional Tax Commission of Lombardy is not necessarily favorable to the taxpayer. Indeed, while the immediate advantage is that no gift tax applies at the time of the transfer of the property to the trust, the flip side is that the gift tax will apply at the time of the transfer of the property from the trust to the beneficiary, and it will be charged upon the entire fair market value of the property at that time, including any market appreciation of the property occurred between the time of the transfer of the property to the trust, and the time of the distribution of the property to the beneficiary.

Italy applies a gift tax at tax rates that vary from 4 percent to 10 percent, depending on the relation between the transferor and the transferee, with an exemption up to 1 million euro for transfer to close family members (spouse, parents, children) and up to 100,000 euro for transfer to siblings.

Application of Tax Treaties To Fiscally Transparent Entities: US-Italy Perspective

The application of tax treaties to fiscally transparent entities is controversial. Two requirements for the application of the benefits of a tax treaty (that is, the elimination or reduction of the source country tax on payments made by a person resident in one Contracting State, to a person resident in the other Contracting Sate) are that the person receiving the payment is a "resident" of the other contracting state, and the "beneficial owner" of the payment.

Residence is usually defined in tax treaties (typically, under article 4, paragraph 1), as requiring that a person be "liable to tax" in the other Contracting States, by reason of his residence, domicile, place of management, place of incorporation or other criterion of a similar nature (article 4, paragraph 1).

According to the OECD, whenever an entity is treated as fiscally transparent in a State, the entity is not "liable to tax" in that State, within the meaning of article 4, paragraph 1, and so it cannot be a resident thereof for purposes of a treaty. In such case, the entity's partners or owners should be entitled to the benefits of the treaty entered into by the State of which they are residents, with respect to their share of the income of the entity, to the extent that the entity's income is allocated to them under the tax laws of their State of residence (see OECD Commentary to the Model Tax Convention, on Article 1, paragraph 5).

The current Tax Treaty between Italy and the United States adopts a slightly different approach and assigns tax residency to a an entity that is treated as fiscally transparent entity in the United States, for the purposes of the treaty, to the extent that the entity's income is taxed in the U.S in the hands of its parents or beneficiaries. In fact, Article 4, paragraph 1, letter b) of the Convention, with reference to partnerships, estates and trusts, provides that in the case of income derived or paid by a partnership, estate of trust, this term applies only to the extent that the income derived by such partnership, estate or trust is subject to tax in that State, either in its hands or in the hands of its partners or beneficiaries”. Article 1, paragraph 5, letter d) of the Protocol extends the same provision to fiscally transparent entities, by providing that d) The provisions of subparagraph 1(b) of Article 4 (Resident) of the Convention shall apply to determine the residence of an entity that is treated as fiscally transparent under the laws of either Contracting State.

Under the provisions referred to here above, a U.S. entity that is treated as fiscally transparent under US tax laws, receiving dividends from an Italian subsidiary, should be entitled to the 5% withholding tax on inter company dividends, provided that it satisfies the other requirement (minimum 25% ownership for a period of at least 12 months at the time of the payment of the dividends). For that purpose, the documentation provided to the Italian subsidiary must include tax certificates for both the entity and it shareholders or beneficiaries, providing that the shareholders or beneficiaries US residents and are taxed on the entity's income in the United States.    

As for the second requirement, the term "beneficial owner" is generally not defined in tax treaties. However, the 2014 Update to the OECD Model Tax Convention issued by OECD the Committee on Fiscal Affairs on June 26, 2014 clarifies the meaning of beneficial owner as requiring that a person have "the right to use and enjoy" the income, "unconstrained by a contractual or legal obligation to pass on the payment received to another person". Sometimes, the term is interpreted as meaning that the beneficial owner is the person to whom the income is attributed for tax purposes under the tax laws of a Contracting State. 

The EU Directive 2003/49/EC of June 3, 2003 provides a definition of the term “beneficial owner” for the purposes of the withholding tax exemption of interest and royalties paid to a EU parent or affiliate corporation, according to which “A company of a Member State shall be treated as the “beneficial owner” of interest or royalties only if it receives those payments for its own benefit and not as an intermediary, such as an agent, trustee or authorized signatory, for some other person”. Circular 47/E of November 2, 2005, which at paragraph 2.3.2 clarifies that in order for a company to be considered the beneficial owner of the interest or royalties, “it is necessary that the company receives the payment as the ultimate beneficiary, not as an intermediary such as an agent, a fiduciary, or collector of the payment for another person, … and that the company receiving the interest or royalties derives a direct personal economic benefit from the income from the transaction”.

Clearly, the tax treatment of an entity in its country of organization is key to determine whether the entity, or its shareholders, partners or members, are entitled to the benefits of a treaty with respect to a parent made by a resident of the other Contracting State. The residence and beneficial owner requirements, whose meaning is not entirely free from doubt, and depends on the facts and circumstances of the particular case, call for extensive analysis of the tax classification and treatment of the entity and its owners, under the laws of their country or organization or asserted residence, as well as the organizational structure, role and functions of the entity receiving the payment. Under that scenario, the payer of the income bearing withholding agent obligations is usually under pressure, and must make sure that the documentation provided by the payee establishes with sufficient certainty the payee's eligibility for treaty benefit.               






New Disclosure Rules for Trusts

On November 25, 2015 we reported on new disclosure rules on trusts, which are part of a bill currently discussed by the Italian Parliament. The bill would implement in Italy the new European Union anti money laundering directive.

We reported further on those rules in the article attached.



Amended Return Not Sufficient To Avoid Penalties For Failure To Report Foreign Assets On Form RW

The Regional Tax Court for the Region Lombardia with ruling n. 3778/67/15 held that the amended income tax return, which an Italian taxpayer may file to integrate a previous incomplete file return after the filing deadline has expired, does not remedy the penalties connected to the failure to file a timely RW form. The information disclosed in the RW form is required to allow the tax administration to know about an Italian resident  taxpayer’s foreign assets even though they do not generate taxable income. Failure to disclose foreign investments and assets constitutes a substantial violation that is not subject to review. 

The case involved a German taxpayer residing in Italy, who did not file an income tax return regarding the purchase of some shares from a Swiss corporation that occurred in 2005. After the tax administration invited the taxpayer to explain the omission regarding the shares, the taxpayer filed a supplementary tax return for 2006, which included the RW form previously omitted. Nevertheless, the tax administration notified the taxpayer of a violation of his disclosure obligations and assessed the statutory penalties.

The taxpayer then filed a complaint in the tax court. The taxpayer argued that the statute of limitation  had run, and that the supplementary income tax return had, in any event, remedied the previous omission. The administration replied that, given the undisclosed investments involved blacklist countries (tax havens or tax-privileged areas), the extension of the ordinary statute of limitations should apply. Furthermore, for the administration, the supplementary tax return could not constitute a remedy to the previous omission, sufficient to eliminate the applicable penalties for to the initial nondisclosure.

The appellate court reversed the tax court's decision. First, the appellate court held that the extension of the statute of limitations for assessment related to investments in blacklist countries is procedural in nature, such that it applies also retroactively to previous tax years. The court further held that the failure to file an RW form constitutes a substantial violation. The supplementary income tax return allows the taxpayer to adjust the erroneous or omitted report of income, but it does not eliminate the penalties for the late or omitted filing of the return. According to the court, the taxpayer could only have avoided the full penalties by refraining from going to court and settling the matter with the payment of the reduced penalties equal to 1/4 of the minimum.

As reported in our previous article of November 2014 (that you can find here:, an RW form is an annual income tax return that Italian resident individuals are required to file pursuant to art. 4, D.L. nr. 167/90. The form allows individuals to report their foreign financial investments and assets, which are capable of generating foreign-source income, regardless of an actual income produced. This means that, as pointed out by the appellate court, even though the foreign investments reported in the form do not automatically generate taxable income, they nevertheless constitute a red flag for the tax administration. This assertion is even more compelling, considering the tax administration would not otherwise easily know about these investments and assets.

In case of errors or omission in the original return, a taxpayer may file a supplementary tax return, and obtain a reduction of the applicable penalties. If filed within 90 days from the filing deadline, the supplementary return has the same value of a valid and correct tax return originally filedPassed the 90 days, the return is deemed to be omitted, although the administration may still impose taxes based on them. At this point, the supplementary tax return must be filed within the filing deadline of the return concerning the following tax period. Passed 90 days from the original deadline, the sanctions range from 3% to 15% of the unreported income detained in white list countries, or from 6% to 30% of that detained in blacklist countries. In both cases, however, the penalties remain and cannot be remedied.

In conclusion, the opinion of the regional tax appellate court clarifies that the failure to file an RW form disclosing foreign assets and investments constitutes a substantial violation, which triggers automatic penalties. On the other hand, the extension of the statute of limitations for the administration’s assessment power applies retroactively to previous tax years, given its procedural nature.

Although the holding has a limited authority, considering it comes from a regional appellate court, it is indicative of the importance of filing an accurate and timely RW form disclosing foreign assets and investments. The taxpayer should especially pay close attention to the RW form in case assets are held in foreign countries that are part of the black list.


Foreign Trusts Subject to Disclosure in Italy

Every time a trust has connections with Italy and is given legal effects or enforced there, the trustee will need to collect, keep and disclose (if required) information on beneficial ownership of the trust and, potentially, report such information in a special Trust section of the Italian Business Register. The new trust disclosure rules derive from the Italian bill  transposing into national law the EU Fourth Anti-Money Laundering Directive (2015/849).

The Directive requires trustees of any express trust governed under the law of a Member State to obtain and hold information on the beneficial ownership of the trust, inclusive of the identity of the settlor, the trustee, the protector (if any), the beneficiaries, and any other natural person holding any authority or exercising effective control over the trust. When the trust generates legal or tax consequences in the legal system of a Member State, such information has to be reported in a central register of that Member State.

The Italian bill implementing the Directive imposes such duties on “trustees of express trusts governed in accordance with Law dated October 16, 1989 n. 364".   With law n. 364 Italy ratified the Hague Convention of July 1, 1985 on the Law applicable to Trusts and their Recognition. The reference to trust governed by law n. 364 has the effect to attract all foreign trusts recognized and enforced in Italy to the new disclosure rules.

Italy does not have a body of national statutory provisions on trusts, but the enforcement of the 1985 Hague Convention with the Law n. 364 of 1989 permits to recognize and give legal effects in Italy to trust created under and governed by foreign law.

As a result, every time a foreign trust is to be legally used in Italy, and is designed to produce legal and tax effects there, it can be considered a trust “governed in accordance with Law n. 364 of 1989”, thereby triggering the know your customer and disclosure obligations set forth in the Directive. Therefore, it will be automatically subject to the new disclosure obligations, including the registration in a special Trust section of the general Business Register. Foreign trustees of a foreign trust that has a connection with Italy, are potentially subject to those rules, and need to pay close attention to the their new reporting obligations under the new rules.

Situations that fall within the scope of the disclosure rules include common cases in which a foreign trust has Italian resident beneficiaries, or owns movable or immovable assets located in Italy. In those cases, the beneficiaries in order to claim the distribution of income or assets from the trust need to put in place the procedure to have the trust recognized and enforced in Italy. The same happens when a foreign beneficiary claims the distribution of the trust’s Italian assets pursuant to the trust.

Even when the settlor of a foreign trust is an Italian individual, the new rules would apply. Indeed, the settlor may need to rely on the trust to separate herself from the assets transferred to the trust, and claim that the trust assets and income belong to somebody else who should bear the responsibility of tax filing, payment and reporting relating to the trust. To the effect, the trust would have legal and tax consequences in Italy, which would put it within the scope of the new disclosure rules.   

The Directive set forth a deadline for its implementation into EU member’ States’ law, currently expiring on June 26, 2017. The Italian bill once enacted into law will need legislative decrees with enforcement provisions to be adopted by the Government pursuant to the legislative authority granted therein.


Italy's Tax Residency for Foreign Investors

Italy's tax residency for foreign taxpayers buying Italian real estate, and spending significant time in Italy for pleasure or business continues being a very critical and challenging issue. Italy assigns tax residency of individuals based on residence, which means fixed place of living ; domicile, which means main center of interests, or registration on the list of Italian resident individuals for administrative purposes. Whenever one of the three tests is met for more than 183 days in any given year, an individual is resident of Italy for Italian tax purposes for that particular year. Italian tax residency triggers worldwide income taxation and obligation to report worldwide financial and non financial assets to Italian tax authorities on taxpayer's Italian income tax return. 

In case of tax residency under the internal laws of Italy and another treaty country, Italy applies the tie breaker provisions of article 4 of the tax treaty to resolve the double residency problem, which assign tax residency based on the location of of permanent home, center of vital interests, habitual abode or nationality. The treaty "center of vital interests" test requires a comparative analysis of the taxpayer's contacts or ties in Italy and the other treaty country. According to one view, personal and family ties should prevail, while another interpretation gives relative weight to economic and business interests.

A recent decision of Italy's Supreme Court, which we comment here, seems to support the second interpretation. Proof of business and economic interests abroad while living or spending significant time in Italy for personal pleasure may help taxpayer demonstrate that that she kept her center of vital interest and tax residency in her own country.

This area of Italian international tax law is in flux and needs attention. Foreign taxpayers who transfer money to Italy to purchase homes, spend regular time there, register their administrative residency in Italy at their Italian address for convenience, open Italian bank accounts to handle the funds needed to manage their Italian house and living expenses are under the radar screen on Italian tax authorities, which check the real estate database, receive automatic information about the cross border transfers of the funds and often send inquiry letters asking for explanations on the taxpayer tax position in Italy in the absence of past filed Italian income tax returns.                

Such inquiries and related audits requires careful consideration, including the provision of carefully selected and explained tax documents and information, to avoid the risk of an Italian tax residency determination that would trigger far reaching and very troubling consequences.  

Italy's Supreme Court Holding That Economic Interests Prevail Over Personal Ties In Determining Italian Tax Residency

Italy’s Supreme Court’s decision n. 6501 of March 31, 2015, dealing with the case of an Italian citizen  who had most of his personal and family connections in Italy but moved to work in another country (Switzerland), where he had most of his economic and financial interests, ruled that the taxpayer’s economic and financial connections should prevail over the taxpayer’s personal and family connections under the center of vital interests test of the Italy-Switzerland treaty, and concluded that the taxpayer’s tax residency had to be allocated to Switzerland under that treaty.

The above decision is the last of a series of recent Italian tax courts' rulings supporting the conclusion that economic ties to a country are more important than personal or family ties to another country in determining an individual's tax residency.

The Supreme Court’s holding goes against older case law and has very important ramifications.

We refer, in particular, to the frequent cases of American citizens who transfer money from the United States from Italy, purchase and own valuable homes in Italy, and spend significant time there, together with their family. Those people usually pass the test for establishing tax residency in Italy under Italian domestic tax law.

In many cases, the Italian tax administration, who can rely on extensive data base detecting U.S. transfers of money to Italy and purchase and ownership of Italian homes, sends audit letters to inquire about the tax status of those foreign citizens in Italy, considering that they usually are not aware of the problem and have never filed any Italian income tax returns.

The recent case law offers a valuable opportunity to avoid unintended tax consequences arising from inadvertent Italian tax residency, in a sense that taxpayers in those cases can still argue that their tax residency remained in the United States whenever sufficient economic and financial interests are still located there, while physical presence and personal and family connections have shifted to Italy.