The Italian Desk of Ernst & Young in New York has published comments on the new US-Italy Tax Treaty. The new Treaty entered to force with the exchange of instruments of ratification on December 17, 2010.
Italian parliament passed a new law which extends the statute of limitation for assessment of taxes due on income arising from foreign investments and controlled foreign companies.
The general statute of limitation period is five years from the year in which the return is filed. The special statute of limitation for income from foreign assets and controlled foreign companies is extended to nine years.
The new measure is part of the package of measures which includes and extension of deadlines for the tax amnesty and voluntary disclosure of undeclared foreign assets to February 28, 2010 (with tax of six percent) and April 30, 2010 (with the tax increased to seven percent).
On December 17, 2009 the Italian Government passed a decree which extends the deadlines for the Italian voluntary disclosure program.
The new deadlines are February 28, 2010 and April 30, 2010. Taxpayers who repatriate or regularize their undeclared foreign assets within February 28, 2010 pay a 6 percent flat tax on the fair market value of the repatriated or regularized assets. Taxpayers who repatriate or regularize their undeclared foreign assets within March 31, 2010 pay a flat 7 percent tax.
According to the latest statistics, foreign assets in excess of E 100 billion have been declared pursuant to the current voluntary disclosure program enacted in September this year.
In connection with the unreported foreign assets disclosure program, new penalties have been enacted for failure to report foreign investments. The new penalties are equal to minimum of 200 to a maximum of 400 percent of the unpaid tax on unreported foreign investments and 50 percent of the fair market value of the unreported foreign assets.
Also, any foreign asset which has not be reported is deemed to be unreported income subject to tax.
The pending 1999 U.S.-Italy Tax Treaty entered into force on December 16, 2009, when Italy and the United States exchanged the instruments of ratification.
The new U.S.-Italy Tax Treaty (PDF) is effective from February 1, 2009, for income subject to withholding tax and from January 1 2010, for all other provisions of the treaty.
The 1999 U.S.-Italy Tax Treaty remained pending for ten years due to certain general anti abuse provisions for the application of the reduced withholding tax rates on dividends interest and royalties, and some other issues concerning the exchange of information provision of the treaty and the arbitration procedure to resolve treaty disputes. Italy waived the anti abuse provisions by means of the exchange of diplomatic notes in April 2006 and February 2007 and ratified the treaty in April 2009.
The new treaty includes provision on the creditability in the United States of the Italian Regional Tax on Production Activities (IRAP), the application of the US branch profits tax and new withholding tax rates on dividends, interest and royalties, plus a limitation of benefits provision in the protocol.
The new withholding tax rates are 5 percent for inter-company dividends (namely, dividends paid to a company which owned at least 25 percent of the stock of the distributing company for more than twelve months), 10 percent on interest and zero percent on royalties from copyrights.
For practitioner and professionals active in the international tax arena, it is interesting to know that the International Tax Institute, Inc. has launched its new web site (www.internationaltaxinstitute.org).
Founded in 1961, the International Tax Institute, Inc. is a non-profit organization run by tax professionals to benefit the international tax community. It provides continuing education led by top tax professionals as well as government policy-makers.
Its core program is a series of monthly luncheon seminars, which are available to members and non-members. It provides New York State Continuing Legal Education Credits to lawyers, and New York State Continuing Professional Education Credits to accountants.
It is a membership organization comprised of the top global accounting and law firms, as well as boutique international firms. Individual memberships are also available. Non-members are welcome at all its programs.
The OECD Committee on Fiscal Affairs has released as a discussion draft a Report on “The Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles”(PDF) which contains proposed changes to the Commentary on the OECD Model Tax Convention dealing with the question of the extent to which either collective investment vehicles (CIVs) or their investors are entitled to treaty benefits on income received by the CIVs. The Report is a modified version of the Report “Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles” (PDF) of the Informal Consultative Group on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross-Border Investors (“ICG”) which was released on 12 January 2009. In that original Report, the ICG addressed the legal and policy issues specific to CIVs and formulated a comprehensive set of recommendations addressing the issues presented by CIVs in the cross-border context.
Continue Reading...On August 18, 2009 Italy's tax administration issued resolution n. 226/E (published only on December 6, 2009), which concerns the application of the Italian participation exemption rules to gains from sale of stock of an intellectual property holding company (Rul_ 226_E - Aug_ 18, 2009.PDF).
Italy operates a very favorable participation exemption regime, pursuant to which 95 percent of the amount of gains realized from the sale or exchange of stock is exempt from tax. The remaining 5 percent is taxed at the corporate tax rate of 27.5 percent (equivalent to an effective tax rate of 1.375 percent). The exemption applies also to gains from the sale of partnership interests or participating financial instruments that are treated as stock for tax purposes (for an analysis of Italy's participation exemption rules, see Italy's Participation Exemption Rules.PDF).
One of the requirements of the participation exemption is that the company whose stock is sold is engaged in the conduct of a commercial enterprise (as defined in the commercial code). The commercial code definition of commercial enterprise is very wide in scope. Under the tax code, any activity conducted by a commercial company is deemed to be a commercial activity generating business income.
Under the facts of the resolution, an Italian company owns 50 percent of stock of a Dutch B.V., who holds intangible properties (trademarks and trade names). The Dutch holding company is responsible for the registration and legal protection of the intangible properties and licenses those properties to other affiliated companies and third parties in exchange for royalties.
In the resolution n. 226/E, the tax administration clarified that the active business requirement for the participation exemption must be interpreted strictly and is not met when the activity of a company is limited to the mere holding of the legal title to intellectual property and licensing of that property to affiliated companies. To benefit from the exemption the company must be engaged in an active licensing business, which includes actively managing and developing the intangibles by way of research and development activities and its active licensing to third parties.
The distinction between passive intellectual property holding activity, which does not qualify for the exemption, and active licensing business, which qualifies for the exemption, depends of the facts and circumstances of each specific case. For this reason, the tax administration, after clarifying the general principle that applies to the matter, refused to rule on the specific case submitted by the taxpayer.
In connection with the enactment of its own tax amnesty (which permits the repatriation or regularization of undeclared foreign investments with the payment of a very generous 5% flat tax on the fair market value of the undeclared assets), Italy is cracking down on tax havens, especially those across the border such as Switzerland, Liechtenstein and San Marino. Current estimates of the Italian tax administration suggest that more than 35 percent of Italian investments in Switzerland are being repatriated under the amnesty, and more are expected to come and sit permanently in Italy after the repatriation procedure (for which the deadline is set at December 15).
Recently, it has been reported that Italian tax agents under cover visited several Swiss banks taking pictures of clients coming in and out the banks, and have increased the controls at the border for Italians moving in and out of Switzerland.
As a result of Italy's strong action, Switzerland is now working on a revised proposal to the EU for the enactment of a new back withholding in exchange for Swiss banks customers privacy. Under the new proposal, Switzerland would negotiate with each EU member state a new back up withholding tax, that could be as high as 30 percent and would apply on savings from Swiss accounts of residents of other EU Member States. The proceeds from the withholding tax would go to the resident state of the Swiss bank account holder. In exchange for the back-up withholding, Swiss banks would not be forced to give up the bank secrecy and reveal the names of their customers.
Italy's reaction to the proposal has been rather skeptical so far. The approach of the Italian government is that first the tax amnesty procedure is completed, and then the due consideration will be given to any possible solution to the problem of those Italian individual investors who have decided to keep their undeclared funds offshore. A new provision in the Italian tax code now presumes that any money kept offshore comes from undeclared income for which Italian taxes are due, and the penalty has been increased to up to 400 percent of the amount of unpaid taxes.
Liechtenstein, on the other side, is negotiating a new exchange of tax information treaty with Italy, after several other similar treaties have been signed with a number of other EU Member States.
We are pleased to announce that Elettra Menarini has joined our firm as international tax counsel on US-Italy matters. Elettra is admitted in Italy (2003) and California (2006). She specializes in international tax and corporate law and shall provide legal and tax advice for US-Italy cross border transactions.
The new tax amnesty recently enacted by the Italian parliament took effect on Sept. 15. Taxpayers have time until April 15, 2010 to apply.
The amnesty applies to individuals and pass through entities which held undeclared foreign accounts and investments outside of Italy as of December 31, 2008.
Taxpayers can declare (and leave abroad) or repatriate the foreign accounts and investments and avoid any applicable tax and civil penalties by paying a tax at a flat rate of 5% on the amount of the reported foreign accounts or investments.
To apply for the amnesty, taxpayers shall file a form with a bank or other Italian qualified financial intermediary, on which they will report the assets that they want to declare or repatriate. The bank or financial intermediary, in turn, will file the form with the payment of the tax with the tax administration. The form does not contain any personal information on the filing taxpayer. Therefore, the amnesty is completely anonymous.
Any future audits on the amounts that are reported on the form is not allowed and administrative penalties for the violation of the rules on reporting cross-border transfer of assets and foreign investments are permanently forgiven.
Similar amnesties enacted in 2001 and 2003 generated a repatriation of 59.8 and 14.9 billion euros, with a tax revenue of 1,4 and 0.6 billion euro (at 2.5 and 4% tax rate), with 56 and 51% of the declared money coming from Switzerland. The estimated amount of declared or repatriated foreign assets that is expected from the new amnesty is 60-90 billion euro with a tax revenue of 3-45 billion euros.
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