Italian Supreme Court Held That Burden of Proof in Tax Avoidance Cases is Upon Taxpayers
The Italian Supreme Court in judgment n. 8487 issued on April 8, 2009 held that taxpayers bear the burden to prove that a transaction is entered into for legitimate economic reasons beyond the mere possibility to obtain tax benefits.
The above decision contradicts a previous ruling, n. 1465 of January 21, 2009, in which the Court placed yon the tax administration the burden of proof that a transaction lacks economic substance and is entered into for the essential purpose of obtaining a tax advantage.
Judgment n. 8487 concerns a case in which an Italian company transferred the stock of a wholly owned subsidiary to its parent, as part of a reorganization which was designed to enable the parent to go public.
Under those circumstances, Italian law taxed the gain realized from the transfer of stock of the lower tier subsidiary to the parent to a reduced 10% tax, instead of corporate income tax at ordinary rate. Eventually, the parent was not publicly traded.
The Court applied the anti avoidance provisions of article 37-bis of Presidential Decree n. 600 of 1973 and held that, for those provisions to apply, it is sufficient that a even a single contractual transaction or legal arrangement that is legitimate, on its face, is used in a way that is inappropriate or abusive, and is essentially entered into for no valid economic reasons except for obtaining a tax advantage.
That interpretation, according to the Court, is supported by the Italian constitution, which does not permit tax avoidance.
According to the Court the taxpayer has the burden to prove the specific economic reasons that justify the transaction, in order to be granted the contemplated tax benefits.
The above decision is the last of several decisions issued in the last few months on the topic of tax avoidance and demonstrates that this area is in a constant flux and needs constant monitoring.
