EU & Italian International Tax Law Blog : International Tax Lawyer & Attorney : Marco Rossi Law Firm : Italy, New York, European Union, EU

The IRS issued press release IR-2011-14 (Feb. 8, 2011) which announces the opening of a new program for the voluntary disclosure of foreign bank accounts with filing of back taxes and delinquent foreign bank account reports for the past eight years. The press release summarizes the highlights of the program and also links to a more detailed Q&A. The press release can be found here and the Q&A could be found here. As suggested by the IRS previously, the new program has stiffer penalty rules. OVDI requires individuals to pay a penalty of 25% of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. There are reduced penalties for some eligible taxpayer of 5 or 12.5%. Taxpayers will also have to pay back-taxes and interest for up to 8 years.  All of this is obviously more stringent compared to the 2009 program’s 20% penalty and 6 year look-back (2003-2008).  Taxpayers will have to enroll in the program by August 31st in order to be able to benefit from the potential avoidance of criminal liability and higher civil penalties. U.S. resident taxpayers with assets in Italy or other foreign countries, and U.S. citizens residing abroad and in Italy should pay attention to the new program, which may offer opportunities to rectify previous mistakes or omissions and be back in compliance with substantially reduced penalties.   

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The Italian Supreme Court with judgment n. 1372 of January 21, 2011 confirmed that a merger leveraged buyout is not abusive in itself and can be respected for tax purposes. In the transaction under scrutiny, a company member of a group obtained a loan from a third party and purchased 100 per cent of the stock of another company member of the same group. Immediately after the acquisition and as part of the overall plan, the acquired company merged into the acquiring company. As a result, the acquiring company was able to use its acquisition interest expenses to offset the income of the target. Historically, leveraged buyout transaction had been challenged as elusive and tax deductions had been rejected by the tax administration. The Supreme Court's decision is important in the process of recognizing the general legitimacy of leveraged buyout arrangements in the Italian tax system.        

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Article 2 of the bill on tax federalism under discussion in Parliament would introduce new provisions on taxation of Italian real estate income for individual taxpayers. Under current law, real estate income (both foreign and domestic) is reported on individual taxpayer's annual income tax return and is taxed as ordinary income at graduated rates. Under the new provisions, domestic real estate income would be subject to withholding tax at the flat rate of 20 per cent. The withholding tax would be a final tax. As the bill is currently drafted, the new flat tax would not apply to foreign source real estate income, which would still be part of total income subject to tax on a net basis. To the extent that the different taxation system leads to a harsher taxation of foreign real estate income compared to domestic real estate income, the new provisions could be challenged as invalid under the non discrimination and freedom of movement of capital principles of EU tax law. For foreign investors in Italian real estate, the new provisions would be beneficial because they would grant a lower tax rate under domestic law - the new flat 20 percent tax - than the tax rate currently commonly granted under tax treaties - 30 per cent.       

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