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.                                          

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.               






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.


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.

Overview of Italy's Tax Reporting Rules

Italian resident taxpayers are required to report all of their assets held outside of Italy,  on form RW of their Italian income tax returns (which include various sections and can be considered the equivalent of the FBAR and other international tax returns that are required to be filed in the United States).

Resident taxpayers subject to reporting include U.S. (or any other foreign) citizens who crossed the line and have become tax residents of Italy under Italian tax residency rules (unless they can claim U.S. tax residency under the tie breaker provisions of article 4 of the U.S.-Italy income tax treaty).

They also include Italian nationals who moved abroad but maintained their tax residency in Italy as a result of keeping their domicile there.   

Reporting requirements extend to any foreign asset, not just bank or financial accounts, which is capable of generating (currently or at any time in the future) foreign source income taxable in Italy (such as houses, boats, jewelry, artworks, etc.). 

Recently, the scope of reporting has been dramatically extended as a result of the enactment of the "beneficial owner" rule, which requires to report assets that are not immediately or directly owned by the taxpayer, but are owned indirectly as a result of owning shares of stock or similar interests in foreign entities, or that will be received in the future as distributions out of trusts of which the taxpayer is a beneficiary.

The new reporting rules adopt a "look through" approach pursuant to which the taxpayer is required to report her pro rata share of the underlying assets owned by an entity in which she is owns stock or other similar interests.

Reporting can be very daunting, in case of multiple entities and levels of ownership, and assets owned foreign in trusts that need to be properly classified and interpreted under Italian tax rules to understand exactly who and how (among the various settlors and beneficiaries) is required to report the assets held in trust.

In this article we provide a general overview of the new Italy's international tax reporting rules referred to here above. We hope it proves to be useful as an initial orientation guidance in a very complex area of Italian international tax law.                



Italian Perspective on Beneficial Ownership

In recent years the concept of 'beneficial ownership' has emerged as a major anti abuse rule applicable in the context of tax treaties and other important areas of international tax law. This article provides an overview of the recent interpretation and applications of the beneficial ownership rule as clarified by the OECD, pursued by tax administrations and courts in various countries, and carried out in Italy.

Italian Supreme Court Rules on Individual Tax Residency

The Italian Supreme Court in its Ruling 20285 dated September 4, 2013 held that an individual taxpayer claiming to have his tax residency outside of Italy had properly discharged his burden of proof and correctly established his tax residency abroad by producing copy of his residential lease, regular payments of rent and utility bills and use of personal bank account for day to day expenses, thereby proving that his actual and real residence and domicile was located in the foreign country. 

Under Italian tax law, individual tax residency is determined pursuant to highly factual tests and can be established even when there are relatively minor contacts with Italy, such as a house, frequent visits to the country, or business interests located there. Once determined, it subjects the taxpayer to worldwide taxation in Italy both for income and estate tax purposes including the obligation to report all of taxpayer's assets wherever located in the world under a form that is the equivalent of the american foreign bank account report, except that it requires reporting of non financial assets (such as cars, houses, planes, artworks, etc.) as well as financial assets and accounts. Foreign persons with interests in Italy must pay particular attention to those rules to avoid to be trapped into unintended Italian tax residency. 

Under the facts of the case decided by the Supreme Court,  the taxpayer - a tennis player originally resident in Italy - claimed to have moved his tax residency to Monaco, while still traveling to Italy and other countries in connection with his business interests and professional activity.

Under Italian law, Monaco is a tax haven, black listed jurisdiction and Italian taxpayers who register as residents there are presumed to be still resident in Italy for Italian tax purpose, unless they prove that their actual residence and domicile is located in that country. For this purpose, residence identifies the taxpayer's habitual and regular place of living, while domicile identifies the taxpayer's main center of personal, financial and business interests.  


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Italy Amends Its Rules On Tax Disclosure of Foreign Assets

Italy enacted a new law that significantly amends its rules requiring Italian resident individual taxpayers to report their foreign financial investment and accounts and other assets capable of generating foreign source taxable income.


The fist significant change reduces the scope of the reporting. it eliminates the duty to report intra year transfers relating to reportable foreign assets, previously reported through sections III and I of form RW part of Italian tax returns. As a result, any transfers of money out of Italy for the purchase of foreign reportable assets, or into Italy as a result of a liquidation or sale of a reportable foreign assets, or foreign to foreign transfers relating to changes to the portfolio of foreign reportable assets, which occurred during a tax year, need not be reported.      


The second significant change reduces the amount of applicable penalties. Under the old law, penalties could be assessed from a minimum of 10 percent up to a maximum of 50 percent of the value of unreported  foreign assets. Under the new rules, the penalties are reduced to 3 percent minimum and 15 percent maximum respectively. Furthermore, taxpayers can settle any audit out of court by paying a penalty equal to 1/3 of the minimum (that is to say, 1 percent of the value of unreported assets).


The new rules have retroactive effect and apply to any situation in which penalties have not been assessed and paid yet.  Therefore, past violations that are no longer sanctioned under the new rules have become moot. 


The duty to report extends to taxpayers who are the "beneficial owners" of the reportable foreign assets, regardless of the fact that they may not be the owner of record or hold the legal title to those assets. The new law does not define the term "beneficial owner", but refers to the definition of the term that is provided by anti money laundering legislation. Accordingly, in case of companies, any shareholder, member or partner owning more than 25 percent of the company (by vote or value) is deemed to be a beneficial owner of the underlying investments or assets owned by the company. For other entities, such as foundations and trusts, beneficial owners are deemed to be the individuals who are the final beneficiaries or recipients of the entities' assets.


The elimination of the duty to report intra year transfers and the reduction of penalties for failure to report is surely good news.  

On the other side, the extension of the duty to report to the beneficial owners of a reportable foreign assets is very concerning. How taxpayers will handle their reporting obligations under the new rules is not easy to predict and will likely require further clarifications and guidance from the tax administration.

Indeed, the term beneficial owner in the context of the anti money laundering rules is very wide in scope, and its automatic use also for foreign assets reporting purposes might have unintended consequences. If applied literally, it would require any shareholder  owning more than 25 percent of the stock of a company to report his or her pro rata share of all of the company's underlying assets held outside of Italy. While this might make sense in case of closely held companies or conduits that are set up for the sole purpose of holding and managing foreign financial investments and accounts, it may be completely impossible to handle in practice in case of straightforward commercial companies and other business entities engaged in trade or business.        

Further guidance on this issue is absolutely necessary 




Overview of Italy's Tax Provisions on Trust - Updated

I. Introduction

Italy does not have domestic rules on trust.

However, trusts created under foreign law are recognized and enforceable in Italy pursuant to the provisions of the 1985 Hague Convention on the Law Applicable to Trusts and Their Recognition, which has been ratified and implemented and is fully effective in Italy as part of Italian legal system.


The Hague Convention was signed on July 1, 1985 and ratified in Italy with law n. 364 of October 16, 1989 and entered into force on January 1, 1992. It is aimed at harmonizing the private international laws of the contracting states relating to trusts; provides that each contracting state recognizes the existence and validity of trusts created by a written trust instrument; sets out the general characteristics of a trust and establishes rules for determining the governing law of trusts with cross-border elements.


According to the Convention, as implemented in Italy, a trust created pursuant to and governed by the law of a country that has provisions governing trusts is recognized and valid in Italy, subject only to the overarching limitation of Italian public order principles.


Purely internal trusts, with Italian grantors, Italian beneficiaries and assets located in Italy are also recognized.


With the Finance Bill for 2007 Italy enacted, for the first time, specific provisions dictating the tax treatment of trusts for Italian tax purposes[1]. They establish general principles on tax classification and treatment of trusts in Italy for income and indirect tax purposes and have significant cross-border implications


On August 6, 2007 Italy’s tax administration issued Circular n. 48/E that provides administrative guidance on the interpretation and application of the new tax provisions on trust. Circular 48/E clarifies the tax treatment of trusts both for income tax and transfer (indirect) tax purposes. 


Subsequently, Italy’s tax administration issued additional interpretative guidance by way of Circular n. 61/E issued on December 27, 2010.


Generally, for a trust to exist as a legal and tax entity separate from the grantor, the trustee and its beneficiaries, there must be a real and effective legal separation of the trust’s assets from both the estate of the grantor and the beneficiaries of the trust and the trustee must be granted with real powers of administration of the trust, acting independently from and not being under the direct or indirect control of the grantor or beneficiaries of the trust.


Once it is positively established that a trust actually exists, as a general rule, for income tax purposes trusts are classified as separate taxable entities and taxed as corporations.


However, trusts with income beneficiaries that are identified and named in the trust agreement are treated as fiscally transparent entities - that is, income is attributed to the beneficiaries as provided for in the trust agreement, regardless of whether and how the trust distributes its funds, and the beneficiaries are taxed directly on their share of trust’s income. This fiscally transparent treatment applies also in the event that after the initial creation of the trust, the trustee determines the income beneficiaries of the trust pursuant to the authority granted in the trust agreement.


A trust is resident in Italy for tax purposes if its place of management or place of activity is located in Italy. Trusts formed in jurisdictions that do not allow exchange of information with Italy are treated as residents and subject to worldwide taxation in Italy, if certain connections with Italy exist (for example, if any grantor or beneficiary is Italian), unless taxpayers provide sufficient evidence that they are resident (that is, effectively managed) outside of Italy.


Trusts must keep tax books to compute their taxable income (taxed upon the trust in case of fiscally non transparent trusts, or passed through to and taxed upon the beneficiaries in case of fiscally transparent trusts).


A gratuitous transfer of assets to a trust is subject to gift or estate tax. The tax is charged at reduced rates (4 and 6 per cent) if beneficiaries named in the trust agreement or determined by the trustee at any time thereafter are close family members. Otherwise, the regular rate for trusts with no identified beneficiaries or beneficiaries that are not close family members or charitable trust is 8 per cent. 


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Reciprocal Inter Governmental Agreement Will Introduce Automatic and Reciprocal US-Italy Disclosure and Exchange of Information For Tax Purposes

The Foreign Account Tax Compliance Act (FATCA) was enacted by the United States Congress in March 2010 and became effective on January 1, 2013. It is intended to assist US efforts to improve international compliance with US tax laws and will impose certain due diligence and reporting obligations on foreign (non-US) financial institutions which hold financial accounts for US customers. Under the new law, foreign financial institutions will provide to the U.S. tax administration automatic information about their US customers' financial accounts. 

On 26 July 2012, the U.S. Department of the Treasury published a Model Inter Governmental Agreement which will form the basis of bilateral IGAs with jurisdictions that wish to adopt this alternative means for their financial institutions to comply with FATCA while minimizing compliance burdens.

Italy joined the U.S. with a groups of other countries in a Joint Statement announcing that Italy will enter into and use the reciprocal agreement with the United States to implement FATCA and enact a system of reciprocal automatic exchange of information pursuant to which:

- Italian banks and financial institutions will provide the US tax administration with information about Italian banking and financial accounts held by U.S. customers with Italian banks in Italy,

- U.S. banks and financial institutions will provide Italy's tax authorities with information about US banking and financial accounts and investments held by Italian customers with US banks in the United States.        

The Model IGA follows the U.S. Department of the Treasury and Internal Revenue Service's release of proposed FATCA regulations, and the simultaneous announcement of an intergovernmental alternative to FATCA implementation, on 8 February 2012.

On January 17, 2013 the Treasury Department and the Internal Revenue Services issued the set of Final Regulations implementing the information reporting and back up withholding tax provisions of FATCA, with far reaching implications for U.S. taxpayers with Italian bank and financial accounts, as well as Italian taxpayers with US bank and financial accounts,  in addition to foreign financial institutions as well as US banks as explained above.   




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Italian International Tax Reporting Rules Through Part RW of Italian Tax Return

Italian resident taxpayers are required to report to the Italian tax administration their foreign financial investments and assets, which can generate foreign-source income subject to tax in Italy. They report their foreign investments by filling out a special part of their annual income tax return referred to as form RW. Taxpayers who are not otherwise required to file an income tax return  (e.g., those who earn only salary income reported on form 730 equivalent to form W-2 in the United States) must file a full return just for the purpose of reporting their foreign investments on Part RW.

Italian international tax reporting through form RW is very extensive in scope and accompanied by very harsh penalties with very limited opportunities to rectify past mistakes or failures. It includes personal assets other than financial investments (e.g. personal residences, boats, jewelry, artworks). One section of form RW is used to report the value of the reportable assets at the end of the taxable year. Two separate sections are used to report outbound, inbound and foreign transfers of money or other assets relating to foreign assets subject to reporting (i.e. additional investments and disinvestments through purchases, sales or transfers of reportable assets).    

Reporting may be particularly complicated when foreign investments and assets are held through trusts or other foreign entities. Depending on the tax classification and treatment of the entity or trust the taxpayer may be exempt from reporting, required to report his or her own interest in the trust or entity itself, or required to report his or her own undivided ownership interest in the underlying assets held through the entity, with totally different results.

The duty to report revolves around several fundamental tax concepts: tax residency of the taxpayer, ownership of the asset, and tax nature of the asset and associated income.

Italian tax residency rules are far reaching and often based on technical and heavily factual tests. As a result, many non-Italian nationals who spend significant time in Italy for personal or business purposes or have personal, investments or business interests in Italy should act very carefully, especially now that the Italian tax agency is stepping up its enforcement actions in the effort of collecting additional revenue.

Indeed, if it turns out that they should be treated as resident of Italy for Italian tax purposes, they would automatically face the issue of not having reported their non-Italian assets, with all potential penalties associated with it, in addition to the main issue of having failed to file and their tax returns and to pay any taxes due.

International tax reporting rules are very technical and complex to administer. Italy’s tax administration issued a general guidance on international tax reporting of foreign assets and investments with Circular n. 45 of September 13, 2010. 

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Italian Supreme Court Reverses Course on Permanent Establishment Issue

With its Ruling n. 3769 issued on March 9, 2012, the Italian Supreme Court significantly departed from its previous line of decisions on the issue of characterization of a foreign-owned Italian company as the permanent establishment of its foreign parent.

The case in which the ruling has been issued involved Boston Scientific S.p.A., an Italian joint stock company ("BS SPA") whose stock is  owned for 99 percent by Boston Scientific B.V. ("BS B.V.") a Dutch company  and for the remaining 1 per cent by Boston Scientific Corporation, a U.S. corporation ("BS USA"), which in turn controls BS B.V.

BS USA was engaged in the business of designing, manufacturing and selling medical equipment and devices. BS SPA operated as commission agent for BS B.V. for the purpose of the marketing and sale of the products of BS USA in Italy and the EU. 

From the summary of the facts as reported on the Supreme Court Judgment it appears that BS SPA acted under the management direction and control of BS B.V,, operated exclusively for BS B.V. as its only  client  and signed sales contracts with customers under its own name although in the interest of and pursuant to the final approval from BS B.V.    

The Italian tax agency took the position that BS SPA lacked economic and legal independence from BS B.V. and it operated as agent of BS B.V. according to the substance of its business dealings with its principal and final customers, even though it normally signed the contracts in its own name.  As a consequence, the tax agency re-characterized BS SPA as the permanent establishment of BS B.V. in Italy and assessed additional taxes and penalties on BS B.V., which should have accounted separately for its sales of products carried out in Italy through BS SPA, file its own Italian corporate tax return and pay the Italian corporate income tax on its net profits from its Italian sales accordingly.

Both the Italian Tax Court and the Appellate Court ruled in favor of the taxpayer and rejected the agency re-characterization and tax assessment, motivating their decisions with the fact that BS SPA had its own separate business organization of which it sustained all the costs, had assumed the economic risks of its business operations and was legally bound by the contracts it signed with the final buyers of the products under its own name as seller.

The Supreme Court affirmed the decision of the Appellate Court concluding that it was sufficiently and adequately motivated and that the grounds for appeal set forth by the tax agency were not sufficiently explained and could not be considered.

The Court in particular referred to the provisions of article 5 of U.S.-Italy tax treaty and argued that the Italian tax agency failed to explain the reasons why those provisions should be read in a way to create a permanent establishment when an Italian company contracts under its own name and risks and bears the economic cost of its business organization through which it conducts its business in Italy, for the sole fact that it is owned and controlled by a foreign company and operates under the supervision and directions of its foreign parent company.

Ruling 3769 is very encouraging. Indeed, the ruling seems to depart from the Supreme Court's previously established case law stemming form its 2002 decisions in the Philip Morris case and to provide more clarity for foreign businesses which plan to expand their operations into Italy. 

Imprese italiane che investono sul mercato americano: migliori pratiche legali e fiscali

Il 17 Settembre scorso ad un convegno organizzato dalla American Chamber of Commerce in Italy a Milano abbiamo illustrato i principali aspetti legali e fiscali che le imprese italiane che investono sul mercato americano si trovano ad affrontare. Gli Stati Uniti, grazie alla loro competività e flessibilità, ad un mercato dei capitali estremamente evoluto, alla totale assenza di discriminazioni e barriere e a una grande propensione a premiare le capacità, lo spirito imprenditoriale ed il merito,   offrono formidabili opportunità di crescita e sviluppo del business alle numerose imprese italiane di piccole e medie dimensioni dotate di prodotti o servici unici o di alta qualità e di know how e tecnologia che le pongono in posizione di vantaggio competivo rispetto alla concorrenza. Allo stesso tempo, il sistema legale e fiscale USA richiede estrema attenzione e professionalità sia al momento dell'ingresso sia nella fase successiva della gestione del proprio business negli USA, e non tollera improvvisazione. Tra gli aspetti da curare vi sono quelli contrattuali, relativi ai contratti di distribuzione, agenzia o collaborazione commerciale stipulati con partners commerciali e ai contratti con i clienti, gli aspetti societari, amministrativi e organizzativi (scelta della migliore forma societaria, costituzione e capitalizzazione della società, apertura conti bancari, assunzione del personale e libri paga, assicurazioni, gestione della contabilità e dei bilanci, licenze e permessi, eccetera), e gli aspetti fiscali relativi  alle imposte sul reddito, federali e statali, e alle imposte indirette sulle vendite e sui consumi. Alleghiamo la nostra presentazione con la discussione dei suddetti aspetti, su cui è bene sollevare il livello di allerta ai fini di una corretta gestione ed esecuzione del proprio piano di business negli Stati Uniti.

Presentazione Università Roma Tre 17 Maggio 2012

In data 17 Maggio 2012 presso l'Università degli Studi di Roma Tre, nel contesto del master per Giuristi e Consulenti di Impresa gestito dal Prof. Tinelli, lo studio MQR&A ha riferito sul tema "Aspetti internazionali della fiscalità americana di interesse per gli investitori esteri".

La relazione, sia pure sintetica, ha inteso offire un breve excursus sui principi fondamentali di diritto fiscale internazionale americano applicabili agli investimenti e alle attività estere negli Stati uniti.

Gli Stati Uniti costituiscono tuttora il maggiore mercato del mondo di destinazione di attività e investimenti internazionali e attraggono costantemente imprenditori, professionisti, personale d'azienda e investitori esteri. La conoscenza del regime fiscale applicabile a questa categoria di soggetti ed attività è cruciale, in un contesto sempre più difficile e complesso di crescente globalizzazione e maggiore attenzione da parte delle amministrazioni fiscali.          

Presentazione API Torino 14 Maggio 2012

In data 14 Maggio 29012 lo studio MQR&A ha presentato alle imprese italiane interessate presso l'Associazione delle Piccole e Medie Imprese di Torino una relazione dal titolo "Fare Business negli USA - Casi di studio e analisi dei principali profili legali e fiscali".

Le imprese italiane che fanno business con o negli USA sono numerose. Le forme di business variano dalla esportazione diretta dall'Italia o vendita tramite agenti e distributori locali, alla fornitura di beni con prestazione di servizi accessori (installazione, assistenza post vendita) tramite proprio personale in loco, alla costituzione e gestione di società di diritto locale controllate dalla capo-gruppo o casa madre italiana.

Ciascuna forma presenta peculiarità e aspetti giuridici e fiscali che devono essere gestiti in maniera consapevole onde evitare rischi. Il sistema legale e fiscale americano è complesso e non consente di operare in maniera improvvisata.

La presentazione aveva lo scopo di fornire una disamina sommaria dei suddetti aspetti che consenta alle imprese di mettere in atto il giusto set up e la corretta struttura di gestione legale e fiscale dei propri affari e delle proprie attività negli Stati Uniti.

Article on the section LEGAL of Italian newspaper FINANZA & MERCATI

We provide below the link to an article on the U.S. Offshore Voluntary Disclosure Program appeared on the section LEGAL of the Italian newspaper FINANZA & MERCATI:

IRS Announced Reopening of Tax Amnesty Program For Undisclosed Foreign Financial Accounts

On January 9, 2011 the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the terms of the program could change at any time going forward.  For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”


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The IRS Issues Guidance on International Tax Reporting For U.S. Citizens or Dual Citizens Residing Outside of the United States

The Internal Revenue Service (U.S. tax administration) issued guidance (in the form of Fact Sheet FS 2011-13) on international tax reporting requirements for U.S. citizens or dual citizens residing outside of the United States.

In essence, the Guidance provides that U.S. citizens or dual citizens living and working abroad with (1) no tax balance due on their U.S. income tax returns (due, for example, to foreign tax credits for foreign taxes paid on their unreported foreign income earned in a foreign country, which offsets any U.S. tax due on that income, or U.S. foreign earned income exclusion excluding from U.S. tax certain employment income earned outside of the U.S.) or (2) a tax balance due but where the failure to report foreign income and pay associated residual U.S. taxes on it was due to reasonable cause (lack of proper advice or knowledge about the duty to report and tax such income), can file delinquent or amended tax  returns and rectify past mistakes and will not be assessed late filing or late payment payment penalties. In addition, there will be no penalties assessed on those same individuals with respect to late filings of their Foreign Bank Account Reports reporting foreign financial assets if their failure to file was also due to reasonable cause.

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2012 New Self-Reporting Requirements For Foreign Financial Assets

Starting with the tax year 2011, the new IRS Form 8938 must be filed by all U.S. persons if total foreign financial assets exceeded $50,000 at any point during the year.  Form 8938 will be in addition to the long-standing Treasury Department FBAR (Foreign Bank and Financial Accounts Report) required for financial assets abroad that exceed $10,000 and shall have to be filed together with the federal income tax return for the year. 

Furthermore, Form 8621 (Passive Foreign Investment Company – PFIC) must now be filed every year for each separate PFIC investment where as previously it was only required to be filed in years that distributions were made from the PFIC investment. Finally, the statute of limitation for IRS audits of returns listing foreign sourced income has been extended to 6 years (previously 3 years).

Where non-compliance is “non-wilful,” failure to file form 8938 results in a minimum $10,000 penalty but may rise to as much as 40% of the value of the asset or account.  This is in addition to the tax due and interest due.   Non-compliance deemed “wilful” may result additionally in criminal prosecution.

While FATCA does not change the existing penalties resulting from failure to properly report such as the FBAR and Form 8621 (PFIC report), FATCA will result in a dramatically increased enforcement of these rules and therefore U.S. citizens and residents (including Americans living abroad and foreign nationals living in the U.S) should become familiar with the  very significant penalties associated with these and other reporting requirements.

Interview with MQR&A on Italian financial newspaper Italia Oggi

MQR&A Presents at Unindustria Bologna on June 8

On June 8, 2011 at Unindustria Bologna MQR&A will present on on the topic: "Legal, corporate and tax considerations for opening a business in the United States". The presentation will be divided in two sections. The first section will cover the best practices and a check list for the legal, corporate and tax  aspects relating to the establishment of business operations in the US. The second section will discuss the framework for Italian enterprises entering the U.S. market from a business, strategic and planning standpoint. We attach an invitation to the presentation, together with the slides that will be discussed at the event for the part I and part II of the presentation.     

European Commission Blesses Italy's Anti-Inversion Rules

Italy's Tax Code determines the tax residency of a company on the basis of one of three alternative tests: place of legal seat, place of management and principal place of business. As a result, an Italian or foreign company that is effectively managed from Italy is treated as an Italian company for Italian tax purposes and it is subject to tax in Italy on its worldwide income.

In order to prevent abusive practices consisting in putting an Italian company owned or controlled by Italian shareholders under the umbrella of a foreign holding company established in a tax favorable jurisdiction, Italy enacted special anti abuse provisions according to which a foreign company owning or controlling an Italian company is presumed to have its tax residency in Italy if one of two alternative tests are met: Italian shareholders control the foreign company, or the majority of the company's board members are Italian nationals. Taxpayers can rebut the presumption by providing clear and convincing evidence that the foreign company is effectively managed outside of Italy.



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IRS Launches a New Offshore Voluntary Disclosure Program

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.   

New Bill Aimed At Introducing Flat Tax on Italian Real Estate Income

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.       

Anche la nuda proprietà nel modulo RW

Con la Risoluzione n. 142/E del 30 dicembre 2010 l'Agenzia delle Entrate ha chiarito che anche il diritto di nuda proprietà, relativo ad attività estere di natura finanziaria ed altri ed investimenti esteri  attraverso cui possono essere conseguiti redditi di fonte estera imponibili in Italia, va riportato nel modulo RW della dichiarazione dei redditi.

A sostegno del proprio chiarimento, l'Agenzia ha richiamato la Circolare 45/E del 13 Settembre 2010 in cui, con interpretazione innovativa rispetto al regime precedente, si è ritenuto che le attività estere di natura finanziaria e gli altri investimenti esteri suscettibili di produrre redditi di fonte estera imponibili in Italia debbano essere riportati sul modulo RW, non soltanto quando essi effettivamente producono redditi imponibili in Italia, ma anche nell'ipotesi in cui la produzione dei predetti redditi sia soltanto astratta o potenziale. Questo è il caso, evidentemente, del diritto di nuda proprietà, che potrebbe essere ceduto a terzi separatamente dal diritto di usufrutto, e generare in questo modo una plusvalenza imponibile, oppure espandersi al momento dell'estinzione del diritto di usufrutto con possibilità di cessione o locazione dell'intero bene a terzi.

Il diritto di nuda proprietà va dichiarato in base al costo storico ad esso attribuito nell'atto costitutivo del medesimo, senza necessità di aggiornamento annuale. La risoluzione non precisa ma in caso di acquisto del diritto per successione per causa di morte, è ragionevole ritenere che si debba guardare al costo di acquisto del bene nella sua totalità, in capo al de cuius, ed attribuirne una quota proporzionale al diritto di nuda proprietà in ipotesi trasferito separatamente al diritto di usufrutto.

Il titolare del diritto di usufrutto per parte sua deve riportare sul modulo RW il valore del proprio diritto sussistente sul medesimo bene.  

Update on Italian Transfer Pricing Documentation Filing

By December 28, 2010 the tax administration received 1,300 transfer pricing documentation filings. Italy has introduced transfer pricing documentation requirements and Dec. 28 was the first deadline for taxpayers to notify that they have adopted transfer pricing documentation for past tax years. The notice for the year 2010 shall be due with the regular deadline for filing the annual corporate income tax return. Of the 1,300 filings, 500 came from foreign enterprises with Italian business operations and 340 were "major taxpayers" (companies with total revenue in excess of 100 million). The total number of "major taxpayers" operating in Italy is 4,000 and an estimated 60 percent is involved in transfer pricing issues. The tax administration considers the initial response to the new law a reasonable success and expects an increasing compliance from taxpayers. Fling the transfer pricing documentation notice protects from penalties both civil and criminal in case of transfer pricing audits and adjustments.            

Italy's Tax Administration Issued Guidance on Transfer Pricing Documentation

Today Italy's Tax Administration issued Circular 58/E which provides guidance and instructions on transfer pricing documentation for multinational companies. New provisions in the Italian Tax Code now require that Italian multinationals and foreign companies doing business in Italy prepare and keep transfer pricing documentation to be able to avoid stiff penalties applicable in case of transfer pricing audits and adjustments. Taxpayers must notify the tax administration that they have prepared the transfer pricing documentation upon filing their annual income tax return, for the documentation relating to the tax year year 2010 and following years, and within December 29, 2010 for the documentation relating to prior years, and in any event before they receive any requests of information or audit notices from the tax administration. The tax administration clarified that failure to file the transfer pricing documentation notice may be considered as a factor to select taxpayers to be subject to audit.

Italian Taxation of Collective Investment Vehicles and Treaty Benefits

Mutual funds give investors an opportunity to participate in diversified investment holdings and access to professional managent on the face of a relatively small investment.

The Italian tax treatment of domestic mutual funds is designed to provide portfolio investors with the same tax treatment they would receive if they owned directly the same investments that are held by the fund.

Under Italian law, when an Italian resident individual investor invest in portfolio stocks or bonds she is subject to tax at a preferential rate of 12.5% on the dividends or interest received or gain realized from her investments.

If the investment is carried out through an Italian mutual fund the tax rate of 12.5% is charged upon the fund. The tax is computed on the increase of the net asset value of the fund at the end of the tax year. No tax applies to the investor upon distribution of the income from the fund or redemption of fund shares.

If the investment is carried out through a foreign fund that is established and managed in accordance with the EU rules and regulations ("EU regulated fund"), the 12.5% tax is applied to the Italian investor at the time of the receipt of the income from the fund through distribution or redemption (or sale) of fund shares. 

If the investment is carried out through a foreign unregulated offshore fund, the income from the fund is included in the investor's income tax return when received (through distribution of fund profits or redemption or sale of fund shares) and subject to tax as ordinary income at the investor's marginal rate.

In case of investments in foreign stock and bonds, usually the dividends, interest or gains are subject to withholding tax in the foreign country at source, but the foreign withholding tax rate is reduced or eliminated under the tax treaty in effect between the foreign country and Italy as the investor's country of residence. The Italian resident investor is then subject to tax on the net amount received at the flat rate of 12.5% with no credit for the foreign withholding tax.

The same treaty benefits should apply whenever the same investments are held through a fund. However, the application of treaty benefits in that case may be controversial whenever the investor, by carrying out the investment through the fund, is able to defer the tax on the profit of the fund in her own country of residence or change the character of the income and benefit from the preferential rate that would otherwise not be applicable if she held the investment directly.

As a result, the application of the treaty benefits in case of investment through collective investment funds depends to a great extent upon the way in which the fund and its investors are taxed in the country of organization of the fund or the investors' country of residence. 

In the brief overview of Italian tax treatment of Italian mutual funds and Italian mutual funds investors that we attach herewith (Italian Taxation of CIV and Treaty Benefits.pdf) we would like to offer a background for a possible further discussions of the issue from the perspective on Italian law.       


Marco Rossi of MQR&A Spoke at Chartered Institute of Taxation's Meeting in Milan

Marco Rossi was one of the speakers at the meeting organized by the Chartered Institute of Taxation in Milan on October 15, 2010. Marco presented on transfer pricing documentation requirements from the perspective of the United States and regional organizations such as PATA, EU and OECD. Italy recently enacted its own rules on transfer pricing documentation. For the presentation you can click here  

OECD Issued Report on Granting of Treaty Benefits In Respect of Income of Collective Investment Vehicles

On 31 May 2010 the OECD Committee on Fiscal Affairs released a Report on “The Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles”. The Report 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. These changes are expected to be included in the 2010 Update to the Model Tax Convention (the draft contents of which were released on 21 May 2010) and the Report would then be included in volume II of the loose-leaf and electronic versions of the Model.

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Marco Rossi of MQR&A lectured at the Fairfield University International Tax Program

On July 14, 2010 Marco Rossi presented a lecture on the European Union and EU tax law to candidates/students of Master of Science in Taxation at Fairfield University. We provided an overview of the European Union and its institutions, discussed the sources of EU law and the main developments in the area of EU statutory tax law (including the EU tax directives and tax arbitration convention), and illustrated the main concepts of the jurisprudence of the European Court of Justice in the area of direct taxation, including a brief analysis some landmark cases recently decided by the Court. We attach a copy of the presentation materials for your direct reference (EU Law-Fairfield University Lecture.pdf.) (An Italian Perspective On Recent ECJ Direct Tax Decisions (TNI 2_6_08).pdf)        

Italy's Government to Approve New Rules on Transfer Pricing Documentation, Anti Tax Abuse

A decree with extraordinary budget correction measures for a total amount of twenty five billion euros has been presented to the Council of Ministers for approval and presentation to the Parliament for final enactment into law. The decree includes some important tax provisions. Among them, there are new provisions requiring that multinational companies engaged in cross-border intra-group transactions prepare contemporaneous documentation in support of their transfer prices for the services and goods provided to their affiliates. Also, the minimum threshold for the duty to report cross border transfers of money is reduced to euro 5,000. Finally, a super black list of jurisdictions that are considered more at risk for money laundering and support to terrorist or criminal activities will be enacted. Italian financial intermediaries, professional advisers and accountants shall not be allowed to do business with entities or individuals who operate in those countries and shall have to disclose any transactions carried out in or with those jurisdictions to the Italian tax administration.             

Italy's Tax Administration Announces More Controls on Nonresidents' Tax Refunds

Various foreign banks with branches in Italy that act as intermediaries for the purposes of tax refund applications filed on behalf of nonresident persons received a notice from the Italian tax agency in charge with the refund procedure announcing the application of stricter controls in the processing of the tax refunds. The tax office will require specific information about the beneficial owners of the refund in order to avoid abuses and treaty shopping. The banks shall have to provide the complete personal information about the final beneficiaries of the refunds, including their foreign and Italian taxpayer identifications numbers. In case of trusts or funds, the tax agency will require the taxpayer identification number issued in the residence state as well as in Italy both to entity and its legal representative. As a consequence, if the trust or fund is a fiscally transparent entity that does not have a taxpayer identification number in its own country, the bank may need to provide the information about the final investors or the grantors or  beneficiaries of the trust. The new approach follows recent audits that resulted in the denial of the refund of dividend tax credits to various banks that engaged in dividend washing transaction (for a total amount of about 4.2 billion euro).   

Italy's Tax Administration Published Report on Italian International Tax Ruling (APA)

The Italian tax administration has published its first report on the international tax ruling (advance pricing agreement) procedures carried out in the first five years since the program was enacted in 2005.

The Italian international tax ruling is a special procedure through which a domestic enterprise engaged in international activities or a foreign enterprise engaged in investment or business activities in Italy can agree with the Italian tax administration on the tax treatment of certain important items concerning its cross border activities including amount income attributable to an Italian PE, transfer prices for the exchange of goods or services between affiliated companies, Italian withholding taxes on outbound interest, dividends and royalties (for an overview see Italy's International Tax Ruling.pdf.).

The total applications filed were 52 and 19 agreements have been signed, half of which by foreign multinational companies. The average time needed to go through the procedure and sign the agreement was 20 months. More than half of the rulings on transfer prices are based on comparable profits methods. Overall, the program had a very successful start and there are reasonable expectations for a continuing increase in the use of the program in the future.


E&Y Italian Desk in New York Comments on New US-Italy Treaty

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.

New Italy-U.S. Tax Treaty Enters Into Force

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.



OECD Releases Report on Granting of Treaty Benefits with Respect To The Income of Collective Investment Vehicles

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.

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