Every time a trust has connections with Italy and is given legal effects or enforced in Italy, the trustee will need to collect, keep and disclose (if required) information on beneficial ownership of the trust and, potentially, report such information in a special Trust section of the Italian Business Register. These new trust disclosure rules derive from the Italian bill transposing into national law the EU Fourth Anti-Money Laundering Directive (2015/849).
The Directive requires trustees of any express trust governed under the law of a Member State to obtain and hold information on the beneficial ownership of the trust, inclusive of the identity of the settlor, the trustee, the protector (if any), the beneficiaries, and any other natural person holding any authority or exercising effective control over the trust. When the trust generates legal or tax consequences in the legal system of a Member State, such information has to be reported in a central register of that Member State.
The Italian bill implementing the Directive imposes such duties on “trustees of express trusts governed in accordance with Law dated October 16, 1989 n. 364. Such is the law by which Italy ratified the 1985 Hague Convention on Law applicable to Trusts and their recognition.
Italy does not have a body of national statutory provisions on trusts, but the enforcement of the 1985 Hague Convention by the Law n. 364 of 1989 permits to recognize and give legal effects in Italy to trust created under and governed by foreign law.
As a result, every time a foreign trust is to be legally used in Italy, and is designed to produce legal and tax effects there, it can be considered a trust “governed in accordance with Law n. 364 of 1989”, thereby triggering the know your customer and disclosure obligations set forth in the Directive. Therefore, it will be automatically subject to the new disclosure obligations, including the registration in a special Trust section of the general Business Register. Foreign trustees of a foreign trust that has a connection with Italy, are potentially subject to those rules, and need to pay close attention to the their new reporting obligations under the new rules.
Situations that fall within the scope of the disclosure rules include common cases in which a foreign trust has Italian resident beneficiaries, or owns movable or immovable assets located in Italy. In those cases, the beneficiaries in order to claim the distribution of income or assets from the trust need to put in place the procedure to have the trust recognized and enforced in Italy. The same happens when a foreign beneficiary claims the distribution of the trust’s Italian assets pursuant to the trust.
Even when the settlor of a foreign trust is an Italian individual, the new rules would apply. Indeed, the settlor may need to rely on the trust to separate herself from the assets transferred to the trust, and claim that the trust assets and income belong to somebody else who should bear the responsibility of tax filing, payment and reporting relating to the trust. To the effect, the trust would have legal and tax consequences in Italy, which would put it within the scope of the new disclosure rules.
The Directive set forth a deadline for its implementation into EU member’ States’ law, currently expiring on June 26, 2017. The Italian bill once enacted into law will need legislative decrees with enforcement provisions to be adopted by the Government pursuant to the legislative authority granted therein.
Every time a trust has connections with Italy and is given legal effects or enforced in Italy, the trustee will need to collect, keep and disclose (if required) information on beneficial ownership of the trust and, potentially, report such information in a special Trust section of the Italian Business Register. These new trust disclosure rules derive from the Italian bill transposing into national law the EU Fourth Anti-Money Laundering Directive (2015/849).
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.
Italy operates specific provisions on tax treatment of trusts. Trusts formed under foreign law are recognized and enforced in Italy pursuant to the Hague Convention on Trusts dated July 1, 1985. To the extent they have Italian assets, or Italian grantor, trustees or beneficiaries or Italian source income, foreign trusts may be subject to Italy's trust tax provisions. Under certain circumstances, trusts are disregarded and trust assets are treated as owned by the grantor or beneficiaries. This is the case when the grantor has an unconditional power to terminate or revoke the trust or when the beneficiaries have an unconditional right to claim an anticipated distribution of all or part of the trust assets at any time during the life of the trust, or when the trustee lacks actual independent power to administer the trust and is under the directions or instructions of either the grantor or the beneficiaries of the trust. When respected for tax purposes, the trust is taxed on a fiscally transparent basis or as a separate entity, depending on whether and to what extent the income of the trust is attributed to identified beneficiaries specifically mentioned in the trust agreement or separately by the grantor during the life of the trust. When a trust is taxed on a fiscally transparent basis, income of the trust is allocated to and taxed directly upon the beneficiaries. When a trust is taxed as a separate entity, the trust itself pays the corporate income tax on its own income. A trust administered in Italy or by an Italian resident trustee is treated a a resident trust and subject to tax on its world wide income. A trust administered abroad or by a foreign resident trustee is treated as a foreign trust and taxed only upon Italian source income. For more details about Italian tax treatment of trusts as it applies to trusts formed under the laws of any State of the United States or any other foreign country, we refer you to this article which was recently published on Tax Notes International.
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.
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.
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.
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.
An interview on Marco Q Rossi & Associati has been published today on the Italian financial newspaper ITALIA OGGI. We attach below the file with the full account: www.lawrossi.com/images/stories/docs/MQR_Italia_Oggi.pdf
Riteniamo utile segnalare una serie di situazioni che stiamo seguendo sempre più frequentemente per conto dei nostri clienti. Le imprese italiane che vendono beni e servizi a clienti americani devono porre particolare attenzione agli eventuali obblighi e oneri fiscali cui potrebbero essere soggette negli USA, anche quando non hanno una società controllata, filiale o sede secondaria sul territorio degli Stati Uniti. Infatti, salvo i casi di pura esportazione di beni senza alcun ulteriore contatto con gli USA, è altamente probabile che vi siano situazioni tali da generare tali oneri e che eventuali distrazioni possono anche essere costose.Continue Reading...
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.
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.
Three of the answers provided by the Italian Tax Administration to questions from taxpayers set forth in the annual tax forum for 2011 could potentially expand the scope of the Italian CFC rules and pose new challenges on Italian multinationals.
The first answer deals with the active trade of business exception to the CFC rules. The Italian tax administration in the past adopted the interpretation according to which the exception applies when most of the customers and suppliers are located in the same country in which the CFC is organized. With reference to a manufacturing CFC, according to the administration the fact that the production activities are predominantly located in the same country of the CFC is one factor, but not necessarily the sole or decisive one, that should be considered to grant the exception.
The second answer deals with the passive income test established for the application of the CFC rules to controlled foreign companies organized in non black listed jurisdictions.The administration explained that income from services performed to related parties, including contract manufacturing services, count as passive income to trigger the application of the rules.
Finally, the third answer, still dealing with the passive income test referred to above, explained that also income earned by a trading CFC from related party purchases or sales of tangible property is passive income for the purposes of the application of the CFC rules.
Italian multinationals should revise their international tax planning for their foreign subsidiaries to take into account the potential broadening of the CFC rules in accordance with the interpretation provided by the tax administration.
L'Agenzia delle Entrate, in sede di risposta ai quesiti dei contribuenti nell'ambito dell'iniziativa Telefisco 2011, ha fornito tre risposte in materia di normativa sulle società controllate estere ("controlled foreign companies" o "CFC") che potrebbero richiedere una completa rivisitazione della gestione fiscale dei rapporti infra gruppo delle imprese italiane multinazionali od operanti su mercati esteri.
1) La prima risposta riguarda l'applicazione dell'esimente dello svolgimento di attività economica effettiva nel paese di organizzazione della CFC. L'Agenzia aveva chiarito, con la Circolare 51 del 2010, che ai fini dell'applicazione della causa di esclusione occorre che la CFC abbia la prevalenza dei propri fornitori e clienti nel paese in cui essa è costituita.Con la risposta a Telefisco 2011, facendo riferimento a una CFC che svolge attività di produzione, l'Agenzia ha affermato che il fatto che l'attività di produzione sia prevalentemente localizzata nel paese di organizzazione della CFC è un elemento, tra gli altri, ma di per sé solo non decisivo, da prendere in esame per valutare l'applicabilità della causa di escusione.
2) La seconda risposta riguarda l'applicazione del passive income test ai fini dell'estensione della normativa CFC alle controllate estere organizzate in paesi non black list. A questo proposito, l'Agenzia ha affermato che il reddito derivante dalla prestazione di servizi infragruppo, ivi compresi servizi di lavorazione di merci per conto della casa madre (quali quelli prestati nell'ambito di rapporti di contract manufacturing) rientrano nel novero del passive income che fa potenzialmente scattare l'applicazione della normativa CFC.
3) La terza risposta riguarda l'applicazione del passive income test alle controllate estere che svolgono attività di trading, ovvero acquisto e vendita di prodotti della casa madre o del gruppo italiano, A questo proposito, l'Agenzia, adottando un'interpretazione "sostanzialistica", che assimila in sostanza quest'attività alla prestazione di servizi di vendita di prodotti per conto della casa madre dietro commissione (pari al margine di profitto che resta in capo alla controllata estera), ha affermato che anche il reddito derivante da attività di trading rientra nel novero del passive income che fa scattare l'applicazione della normativa CFC.
In conseguenza delle risposte dell'Agenzia molte imprese italiane con controllate estere che svolgono servizi di trading o lavorazione di prodotti per il gruppo devono seriamente valutare se fare istanza di interpello ai fini della disapplicazione della normativa CFC, in mancanza della quale la normativa CFC potrebbe applicarsi in via automatica con pesanti conseguenze in tema di recupero di reddito imponibile ed applicazione di maggiori imposte e conseguenti sanzioni in Italia.
Si può ottenere la disapplicazione della normativa CFC qualora si dimostri in sede di interpello che meno del 50% del reddito della controllata estera è passive income oppure che il passive income è soggetto ad un'imposta efttiva estera non inferiore al 50% della corrispondente imposta italiana.
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.
On December 27, 2010 Italy's Tax Administration issued Circular n. 61/E which provides additional clarifications on Italian tax treatment of trusts.
In one of its paragraphs Circular 61/E purports to clarify when a trust can be respected as such or should be disregarded for (legal and) tax purposes. In particular, it expanded the examples of situations in which a trust can be considered abusive and is disregarded as a mere conduit or fictitious intermediary between the person of the settlor and the trust assets. That shows the administration's willingness to contrast the use of trusts in abusive situations or for tax avoidance purposes.
The minimum requirements for a trust to be respected for tax purposes are the real transfer of the assets to the trust and the real power of the trustee to administer, manage and dispose of the assets of the trust in accordance with the trust agreement and the applicable law.
Any provisions of the trust agreement that limit such power, or the mere circumstance that the trustee is under the influence or control of the settlor when it comes to the administration of the trust, may jeopardize the trust with the consequence that the settlor is still considered as the real owner of the assets and income of the trust.
Both the drafting of the provisions of the trust and the way in which the trust is actually administered are pivotal and needs proper attention and care.
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.
In a post on December 3, 2010 we reported on a recent ruling issued by the Italian tax court of Emilia Romagna against an Italian banking group in respect of a series of structured finance transactions aimed at obtaining abusive tax benefits (mainly, foreign tax credits under applicable tax treaties).
Based on a copy of the decision (Italian Tax Court Ruling.pdf) the transactions under dispute were structured as follows.
1) The first transaction is an interest rate swap combined with a sale and repurchase agreement on Brazilian bonds, pursuant to which the Italian bank as legal owner of the bonds claimed a tax sparing credit under the Brazil-Italy tax treaty equal to 25% of the interest paid on the bonds. According to the Italian tax administration, based on the terms of the transaction the Italian bank did not assume any risk or obtained any economic advantage from the transaction (in substance, it is as though the Italian bank made a loan to the foreign counterpart), except for the tax advantage represented by the tax sparing credit claimed under the Brazil-Italy tax treaty (which the parties shared in form or a below market rate loan from the Italian bank to the foreign counterpart). The foreign bank would not have been entitled to any credit had it owned the bonds directly.
2) The second transaction is a sale and repurchase transaction of UK stock. Economically, under the terms of the contract, the risk of losses and profits from the securities belong to the UK counterpart. UK treated the transaction as a loan. However, for Italian tax purposes the Italian bank was treated as the owner of the securities and the dividend income attached to it. As a result the Italian bank claimed a tax credit even though there was no actual UK tax on the dividends.
3) The third transaction is a sale and repurchase transaction of UK bonds. The interest on the bonds are subject to 10 percent withholding in the UK, which the Italian bank as buyer and owner of the bonds takes as a foreign tax credit in Italy. At the same time the seller receives a tax credit for the same withholding tax under the tax laws of its country of residence, which treats the seller as the economic owner of the bonds. According to the tax administration, the derivative contract eliminates any risk or profit opportunities but for the tax advantage of a double tax credit claimed in two different countries for the same withholding tax (double dip).
The tax court ruled in favor of the tax administration and denied the tax credits under the general abuse of law doctrine according to which, when a transaction is entered into a) without a valid economic reason, and b) for the sole purposes of obtaining an "abusive tax advantage", it can be ignored for tax purposes.
The tax court clarified that it applied a restrictive version of the abuse of law doctrine, which requires that the tax advantage be considered "abusive", meaning that it is obtained clearly moving against the spirit, ratio and purposes of the tax provisions from which it is derived. The mere tax advantage of a specific transaction is not sufficient for this purpose.
The local Tax Court of Emilia Romagna with a judgment entered on November 30 has ruled against the Italian bank Credito Emiliano Holdings in a dispute involving transactions whose sole purpose, according to the Italian tax administration, was to artificially generate tax credits to reduce Italian taxes. The tax schemes under challenge involved the use of derivative contracts on Brazilian securities generating tax sparing credits usable in Italy and sale and repurchase transactions of UK stocks and bonds generating double tax credits with one single withholding ("double dip"). The court used the general anti abuse and anti tax avoidance doctrine recently blessed by the Italian Supreme Court to sustain the tax assessment by the tax administration and reject the taxpayer's petition. The ruling is now being referred to by the Italian tax administration as a precedent for the resolution of a series of similar disputes currently under way with other reputable Italian banks. It is estimated that the total amount of additional taxable income at stake may be in the region of three billion euro with an additional tax in excess of one billion euro plus interest and penalties. We are in the process of retrieving a copy of the tax court's decision for additional more detailed comments on our blog
On Sept. 29, 2010 the Italian Tax Administration issued ruling n. 2010/137654 (for a copy of the ruling, click here) that implements the new provisions on transfer pricing documentation enacted by way of the law decree no. 78 of May 31, 2010 converted into law n. 122 of July 30, 2010. The Italian transfer pricing documentation is consistent with the EU Transfer Pricing Documentation Code of Conduct approved on June 26, 2006 and OECD Guidelines adopted in 1995 and subsequently updated. Multinational enterprises are required to file a notice with the tax administration confirming that they have prepared and are possession of the required transfer pricing documentation simultaneously with the filing of their annual tax return. Consequently, for 2010 tax year for calendar year taxpayer, the notice shall be filed with the tax return due in 2011. For previous taxable years, the notice must be filed within 90 days from the implementation of the rules (i.e., within December. 29, 2010), and in any event before any audit requests from the tax administration. The transfer pricing documentation provides protection from the statutory penalty that is applicable in case of transfer pricing adjustments (equal to minimum 100 percent and maximum 200 percent of additional tax due).Continue Reading...
By way of a ministerial decree issued on July 27, 2010 Italy removed Malta and Cyprus from the black list for the purposes of the application of Italian controlled foreign companies rules and provisions on tax residency of individuals. As a result of the removal, Italian owned foreign companies established in Malta and Cyprus are no longer subject to Italian CFC rules, and Italian individuals who move to Malta or Cyprus are no longer presumed to be resident in Italy for tax purposes unless they prove the contrary (the burden to prove that the move is fictitious and tax residency remained in Italy is upon the tax administration). Finally, Cyprus has been inserted in the white list for the purposes of the application of the portfolio income exemption exempting foreign source portfolio investment income from Italian 12.5 percent withholding or substituted tax.
Marco Q. Rossi & Associati acted as legal counsel of Landi Renzo for the acquisition of Baytech. Landi Renzo is an Italian company publicly traded on thew Italian stock market and a leading supplier of CNG and LPG components and systems for alternative fuel vehicles. Baytech is a US engineering company which holds EPA and CARB certifications for natural gas and propane fuel injection systems for GM vehicles and heavy duty engines.The acquisition was carried out through Landi's wholly owned US subsidiary, Landi Renzo USA Corporation. The closing of the acquisition was announced on July 29 (see presentation, Baytech Acquisition pdf, and press release, Cos Landi Baytech eng def.pdf).
Starting from July 1, Italian enterprises doing business abroad shall have to file a monthly or quarterly return reporting all their transactions entered into with foreign enterprises organized or domiciled in black listed jurisdictions.
According to article 110(10) of Italy's tax code, deduction of costs, expenses or losses arising from transactions entered into with enterprises based or domiciled in black listed jurisdictions is denied, unless the taxpayer can prove that (i) the transaction served a legitimate business and economic purpose going beyond tax saving and has been actually carried out, or (ii) the foreign enterprise is engaged in a real trade or business in the country in which it is organized or domiciled. In addition, all costs, expenses or losses must be separately stated on the annual income tax return.
As a result of the new law, an Italian enterprise doing business with foreign enterprises organized in a black listed country shall also have to file an additional monthly or quarterly return reporting all its transactions with those enterprises.
Italy's Minister of Finance is expected to issue a new list of countries allowing exchange of tax information with Italy, which will fall outside the scope of the disclosure and non deduction rules.
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.
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).
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.
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.
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.
Italy amended its CFC rules with effect from 1/1/2010.
Under the new provisions, the active business exception to the CFC rules applies only when the controlled foreign company carries on a business in the local market of the country in which the company is established, and it never applies to companies more than 50 percent of whose income is passive income (dividends, interest, gains and income from services to affiliated entities).
Also, the CFC rules apply to foreign companies that are established in white listed jurisdictions, when (1) the foreign company is subject to an effective income tax in its own country of organization that is less than 50 percent of the Italian income tax on its profits, and (2) more than 50 percent of the foreign company's income is passive income (dividends, interest, gains and income from services to affiliated entities.
As a result of the changes, many tax planning structures for Italian companies ding business abroad shall have to be revisited. In particular, many EU holding companies used by Italian companies to handle their outbound investments may become CFC and their income could become taxable currently upon their Italian shareholders in Italy.Continue Reading...
Italy's tax administration issued circular n. 26/E of May 21, 2009 (Circ_26E/2009.pdf), which provides clarifications on the application of the reduced withholding tax on EU dividends.
EU dividends are dividends paid to companies that are resident in a EU Member State or in a State that belongs to the European Economic Area and is included in a special list of approved countries (white list). EU dividends distributed out of earnings and profits accumulated in tax years which began on or after January 1, 2008 are subject to the reduced 1.375 percent withholding tax.
Circular 26/E clarifies that the provision which allocates dividends in reverse chronological order beginning first with profits accumulated in older tax years does not apply. Therefore, the distributing company is free to allocate the distribution to profits accumulated in tax years which began on or after 1.1.2008 and apply the reduced withholding tax.
Also, circular 26/E clarifies that the recipient of the dividend qualifies for the reduced withholding tax if it organized as a company subject to a corporate tax under the laws of its State of residence, even though it does not actually pay any tax as a result of a exemption that is compatible with EU law or is granted in connection with the particular nature of the entity's income (e.g., passive income earned by investment companies).
Therefore, investment funds organized as companies in their state of residence, but not subject to tax on their invstment income (such as certain Luxembourgh or Irish investment funds), could qualify for the reduced EU dividend withholding tax rate.Continue Reading...
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.
A new law (Decree n. 5 of 2009 enacted on Feb. 11, 2009 and finally approved by the Parliament on April 9, 2009) targets the tax abuse of sale and repurchase agreements (commonly referred to as repos) and securities lending transactions.
According to a new provision added to article 2, par. 2 of Legislative Decree n. 461 of November 21, 1997, in case of sale and repurchase agreements or securities lending transactions, or any other arrangements having the same or equivalent economic effects, the repo buyer or borrower is entitled to a tax benefit such as credit for withholding taxes or foreign taxes or other similar benefits in respect of the securities transferred or loaned, only if the repo seller, lender or beneficial owner of the securities would be eligible for those tax benefits had it retained the legal ownership of the securities.
A similar provision denies to the repo buyer or borrower of the securities the benefit of the participation exemption for dividends paid on the securities transferred or loaned unless the repo seller or lender would be entitled to it.
Finally, Tax Code article 109, par. 3-bis provides that a loss from sale of stock is non deducible, to extent of the amount of dividends paid on the stock during the 36 months preceding the sale.
The new law establishes that transactions entered into prior to the enactment of the new provisions, can still be challenged under the general anti abuse rules of article 37/bis of Presidential Decree n. 600 of 1973.
The Italian government is working at a bill which would enact a new tax amnesty. The bill should be introduced to the Parliament as early as next week.
Based on certain anticipations on the contents of the new bill, undeclared foreign earnings that are reported and repatriated would be subject to 10% flat tax. Unreported foreign earnings that are reported but reinvested or kept abroad would be subject to a higher tax. In either case, the tax would apply in lieu of any other taxes due on the undeclared earnings and would definitely settle the taxpayer's position.
A similar amnesty was enacted in 2001-2022, together with tougher rules on failure to report foreign bank accounts and other foreign investments that can generate foreign income taxable in Italy. That tax amnesty had a limited success and in general foreign earnings remained significantly unreported.
In ruling n. 92/E of April 2, 2009 Italy's tax administration ruled that stock received through the exercise of stock options granted by a foreign company is income taxable in Italy, if the options are exercised after the taxpayer has moved to Italy and become a resident of Italy for tax purposes, even though the stock options vested mainly in respect of services performed outside of Italy when the taxpayer was not resident of Italy for tax purposes.
The taxpayer argued that a portion of the stock options which vested in respect of services performed outside of Italy when the taxpayer was not a resident of Italy has no connections with Italy and should be excluded from Italian tax.
The tax administration held that all of the stock is taxable in Italy since received when the taxpayer had become resident of Italy for tax purposes, and a credit would be granted for any foreign taxes charged on stock attributable to services performed in a foreign country.
Under the facts of the ruling, the taxpayer worked as an employee of a UK company from October 1, 2004 to September 30, 2007. On October 1, 2007 he moved to Italy where he started working for the Italian parent company of the group. On February 28, 2005 he was granted stock options that would vest in three years. On March 3, 2008, he exercised the options and received the stock.
The taxpayer argued that the sock represented a compensation for services performed between Feb. 28, 2005 and March 1, 2008, when the options vested, including services performed in the UK from Feb. 28, 2005, to October 1, 2007, when the taxpayer was a resident of the UK for tax purposes.
As a result, according to OECD principles on taxation of stock options, the value of the stock should be divided into two portions:
- one portion, which accrued in respect of services performed in the UK between Feb. 28, 2005 and September 30, 2007;
- another portion, which accrued in respect of services performed in Italy, between October 1, 2007 and March 3, 2008.
According to the taxpayer, the first portion should be treated as income for services performed outside of Italy by a non resident individual and should be excluded from Italian tax. Alternatively, Italian tax code article 51, paragraph 8-bis should apply, according to which income of a taxpayer who performs services outside of Italy on continuing basis and as the exclusive object of his employment is limited to a conventional amount determined by way of ministerial decree. The conventional amount would absorb the value of the stock, which would not be separately taxable.
The tax administration disagreed and held that the entire amount of stock is taxable in Italy, because the taxpayer is taxable on a cash basis, and the stock is income received when the taxpayer was resident in Italy for tax purposes.
The provision of tax code article 51, paragraph 8-bis applies exclusively to taxpayers who work abroad but maintain their tax residency in Italy, which is not the case for the taxpayer in the ruling.
The tax administration agreed that, if the UK charges any tax on stock attributable to services performed in the UK, the taxpayer will receive a credit in Italy which would offset the Italian tax and avoid double taxation.
The Italian parliament on March 3, 2009 enacted law n. 20 which authorizes the ratification of the new U.S.-Italy tax treaty signed in 1999.
Law n. 20 of March 3, 2009 was published on the Official Gazette on March 18, 2009 and is now into force. The U.S. had ratified the treaty on December 28, 1999.
The new treaty will enter into force at the time of the exchange of the instruments of ratification. It will apply and take effect for taxable periods beginning on or after January 1, 2010 and for withholding taxes on payments made or accrued on or after the first day of the second month following the date of entry into force. A grandfathering provision allows a taxpayer to elect for the application of the old treaty for a period of 12 months following the entry into force of the new treaty, should the old treaty result in a better treatment.
The new treaty reduces the withholding tax rates on dividends, interest and royalties; authorizes the collection of a dividend equivalent tax on the repatriated profits of a branch, includes a provision limiting the benefits of the treaty to certain qualified residents of the other contracting state, addresses the creditability in the U.S. of the Italian regional tax on production activities, and provides that the competent authorities of the two contracting states may agree to refer a case to special arbitration procedure if they fail to reach an agreement within two years of the date on which the case was referred to one of them.
The current U.S.-Italy tax treaty entered into force on December 30, 1985. On August 25, 1999 Italy and the U.S. signed a new treaty and protocol (the "1999 Treaty"). On November 5, 1999 the U.S. Senate consented to the ratification of the 1999 Treaty, subject to a reservation and understanding.
The reservation required the elimination of following language which appears as the final paragraph of the withholding tax provisions of articles 10 (Dividends), 11 (Interest), 12 (Royalties) and 22 (Other Income):
"The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation of assignment of the" (respectively, shares or other rights; debt claim, rights, and rights) "in respect of which the" (respectively, dividend, interest, royalties and income) "is" (are) "paid is to take advantage of this Article by means of that creation or assignment".
That language established the so-called main purpose tests aimed at tackling possible abuses of the treaty or treaty shopping arrangements.
The understanding concerned the exchange of information provision of Article 26, which, according to the U.S. Senate, should grant to the competent authorities of the two contracting states the authority to obtain or provide information held by financial institutions, nominees, or persons acting in an agent or fiduciary capacity, or respecting interests in a person.
President Clinton signed the U.S. instrument of ratification on December 28, 1999, subject to the above mentioned reservation and understanding. The reservation required approval from the Italian government, which held the ratification process in stand by.
The 2006-2007 Exchange of Diplomatic Notes
By way of diplomatic note n. 291 of April 10, 2006, the Embassy of the United States of America reiterated the above-mentioned conditions to the ratification of the 1999 Treaty.
The Italian Minister of Foreign Affairs issued a note on February 27, 2007 by means of which it formally agreed with the reservation requiring the deletion of the main purpose tests and the understanding on exchange of information.
That step eventually paved the way to the final ratification of the new treaty.
The Italian Law Authorizing the Ratification of the Treaty
Eventually, the Italian Parliament enacted law n. 20 of March 3, 2009 which authorizes the Italian Minister of Foreign Affairs to exchange the instrument of ratification of the new treaty.
Effective Dates and Grandfathering Provision
The 1999 Treaty enters into force on the date on which the instruments of ratification are exchanged.
In general, the 1999 Treaty shall apply to taxable years beginning on or after the the first day of the year in which it entered into force. Therefore, if the instruments of ratification are exchanged in 2009, the Treaty shall take effect for taxable years beginning on or after January 1, 2010.
In the case of withholding taxes at source, the 1999 Treaty shall apply to payments made or accrued on or after the first day of the second month following its entry into force. Therefore, if instruments of ratification are exchanged on March 24, 2009 the Treaty shall apply to withholding taxes due on or after May 1, 2009.
A grandfathering provision allows a taxpayer, for a period of 12 months following the entry into force of the 1999 Treaty, to elect for the application of the 1985 Treaty should it provide a more favorable tax treatment.
Highlights of the New Treaty
Under the 1999 Treaty, the withholding rates on dividends are 5 percent for inter-company dividends (that is, dividends paid to a person owning at least 25 percent of voting shares of the payer for at least 12 months as of the time of the declaration of the dividends) and 15 percent for portfolio dividends. Dividends paid by a US RIC are subject to 15 percent withholding. Dividends paid by a US REIT may be subject to 15 percent withholding only if specific requirements are met.
The withholding rate on interest is reduced to 10 percent.
Royalties for patents and software are subject to a 5 percent withholding and all other royalties are subject to 8 percent withholding rate.
The 1999 Treaty authorizes the application of a branch profits tax. Italy does not have a branch profits tax. However, all Italian companies operating in the U.S. through a branch shall be subject to the U.S. branch profits tax.
Article 23 of the 1999 Treaty (Elimination of Double Taxation) contains specific provisions for the computation of the amount of the foreign tax credit in the U.S. for Italian regional tax on production activities (IRAP) paid to Italy.
Article 2, paragraphs 1-5 of the Protocol to the 1999 Treaty contains the new limitation of benefits provisions of the treaty.
A Memorandum of Understanding signed with respect to article 25 of the 1999 Treaty (Mutual Agreement Procedure) provides that the competent authorities may agree to invoke arbitration in a specific case, if they fail to reach and agreement within two years of the date on which a case was submitted to one of them. The Memorandum of Understanding sets forth the main aspects of the arbitration procedure and refers to the EU Convention on Arbitration Proceeding in transfer pricing matters and the US tax treaty with Germany.
The 1999 Treaty also contains specific provisions on application of treaty benefits to income derived or paid by partnerships or other fiscally transparent entities.
The Italian Supreme Court issued an important decision concerning the application of tax treaty benefits to partnerships.
The judgment (n. 4600 of 2009) will be deposited soon and we will publish it with additional comments as soon as it is available.
Under the facts of the case, a US Limited partnership received the payment of a dividend from an Italian company. A Japanese fund, member of the US limited partnership, claimed the reduction of the Italian withholding tax on the dividend pursuant to the Italy-Japan tax treaty. The Italian dividend withholding tax rate is 27 percent. The Italy-Japan treaty reduces it to 10 percent for inter-company dividends (paid to shareholders owning at least 25 percent of voting shares of the payer) and to 15 percent for portfolio dividends.
Italy's tax administration rejected the treaty claim on the ground that the Japanese fund is not the legal recipient of the dividend. The treaty grants the benefits if "the recipient" of the dividend is a company that qualifies to treaty benefits.
In the case at hand, the US LP, which was the recipient of the dividend, was transparent and did not qualify for treaty benefits under the US-Italy treaty, while the Japanese fund was the final economic owner but not the legal recipient of the dividend.
The Court accepted the position of the tax administration and observed that other Italian treaties, granting treaty benefits to a treaty partner who is the beneficial owner of the dividend, would command a different result.
With ruling n. 54/E of March 3, 2009 the Italian Tax Administration clarified the treatment applicable to debt instruments issued by Italian limited liability companies. According to the ruling, the instruments can be characterized as debt obligations and enjoy the same tax treatment of debt obligations issued by joint stock companies, namely a reduced 12.5 percent tax on interest and complete exemption for certain foreign investors, if the requirements established in the code for this purpose are met.
Article 2483 of Italian Civil Code (as amended with law n. of January 17, 2003) provides that limited liability companies (SRLs) can issue debt instruments to finance their operations of investments, subject to certain limitations. Previously, only joint stock companies (SPAs) could issue debt instruments.
Debt instruments issued by SRLs cannot be offered to the general public and can be subscribed only by professional investors (banks, insurances and financial institutions). If sold to private investors in the secondary market, the seller is liable in the event the buyer fails to make the payments required under the instrument. Seller's secondary liability can be eliminated by way of an agreement between seller and buyer.
The entity's articles or organization or certificate of formation must expressly provide for the possibility that the entity issues debt instruments and confer the power to issue debt instruments either upon the members or the managers, as well as establish the terms of the issuance including the number and amount of the instruments, issuance procedures and voting requirements.
The tax administration in ruling n. 54 clarified that, for tax purposes, debt instruments issued by SRLs are characterized as debt obligations if they satisfy the definition of debt obligation contained in article 44, paragraph 2, letter (c)(2) of the tax code, according to which three tests must be met:
- the instrument is part of a series of transferable instruments issued under same or similar terms pursuant to a single economic transaction;
- the instrument provides for the unconditional reimbursement of an amount that is at least equal to its issue price or face value, with or without payment of interest or other remuneration, and
- the instrument does not confer to the holder any power to control or participate in the management of the issuing enterprise or the transaction pursuant to which it has been issued.
If the three tests are met, the debt instrument is a classified as a debt obligation.
Interest paid under a debt obligation is subject to 12.5 percent withholding tax, provided that the maturity date of the instrument is at least 18 months or longer and the interest rate does not exceed the official discount rate increased by 2/3rd (or 200% is the instruments is regularly traded in a regulated securities market). In all other cases, the withholding tax rate is 27 per cent.
For interest paid to private individuals or foreign investors who hold the instruments outside of a trade or business that is part of an Italian permanent establishment, the 12.5 per cent is a final tax.
However, for debt obligations held by non resident investors who are resident or organized in certain approved jurisdictions (white-listed countries), interest is totally exempt from tax.
Interest on debt instruments that fail to qualify as debt obligation is subject to the ordinary 27 percent tax rate and is not eligible for the foreign investors exemption.
In the light of the above, for foreign investors the characterization of the instrument as debt obligation is particularly important in order to qualify for the exemption.
With Circular 1E of January 26, 2009 (Cir. 1 of Jan 26, 2009.pdf) Italy's tax administration explained that taxpayers must provide a clear evidence of the specific economic interest of a transaction, in order to deduct the costs, losses or expenses arising from transactions with foreign enterprises domiciled in tax haven ("black-listed") jurisdictions.
Tax Code article 110 provided that "no deductions are allowed for costs and other negative items of income deriving from transactions entered into between a resident enterprise and enterprises with their fiscal domicile in countries or territories not belonging to the European Union, having a privileged tax regime. They are deemed to be privileged the tax regimes of those countries and territories identified with a decree of the Ministry of the Economy and finance to be published on the Official Gazette, in consideration of their level of taxation significantly lower than the level of taxation applied in Italy, or of a lack of exchange of information, or other equivalent criteria".
With the budget law for 2008, the above provisions have been amended and now the non-deductibility rule applies to transactions entered into with enterprises domiciled in countries that are not included in a list of approved countries ("white list"), selected primarily on the basis of the lack of exchange of information with Italy. The "white-list" has still to be approved by the Ministry of Finance.
The non-deduction rule applies also to costs for professional services performed by firms organized in low-tax jurisdictions.
Deduction is allowed if costs, losses or expenses are separately stated on the tax return and either of two requirements are met: the foreign enterprise primarily carries out a real commercial activity (active trade or business) in its country of domicile, or the transactions fulfills a real economic interest (economic substance) and has been actually executed. The burden of proof is upon the taxpayer, who can apply for an advance ruling that certifies the applicability of either exemption.
The real commercial activity exception requires that the foreign enterprises uses an adequate organization (office, staff) for its trade or business in its country or organization.
With circular 1E, the tax administration clarified that the real economic interest exemption requires a specific evidence of the fact that the particular transaction actually and directly serves the economic interest and purposes of the resident enterprises and is directly related to the enterprise's trade or business.
Proof of general economic substance based on a general connection between a transaction and the enterprise's business, as reflected and confirmed in information, data and experience generally applicable to enterprises in the same line of business is no longer allowed, and ruling n. 127 of June 6, 2003 is revoked.
The economic crisis measures enacted with Legislative Decree n. 185/2008 include special provisions for big taxpayers. Big taxpayers are defined as companies with annual revenue or receipts equal to or exceeding 300 million EUR, gradually phased down to 100 million EUR through December 31, 2011.
Big taxpayers are subject to automatic audit based on selective lists within one year from the filing of their tax return. The audit automatically extends also to the verification that taxpayers actually complied with the interpretative solutions and advice provided by the tax administration in rulings issued to those taxpayers.
Finally, all requests for a tax ruling will be filed and processed according to the same procedure that applies to the special tax avoidance ruling. The procedure requires that the ruling application be filed with the Regional Department and then passed on the Central Department, which must issue its reply within 120 days from the application. If the ruling is not issued within the 120-day deadline, the taxpayer can file a final reminder and the tax administration has additional 60 days to respond. If the tax administration fails to respond within the extended deadline the position taken by the taxpayer in the application for the ruling is deemed approved.
The procedure referred to above applies to all three types of rulings currently available under Italian law, namely the ordinary interpretative ruling, the tax-avoidance ruling and the ruling for the exemption from the application of tax-abuse provisions limiting the deductions of costs and expenses incurred in transactions with low-tax jurisdiction enterprises .
With Circular n. 5/E of February 24, 2009, Italy's tax administration clarified the new procedure for the request of tax avoidance rulings.
Taxpayers can apply for a special tax avoidance ruling in order to obtain guidance from the tax administration on specific transactions listed in the tax code that provide tax advantages and are perceived as potentially abusive. The listed transactions include conduit arrangements; tax free mergers, liquidations, change of corporate type, return of capital distributions or transfer of assets or going concerns; transfer of receivables; deductible interest and royalty payments to EU related companies controlled by non EU parents; payments charged between related companies one of which is a controlled foreign company, and costs and deductions arising from transactions with companies organized in low-tax jurisdictions.
The request for the ruling is addressed to the Direzione Centrale Normativa e Contenzioso (Central Department on Rules and Litigation) and filed through the Direzione Regionale (Regional Department). It must provide a detailed summary of the facts and an explanation of the position taken by the taxpayer on the issues of law, together with any relevant documentation relating to the transaction.
The Regional Department checks that the request is complete and in order and passes it on to the Central Department within 15 days from the receipt of the request. The Central Department must issue the ruling within 120 days from the filing of the request.
In the event the tax administration fails to issue the ruling within the 120-day deadline, the taxpayer can send a final reminder. Failure to issue the ruling within 60 days following the receipt of the final reminder is equivalent to an approval of the position taken by the taxpayer on the relevant issues of law in the request for the ruling. As a result, the period of time for the issuance of the ruling cannot exceed 180 days or six months.
The ruling (or the silent approval of taxpayer's position) is binding for the tax administration (but not for the taxpayer).
The New Consolidated Corporate Income Tax Form for 2009 Addresses Interest Deduction Limitations in Consolidated Groups
Italy's tax administration issued the new consolidated corporate income tax return form for the year 2009, with its instructions, which deals with the new rules for interest deductions in tax consolidated groups.
The Finance Law for 2008 repealed the thin capitalization rules and enacted new provisions on limitation of interest deductions for business and corporate taxpayers. Under the new rules, interest expenses exceeding interest income are deductible up to 30 percent of borrower's gross accounting profit or earnings before interest, taxes, depreciation and amortization (EBITDA). Excess interest (that is, interest expenses exceeding the 30 percent threshold for a year) and excess limitation (that is, the excess of 30 percent limitation over net interest expenses for a year) can be carried over to and deducted in future tax years up to the limitation amount available in those years.
In tax-consolidated groups, excess interest and excess limitation can be transferred among the members of the group, enhancing the ability to deduct interest expenses within the group.
The new tax form and instructions for 2009 confirm that each member of the group computes their own interest deductions and excess interest and limitation amounts, and any excess interest or excess limitation of any member of the group can be transferred to the parent, which would calculate the additional interest deduction and adjust the taxable income of the group accordingly.
For example, if group member A has excess interest of 100, group member B has excess interest of 50, and group member C has excess limitation of 120, the parent can deduct additional 120 of interest by using the excess limitation of group member C to offset the excess interest of group member A and B.
It is still not clear whether the transfer of the excess limitations and excess interest is mandatory or elective, and whether it should be done proportionally or for the entire amount.
With a proportional rule, 80 of excess interest would be transferred from group member A and 40 of excess interest would be transferred from group member B; a total of 120 excess interest would be offset with a total excess limitation of 120 transferred from group member C, and excess interest of 40 and 10 would be carried over to future years individually by group members A and B.
With an all inclusive rule, 30 would be excess interest of the group that the parent would carry over and deduct in future years.
In general, the new rules as implemented in the new tax form for 2009 facilitate the deduction of interest expenses within a tax consolidated group. For this purposes, the group includes foreign subsidiaries that meet the domestic tax consolidation requirements.
EU Outbound Merger Not Eligible For Tax-Free Treatment if No Permanent Establishment in Italy After the Merger
In ruling n. 21/E of January 27, 2009 (Resolution 21/E-2009.pdf), Italy's tax administration ruled on whether a merger of an Italian company into a Spanish parent would qualify for tax-free treatment under the EU merger directive.
Under the facts of the ruling, a Spanish company engaged in the business of distribution and sale of clothing and accessories would acquire the stock of an Italian company, which perform the following services:
- receipt of goods from Italian manufacturers and suppliers;
- storing and warehousing;
- quality and conformity control;
- packaging, shipping and delivery of goods to the parent or customers;
- collection and provision of information and other auxiliary services.
Immediately after the acquisition, in order to avoid administrative costs the Italian company would be merged into the Spanish company and would continue to operate as a permanent establishment in Italy of the Spanish company.
According to the taxpayer, the transaction should qualify as a tax free merger under the provisions of the EU merger directive as implemented in Italy.
Also, the Spanish company through its Italian permanent establishment should be able to purchase stock of other Italian companies and include them in a domestic tax consolidated group in Italy, with offset of profits and losses among the members of the group.
The Italian tax administration disagreed and ruled that the merger would be a taxable transaction and the Spanish company could not consolidate other Italian subsidiaries under Italian domestic tax consolidation rules.
According to the tax administration, after the merger there would be no permanent establishment of the foreign parent company in Italy, because the activities performed in Italy are excluded from the definition of permanent establishment provided for in the tax code.
Consequently, since the permanent establishment requirement is not met, the tax deferral treatment granted by the EU merger directive would not apply, and any gain or loss realized in the merger would have to be recognized for Italian tax purposes.
The Tax Section of the Italian Supreme Court in its judgment n. 1465 of January 21, 2009 held that the tax administration bears the burden to prove that a transaction is carried out solely to obtain a tax advantage, in order to disregard the transaction and deny the tax benefits obtained by the taxpayer under the general anti avoidance rule.
The Supreme Court in joined chambers had established the general anti avoidance principle in its judgments n. 33055 and 33057 of December 23, 2008.
According to the Court, a transaction can be disregarded when the intention to obtain tax advantages is the essential and predominant element of the transaction, taking into account the purposes of the parties and all the facts and circumstances and the specific structure and design of the transaction used by the taxpayer.
The taxpayer can prove that the transaction pursues alternative or concurrent economic objectives of real significance, which justify the transaction and its structure.
The case decided by the Court concerns a corporate joint venture in which a company purchased industrial machinery and equipment that it leased to related companies for non consideration, and then acquired vehicles from the lessees at a reduced market price. The structure of the transaction generated a tax saving.
However, the transaction was aimed at enabling the group to gain market shares by selling goods at discounted price and was considered sufficient to reject the challenge brought under the general tax avoidance principle.
Italian Regional Tax Court found that a Madeira company engaged in the business of purchasing and selling goods had its permanent establishment in Italy, were the contracts were negotiated and the business was supervised by its shareholders (CTR Toscana 88/18/08 of 7.11.2008.pdf).
As a result, in judgment n. 88/18/08 of November 7, 2008 (which affirmed the trial court judgment) the Regional Tax Court of Tuscany held that the Madeira company was liable to tax in Italy for an amount of over 5 million euros.
The Madeira company (previously organized in Gibraltar) purchased and sold goods (with an annual turnover of several million euros). It was subject to zero or low tax in Madeira. The company had one office and one part time employee in Madeira. Its contracts were negotiated and executed and its business was supervised by its shareholders in Italy.
The Regional Tax Court applied the analysis of the Supreme Court in the seminal Philip Morris cases (see Supreme Court judgment n. 7682 of 2002.pdf) and found that the Madeira company had a permanent establishment in Italy, were contractual negotiations were conducted and the business of the company was supervised, and held that all of the profits of the company were attributable to its Italian permanent establishment and subject to tax in Italy.
The Court also noted that it was not credible that an active business for an annual revenue of several million euros could be conducted through one part time employee out of one office in Madeira, which reinforced the conclusion that the company had its permanent establishment in Italy through which it actually carried out its business and realized its profit.
In two very important decisions issued on December 23, 2008, the Italian Supreme Court for the first time held that the Italian tax system contains a general anti-avoidance principle deriving directly from the Italian Constitution, pursuant to which the tax administration can disregard a transaction entered into for no real economic reasons, but for the sole purpose of obtaining a tax advantage.
According to the Court, the general anti-avoidance principle derives from article 53 of the Italian Constitution, establishing that everybody must pay taxes according to their ability to pay, at higher rates for higher income, and it is a general principle of the tax system that applies on top of and above any other specific anti-avoidance provisions of the tax code.
The first decision, n. 30055 of December 23, 2008 (Supreme Court n. 30055-08.PDF) concerns a "dividend washing" transaction. An Italian company purchased stock from an Italian investment fund immediately before the payment of a dividend declared on the stock, at a purchase price reflecting the amount of the dividend declared and payable on the stock.
The Italian company collected the dividend and received a tax (imputation) credit for an amount equal to the underlying corporate taxes paid by the issuer of the stock on the profits out of which the dividend was paid, which eliminated the tax on the dividend for the buyer. If collected by the investment fund, the dividend would have been subject to a gross basis withholding tax.
Immediately thereafter, the Italian company sold the stock back to the investment fund at a price equal to the purchase price less the amount of the dividend, thereby realizing a taxable loss which reduced its taxable income.
The tax administration denied the benefit of the tax loss under the theory that the the real beneficial owner of the dividend was the investment fund and the Italian company acted merely as a conduit for the collection of the dividend on behalf of the fund.
At the time of the facts of the case, the provision of article 14, paragraph 6-bis of the tax code denying the dividend tax credit for dividend distributed to companies which have bought stock from investment funds after the declaration but before the payment of the dividend had no been enacted.
The second decision, n. 30057 of December 23, 2008 (Supreme Court n. 30057-08.PDF) concerns a "dividend stripping" transaction. A U.S. company not engaged in business in Italy owned stock of an Italian company and transferred the right of use of that stock (so called usufruct), including the right to collect the dividends on the stock, to another Italian company, at a price reflecting the amount of the dividends that were reasonably expected to be declared on the stock during the time of the contract.
Italian tax law treats the dividend equivalent amount paid to the transferor of the usufruct as foreign source income not taxable in Italy.
The Italian company collected the dividends and received a tax (imputation) credit for an amount equal to the underlying corporate taxes paid by the issuer of the stock on the profits out of which the dividend was distributed, which eliminated the tax on the dividend, and took amortization deductions for the the cost of the usufruct, which reduced its taxable income.
If paid to the U.S. company, the dividends would have been subject to a gross basis withholding tax.
The tax administration denied the amortization deduction on the ground that the Italian company was not the real beneficial owner of the income but acted merely as a conduit for the collection of the dividends on behalf of the U.S. company.
At the time of the facts of the case, the provision of article 14, paragraph 7-bis denying the tax credit for dividends collected by Italian companies which purchased the usufruct on the stock from foreign companies had not been enacted.
The Supreme Court held that the transactions lacked significant economic reasons other than the tax benefits and can be disregarded under the general anti-avoidance principle set forth above.Continue Reading...
On December 3, 2008 Italy's tax administration issued ruling n. 470/E, by which it clarified that cross-border mergers between non-EU companies with permanent establishments in Italy can be carried out tax free.
Italian law provides for nonrecognition treatment of mergers between domestic companies, in which all of the assets of the target company are transferred to the acquiring company in a statutory merger, and the target company's shareholders exchange their stock in the target company for stock of the acquiring company. No boot can be exchanged in the transaction. The acquiring company takes a carryover basis in the assets of the target company, and the target company's shareholders get an transferred basis in the stock of the acquiring company received in the transaction.
The EU directive 90/434/CEE (the mergers directive) provides for a tax deferral treatment of mergers that are carried out between companies resident in two different EU member states. In this case, ten per cent of the consideration can be cash.
In the ruling, the tax administration clarifies that the Tax Code non recognition treatment of domestic mergers can apply also to cross border mergers that fall outside the scope of application of the EU mergers directive.
The ruling is extremely important because it facilitates the possibility to carry out cross-border reorganizations involving Italian assets or Italian companies without immediate recognition of gain.Continue Reading...