Deduction of Tax-Haven Costs Requires Proof of Specific Economic Interest
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.
