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

The European Court of Justice (ECJ) with its decision in the case C-277/09 issued on December 22, 2010 (RBS Deutschland Holdings) blessed an international tax arbitrage transaction whose final result has been to obtain a credit for input VAT charged on purchase of vehicles while avoiding the application of output VAT on rental payments from leases of those vehicles.

Under the facts of the case, RBS Deutschland Holdings GmbH, a Germany company, purchased cars in the UK through its VAT registered unit in the UK and leased the cars to a UK company, directly and through one of its German subsidiaries. In the UK the lease contracts were characterized as financial transactions, which for VAT purposes are supply of services that are taxable in the country of supplier (in the case Germany). However in Germany the leases where characterized as sales of goods which are taxable in the country of purchaser (in the case the UK).

RBSD claimed a credit for the input VAT paid on the purchase of the cars even though no output VAT was paid on the leases of those cars . The UK tax authority denied the VAT input credit and asked the Court to determine whether the general anti abuse principle embedded in EU VAT law would prevent a taxpayer from qualifying for an input VAT credit in circumstances in which sales are structured in a way to avoid output VAT.

The ECJ held that a taxpayer is not prohibited from exploiting the differences in national tax systems in a cross border transaction leading to a more favorable tax result, provided that the transactions in which the taxpayer is engaged are not entirely artificial and are not entered into for the sole purpose of avoiding taxes.

The Court acknowledge that taxes are a factor that is taken into consideration to determine the final form of a transaction, but when they are not the only factor and the transaction otherwise serves a legitimate business purpose, the final tax result should be respected event when if is predicated on an inconsistent tax treatment of the transaction under two different legal systems.      

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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               

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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.         

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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.                 

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