In its Ruling N. 380 of September 11, 2019, Italy’s Tax Agency provided its guidance on certain tax implications of a corporate reorganization pursuant to which a Luxembourg holding company, which owns an Italian company, would reincorporate into Switzerland and convert into a Swiss tax resident company.

Prior to the reincorporation of the holding company in Switzerland, the dividends paid by the Italian subsidiary to its Luxembourg parent were exempt from Italian withholding tax under the EU Parent-Subsidiary Directive.

The issue in the ruling request was whether, after the reincorporation of the holding company into a Swiss tax resident company, the dividends paid by the Italian subsidiary to its (Swiss) parent company would still be exempt from Italian withholding tax.

Under the Switzerland-EU Agreement, which provides Switzerland access to benefits similar to those in the EU parent-subsidiary directive, withholding tax is reduced to 0% on cross-border payments of dividends between related companies residing in EU member states and Switzerland when the capital participation is 25% or more and certain other criteria are met.

More precisely, Article 9 of the Switzerland Tax Agreement extends the dividend withholding tax exemption of the EU Parent-Subsidiary Directive to dividends paid to EU-based companies to a parent company organized in Switzerland, provided that the Swiss holding company has been owning 25 percent or more of the shares of the Italian company distributing the dividends, for at least two consecutive years as of the date the dividends are declared.

In its ruling request, the taxpayer provided evidence that Luxembourg law allows a Luxembourg company to reincorporate abroad, as a Switzerland company, and that Swiss law, conversely, allows a foreign company to reincorporate into Switzerland, maintaining its original corporate charter now governed under Swiss law, with both laws treating the transaction as a reincorporation of a Luxembourg company into Switzerland, rather than a dissolution of the Luxembourg company followed by the incorporation of a newly organized Swiss company.

In light of the treatment of the transaction under the corporate laws of the two countries involved, according to the Italian Tax Agency, the original Luxembourg entity is not dissolved but continues as a Swiss entity; as a result, under the terms of the reorganization transaction, the minimum ownership and holding period requirements for the dividend withholding tax exemption are met and dividends paid by the Italian subsidiary would still be exempt from withholding tax.

The question is whether the same conclusion should stand whenever two EU-based companies engage into a tax-free reorganization pursuant to which the acquiring company receives the shares of a EU subsidiary from the acquired company, on a tax-free basis and without recognition of gain, and prior to the reorganization the requirements for dividend withholding tax exemption with respect to those shares were met.

In that scenario, taxpayers would argue that the minimum ownership and holding period requirements in the hands of the acquired company should be teated as carrying over to the acquiring company, and the withholding tax exemption should be maintained.

In its Private Letter Ruling n. 355 of August 30, 2019 the Italian Tax Agency considered the tax implications, for Italian gift tax purposes, of a transaction involving the early termination of an irrevocable trust by way of mutual consent of the trustee, settlor and beneficiaries of the trust, with a return of the trust’s assets to the settlor.

The Tax Agency treated the termination of the trust as a gift of the trust’s assets to the settlor, which was subject to Italian gift tax.

The trust had been set up in Italy and was governed by the laws of Jersey. The trust had a term of thirty years, and the lineal descendants of the settlor were named as beneficiaries of the trust’s assets upon the expiration of the trust. The trust agreement provided that the beneficiaries were not allowed to early terminate the trust, without the consent of all other parties (namely, the settlor and trustee).

The relevant statutory provision of the governing law of the trust provides that “Without prejudice to the powers of the court under paragraph (4) and notwithstanding the terms of the trust, where all the beneficiaries are in existence and have been ascertained and none are interdicts or minors they may require the trustee to terminate the trust and distribute the trust property among them”.

Considering the limits and restraints to a unilateral anticipated termination of the trust by the beneficiaries of the trust as set forth in the trust agreement, the parties to the trust decided to early terminate the trust by way of mutual consent among all of the parties to the trust, namely the settlor, trustee and named beneficiaries, and return the trust’s assets to the settlor.

The taxpayer took the position that a transfer of assets to a trust is not a complete gift, until the assets are distributed to the beneficiaries, and, conversely, an anticipated termination of the trust, with a return of the assets to the settlor, before they are actually distributed to the beneficiaries, would just retore the parties into their initial positions and should have no effects for Italian gift tax purposes.

The tax agency disagreed and confirmed its position according to which a transfer of assets to an irrevocable trust for no consideration constitutes a final gift and is subject to gift tax, while no further tax is due at the time of the final transfer of the trust’s assets to the beneficiaries. As a result, according to the Tax Agency, an anticipated termination of the trust by way of mutual consent of settlor, trustee and beneficiaries, with the return of the trust’s assets to the settlor, costitute a “gift” of the trust’s assets to the settlor, which, in turn, triggers the gift tax.

The ruling is important, especially in a cross border context, whenever the parties to a non Italian trust with Italian assets decide to proceed with an anticipated termination of the trust, without being fully aware of the implications that the transaction may have in Italy. Similarly, in case of an Italian trust with foreign assets, the anticipated termination of the trust with a return of the assets to the settlor could trigger a gift tax in Italy, as well as in the foreign country in which the assets are located, in the event it follows the same approach as that pursued by the Italian tax agency. That would be, indeed, the exact result in the event on an early termination of an irrevocable trust holding assets in the United States.

Italian tax residence is a very important topic for foreign nationals who travel regularly to Italy, own houses and spend significant time with their family there, while living and working abroad, as well as for those who relocate to Italy and work, do business or just retire there.

For the former, it may be surprising to know that they may have crossed the line and become Italian tax residents, under Italian tax law, even though they have spent less than 183 (or 121 on average) days a year in Italy and would never be resident should the provisions of the Internal Revenue Code apply to their case.

For the latter, it is important to understand the need to plan in advance the establishment of their Italian tax residence, to fully understand the tax treatment they will be subject to once they have become resident, and make the proper adjustments to maximize the benefits and minimize the inconvenience of being subject to tax in Italy.

Now that Italy is the most formidable tax haven in the world for foreign nationals who plan to relocate there, Italian tax residence can be an opportunity, more than it has ever been, and an interesting topic to review with a positive state of mind.

In this area of international tax law, the disconnection between Italian internal law and U.S. domestic tax law is a significant as it can be, and can give rise to opportunities, or problems, depending on the taxpayer’s approach.

While the basic Italian rules are sufficiently clear, not surprisingly, there are still open issues, which arise in particular in the context of the interactions between Italian internal law and tax treaties.

In this article we offer a refresher of the basic rules while we stop and outline the open issues in the hope of rising awareness and create a basic knowledge of the system that can help any further and more detailed investigation of specific real-life situations.

Tax Residence Tests

Italy assigns tax residency to individuals based on one of three alternative criteria:

– registration on the list of Italian resident individuals,

– residence, as defined in the civil code (i.e. place of habitual abode),

– domicile, as defined in the civil code (i.e. main center of interests).

Tax residence is triggered whenever any one of those three criteria is met for more than 183 days in a given a year.

The Registration Test

The registration on the list of Italian resident people is carried out upon an individual’s application, which sets forth the individual’s home address in Italy and the date the individual moved to and started living regularly there. The application is filed with the local municipal office of the place where the individual’s home is located.

The effective date of registration, which will ultimately dictate the tax residence starting date (see the discussion of this topic below), may be tricky. The general rule is that the application takes effect from the date it is filed. The application paper, however, requires to set forth the date of the relocation to Italy (on which the individuals filing the application moved to and started living there), which can even be an earlier date.

In many instances, foreign nationals register inadvertently, or, rather, without fully knowing the tax implications of the registration, often encouraged by local notaries or accountants at the time of the purchase of a home in Italy, as suggested in order to benefit from abatement of transfer taxes granted by Italian law in connection with the purchase of a “first home” in Italy.

The registration, together with the ownership of a home in Italy, are matters of public record, and Italian tax offices carry out regular checks on the list of residents and real estate register and, when they do not find a matching Italian income tax returns on their file, they send inquiries about the tax status of those individuals who are registered as residents and own a home but appear to have never filed an Italian income return.

The Residence Test

Residence means place of habitual abode, that is, the place where an individual regularly lives, in a non transitory manner, and with the intention of living there for an indefinite time as it may be inferred from his or her social relations, activities, personal connections and family ties to that place. Residence is a fact and circumstances test based both on physical presence (which must be regular and not sporadic or temporary) and state of mind.

No fixed or minimum number of days of presence is required to meet the residence test, and traveling away for some temporary of transitory reasons, and staying outside of Italy for a long period of time, or even working primarily outside of Italy while traveling regularly back and maintaining personal ties and family life there, does not affect the location of someone’s place of habitual abode in Italy.

The Domicile Test

Domicile means main center of interests, which can be personal or economic. For the purpose of this test, the days of presence in Italy are completely irrelevant. One can have his for her domicile in Italy event without living there at all.

Case law is inconsistent on whether personal and family interests should be given more weight than economic or professional connections, for purposes of both the residence and domicile test.

A substantial body of case law and tax ruling exists in this area, and no meaningfully conclusion can be reached, without a carefully review of the facts of each particular case against the background of the reveal case law and administrative guidance.

First and Last Day of Residence and Change Of Residence During The Year

For Italian tax residence to begin, it is required that any of the three tests described above is met for more than 183 days in any particular year.

The first day of residence is the first day of the year in which either test is satisfied. Conversely, the last day of residence is the last day of the year in which either test is satisfied.

In other words, if someone establishes his or her residence or domicile in Italy sometime on or before June 30 of a given year, his or her tax residence would begin on the first day (January 1) of that year, and if someone moves his or her residence or domicile outside of Italy sometimes on or after July 1 of a given year, his or her last day of residence would be the last day (December 31) of that year year.

Conversely, if someone establishes his or her residence or domicile in Italy sometimes on or after July 1 of a given year, and moves his or her residence or domicile outside of Italy sometimes on or before June 30 of the following year, he or she would had never been be a tax resident of Italy, either in year one or the following year.

In light of the above, as a rest of the application of the Italian rules, there may be situations on double tax nonresidence, or double tax residence, with all the implications that would have.

Tax Treaties And Change of Residence During the Year

Italian internal tax law does not contemplate a case in which an individual can be a resident – or a nonresident – for part of the year. Tax residence, whenever established during the year, either retroacts to the first day of the year (if established within the first half of the year) or is postponed to the first day of the following year (if established in the second half of the year). Under that approach, an individual is either a resident, or a non resident, for the entire year.

An open issue concerns whether the application of a tax treaty may change the outcome dictated under Italian law and make somebody a part-year resident (or part-year non resident) of Italy for the purposes of that treaty. We refer to a case in which an individual, who is resident of Italy and another country which has a tax treaty with Italy, under their respective internal tax laws, moves from Italy to the other State during the second half of the year and successfully demonstrates that his or her residence should be assigned to the other contracting State, under the provisions of article 4 of the treaty between Italy and that State, from the time he moved there.

In that case, the issue is whether, pursuant to the treaty, the last day of residence in Italy (which, under Italian law, would be the last day of the year) should be set on the the day within the year on which the treaty test assigning residence to the other treaty country is met.

The Italian tax administration (in a tax ruling dating back to 2008) seems to take the position that part-year residence applies solely when expressly provided for in the tax treaty. However, as far as we know, there is very little direct guidance and clear case law on the issue, which is open to discussion.

Effects of Tax Residence

Italian tax residence has far reaching effects that cover income tax, gifted estate tax, international tax reporting and taxation of trusts.

Notably, under Italian law, and unlike in the U.S., the tax residence tests are the same for income tax as well as gift and estate tax purposes.

Once Italian tax residence is established, under any of the tests discussed here above, a taxpayer treated as an Italian resident individual:

– is subject to income tax in Italy on all of his or her or income, from whatever source derived, in Italy or abroad,

– is subject to Italian gift and estate tax, on all of his or her assets, wherever located in the world,

– is required to report, for information purposes, on his or her Italian income tax return, all of his or her assets, located outside of Italy, in which he or she has a financial interest, legal or beneficial ownership or legal control,

– is subject to foreign assets based taxes charged on the fair market value of foreign real estate (at the rate or 0.76%) or financial assets (at the frate of 0.2%), due on top of Italian personal income taxes,

Also – and equally important – any trust of which an Italian resident individual is a trustee, is presumed to be an Italian resident trust, subject to tax in Italy on its income (as attributed to the trust under Italian tax rules), from whatever sources derived.

Tax Treaty Residence And International Tax Reporting Of Foreign Assets

Under the typical tie breaker provisions of article 4 of Italian income tax treaties, an individual who is a tax resident of both Italy and another State, under their respective internal tax laws, can be treated as a resident of the other contracting State, for the purposes of that treaty.

Generally, a tax treaty applies only to income taxes, and solely for the purpose of computing a taxpayer’s income taxes due.

An unsettled issue is whether an Italian tax resident individual, under Italian internal law, who is treated as a non resident pursuant to the provisions of article 4 of an income tax treaty and, consequently, is not liable to tax in Italy on his or her foreign (i.e, non-Italian) income, for purposes of that treaty, would also be exempt from the duty to report his or her foreign (i.e. non-Italian) assets on his or her Italian income tax return.

The technical language of the treaty limits its application to the computation of income taxes due in either of the two contracting States, while, for all the tax purposes, an individual remains a resident of the contracting State under its own internal law.

The U.S. approach is that a resident alien individual, under U.S. internal tax laws, who files as a nonresident pursuant to article 4 of an income tax treaty, is treated as resident for all other income tax purposes and is subject to the duty to file his or her international informational returns (such as form 8938, 114a, 5471, and the like) as required under U.S. tax law.

In Italy, the issue is open. There is some case law that seems to suggest that the Italian tax administration would require that an Italian income tax return be filed, with section RW duly filled out with information on foreign assets, even when there is no income tax liability because the taxpayer is treated as a nonresident under a treaty (and does not have Italian source taxable income to report). That would be consistent with a recent administrative guidance according to which the Italian tax agency requires reporting also for foreign personal assets that do not produce any income taxable in Italy.

On the other hand, Italian international tax reporting rules seems to limit the reporting by making reference to foreign assets “which are capable of producing foreign source taxable income”, which clearly is not the case when the taxpayer in a nonresident under a treaty (and is never liable to tax in Italy on foreign source income). The language of the statute would appear to justify the absence of a duty to file an Italian tax return in the situations described above.

Since reporting is for information purposes only and there is no tax attached to it (and considering the penalties for failure to file) a conservative approach would suggest filing an income tax return whenever an individual is an Italian tax resident under Italian internal law.

Tax Treaty Residence And Non-Income Taxes

Another issue is whether an individual, who is treated as a nonresident under thew provisions of article 4 of an income tax treaty, should still be treated as a resident, for all other Italian non-income tax purposes.

As noted, Italy uses the same tests to determine an individual’s tax residence for purpose of the Italian estate and gift tax.

However, income tax treaties do not apply to estate and gift taxes, and typically estate and gift tax treaties (which Italy has with several countries, including the U.S.) do not set forth provisions on residence or domicile for estate and gift tax purposes.

As a result, the answer to our question should be a clear yes.

However, some tax experts opine that, since the residence test are the same, for income tax and estate and gift tax purposes, there seems to be a unitary tax residence concept in the Italian tax system, and it would set fair that, in the event that an individuals’ tax residence is assigned to another country, under the provisions of article 4 of an income tax treaty, that individual should be treated as a nonresident for any tax purposes, and also for the purpose of the Italian estate and gift tax.

Interestingly, the same issue arises with respect to certain asset-based taxes that have to be reported on the regular income tax return. They are the tax on the fair value of foreign real estate, charged at the rate of 0.76%, and the tax on the fair value of foreign financial assets, which is charged at the rate of 0.2%.

Italian resident taxpayers are subject to those taxes, which are computed on a separate section of the regular income tax return and are paid together with the regular income tax.

The question is whether a taxpayer who is treated as a nonresident under an income tax treaty, is exempt from those taxes, and therefore not required to file an income tax return, or due to the fact that they are non-income taxes falling outside the scope of the treaty, implies that a resident taxpayer under Italian internal law regardless of the treaty is still subject to those taxes and required to file the return.

Tax Residence and Trusts

Another implication – and potentially unintended consequence – of establishing the tax residence in Italy arises with respect of trusts. Under Italian tax rules on trusts, the tax residence of a trust is deemed to be in Italy, whenever the trustee is an Italian resident individual. The taxpayer has the burden to prove that the trust is effectively managed in a foreign country.

A Italian tax resident trust is taxed in Italy on any income which is allocated to the trust under Italian tax law (which does not need to be consistent with US law), whether from Italian or foreign source. In the case of a trust with identified beneficiaries, the trust’s income flows through the trust and is allocated and taxed to the beneficiaries. However, whenever it flows through an Italian resident trust, its source and character change, in a sense that it becomes Italian source income and is classified as income from trust. As such, it is taxable to foreign beneficiaries, unless it is exempt under a treaty (presumably, the other income provision of article 12).

Tax Residence And Special Tax Regimes For Foreign Nationals

Italy enacted several special tax regimes for foreign nationals (or Italian citizens living abroad) who move to Italy.

One regime is designed for high skilled workers, professionals and independent contractors and entrepreneurs, and provides for a 70% or 90% taxable income exemption for employment income, professional income and business income, for a period of five years that can be extended to ten years under certain circumstances.

Another regime is designed for retirees and provides for a 7 percent flat income tax rate applicable on all of the income of individuals who receive some retirement income.

Another regime is designed for high net worth individuals and provides for a fixed 100,000 euro tax on all of their foreign source income.

All those special tax regimes are predicated on the requirement that the taxpayer did not have his or her tax residence in Italy for a certain period of time before, and established his or her tax residence in Italy after, electing for the special tax regime.

In this context, the analysis on a taxpayer’s residence is critical to determine his or her eligibility for the preferential tax regimes.

Recently, the Italian tax administration has clarified that, whenever a taxpayer has been a resident of Italy under the registration test, and would not be eligible for the special tax regime, but maintained his or her residence or domicile in a foreign country, he or she can claim to be treated as a nonresident under article 4 of the income tax treaty with that country also for the purpose of claiming his or her eligibility for the special tax regime. The interpretative guidance addresses the very common situation of many Italian citizens who move abroad but never terminate their registration in Italy.

Even though the Italian tax administration has not dealt with it, also the opposite should be true: an individual who has never been registered in Italy, but maintained in Italy his or her actual domicile or place of habitual abode, within the relevant period of time before the election, might have become a resident under the domicile or residence test and could therefore be considered not eligible for the special tax regime.

Considering the attractiveness and rising popularity of the special tax regimes for new residents, it is not surprising that the concept of tax residence will receive additional attention and greater scrutiny.


In conclusion, the concept of tax residence in Italy has pervasive ramifications in many areas of Italian tax law and gives rise to challenging issues in a cross border context.

Careful tax planning on the issue of Italian residence can provide significant tax benefits, while taxpayers who ignore it do that at their own peril and may encounter severe troubles.

Italy taxes various categories of financial income – namely dividends, interest and capital gains – earned by private investors outside the carrying on of a trade or business, by way of a substitute tax charged on the gross amount of the income at the flat rate of 26 percent.

With effect from January 1, 2018, capital gains are no longer categorized as gains realized from the sale of qualified shareholdings (i.e., shareholdings exceeding a minimum percentage of a company’s stock measured by vote or value), which were partially exempt under Italy’s participation exemption rules, and partially taxed, as ordinary income, and gains realized from the sale of portfolio shareholdings (which were subject to the substituted tax), and are all taxed at the 26 percent substituted tax rate.

In case of dividends, interest and capital gains earned through an Italian-based bank or financial intermediary, the bank or financial intermediary which collects the income on behalf of its customers applies the 26 percent substituted tax and credit the net amount of the income to the customers.

In case of dividends, interest or capital gains that are earned form investments held outside of Italy, and without the intermediation of an Italian-based bank or financial institution, the taxpayer is required to self-report the income on a separate section of his or her Italian income tax return, and compute the 26 percent substituted tax, which adds up to the ordinary income tax due on taxpayer’s general income.

One significant issue arising from Italy’s method of taxation of financial income described above is that no foreign tax credit is allowed to be computed, on the Italian income tax return, for any foreign income tax paid in respect of foreign-source financial income earned from investments held outside of Italy and reported by an Italian resident taxpayer on the Italian income tax return.

Under the general provisions of the Italian income tax code, any foreign tax credit for foreign income taxes paid on foreign-source income is limited by a fraction that bears, at the numerator, the foreign-source portion of the taxpayer’s general income, and, at the denominator, the total amount of the taxpayer’s general income.

Since the income subject to the 26 percent substituted taxed is separately stated on the return and does not fall within the taxpayer’s general income pool, and the 26 percent substituted tax is charged separately from the general income tax due on taxpayer’s general income, the result of the limitation fraction is zero.

The 26 percent substituted tax is mandatory. Neither the provisions of the tax code nor the mechanical steps for the preparation of the Italian income tax return give the taxpayer the election to report the financial income within the general income pool, compute the Italian tax on that income at graduated rates, and compute and take a credit for the foreign income taxes paid on that income to educe the Italian general income tax, even when that computation would lead to a lower tax than the tax computed by charging the 26 percent substituted tax rate.

For American taxpayers living in Italy, the issue affects the taxation of dividends and interest earned from their U.S. investments. Capital gains are generally classified as foreign source, under the U.S. Internal Revenue Code, based on the residency of the taxpayer, which would allow a foreign tax credit in the United States for the Italian substituted tax paid in Italy.

For all other Italian-resident taxpayers (Italian citizens or foreign national alike) which invest outside of Italy, the issue extends to capital gains realized from the sale of shares of or other ownership interests held in foreign entities, and which are subject to tax in the foreign country in which the entity is organized, based on the criteria of the entity’s residency or place of organization. That is particularly true for gains realized from the sale of shares in privately-held company, such as start-ups and the like.

We believe that Italy’s 26 percent substituted tax on financial income, with the denial of a foreign tax credit for foreign income taxes paid on foreign source financial income, is a potential violation of the provision of Article 23 of Italy’s tax treaties. The typical languages of a treaty’s Article 23 requires Italy to grant a foreign tax credit for foreign income taxes paid on foreign source income, and under Italy’s constitutional law system, tax tarries prevail over domestic tax law.

The language of Article 23 of Italy-U.S. income tax treaty appears to support the taxpayer’s position. In particular, the first part of paragraph 3 of Article 23 appears to clearly require that Italy grants the credit, by providing as follows:

“If a resident of Italy derives items of income which are taxable in the United States under the Convention (without regard to paragraph 2(b) of Article 1 (Personal Scope)), Italy may, in determining its income taxes specified in Article 2 of this Convention, include in the basis upon which such taxes are imposed the said items of income (unless specified provisions of this Convention otherwise provide). In such case, Italy shall deduct from the taxes so calculated the tax on income paid to the United States, but in an amount not exceeding that proportion of the aforesaid Italian tax which such items of income bear to the entire income”.

The second part of paragraph 3 of Article 23 allows Italy to deny the foreign tax credit solely in the event that a particular item of foreign income is subject to a flat rate withholding tax separately from the general tax on general income, at the request of the taxpayer:

“However, no deduction will be granted if the item of income is subjected in Italy to a final withholding tax by request of the recipient of the said income in accordance with Italian law”.

As explained above, the 26 percent substituted tax is mandatory, and the Italian income tax code does not grant the taxpayer the ability to declare the income in the general income pool and reduce his or her tax by a credit for the foreign income taxes paid on foreign-source financial income.

We are not aware of any court case, administrative guidance or tax ruling addressing the issue.

Considering the dramatic increase of the substitute tax rate on financial income, which raised from 12.5 percent to 26 percent in the last few years, the issue has clearly become substantial for many taxpayers. It is reasonable to expect that the matter will be brought to the attention for the Italian tax administration, in form a ruling request, or, more likely, the denial of the credit will be challenged and the matter will be ultimately decided by the tax courts or the Supreme Court.

With its resolution n. 53/E issued on May 29, 2019 the Italian tax agency issued some important clarifications on the exact scope of the Italian international tax reporting rules in case of foreign assets held through trusts, foundations or similar entities.

In particular, the ruling focuses upon the interpretation of the term “beneficial owner”, which applies and is used to identify the individuals subject to the duty to report.

Under Italian law (article 4, paragraph 1 of Law Decree n. 167 of 6/28/1990), resident individual taxpayers and non-commercial entities such as foundations and trusts have the duty to report, on a specific section of their Italian income tax return (so called section RW), any assets that they own outside of Italy, which are capable of producing foreign-source income taxable to Italian taxpayers in Italy.

The duty to report falls upon those individuals who are the legal owners of the foreign reportable assets, as well those individuals who indirectly own the assets through intermediaries, fiduciaries, conduits or similar legal arrangements, through which they have the dominion and control over those assets and enjoy the economic benefit of the income arising therefrom.

The term beneficial owner has been enacted to properly extend the duty to report beyond the mere holding of the legal title to foreign assets, to the actual control and enjoyment of those assets and associated income.

The tax statute does not uses its own definition of the term beneficial owner, but, rather, it incorporates by reference the definition of the term beneficial owner which is provided in the anti money laundering legislation.

As recently amended by way of Legislative Decree n. 90 of 2017, which transposed into Italian law the provisions of the EU IV Anti Money Laundering Directive (2015/849/EU), Italian anti money laundering law provides (at the new article 20 of legislative decree n. 231 of 2007) that, in case of private foundations, trusts and similar entities, beneficial owners are: the settlor, the trustee, the guardian, the beneficiaries of the trust, if identified, or the class or classes of persons for the ultimate benefit of which the assets are held in trust.

The issue addressed in the ruling was whether an Italian resident trustee of an Italian resident trust with investments outside of Italy, who falls within the definition of beneficial owner of those investments as provided in the anti money laundering statute, had the duty to report the investments on his own income tax return.

The taxpayer took the position that the meaning of the term beneficial owner as set forth in the anti money laundering legislation, and incorporated by reference into the tax statute, must be interpreted in a way that is consistent with the ratio and overall purpose of the income tax reporting rules, namely that of allowing the tax administration to monitor the existence of foreign assets owned or controlled by Italian resident taxpayers potentially generating foreign source income taxable in Italy. In that context, according to the taxpayer, the trustee should have no duty to report, on his own income tax returns, the foreign assets of the trust that he owns and administer not for his own benefit, but on behalf of the trust and in the interest of the settlor and the trust’s ultimate beneficiaries.

The Italian tax agency, in its ruling approving the position of the taxpayer, confirmed that the tax reporting rules apply in case of foreign investments legally or beneficially owned by Italian resident taxpayers, the income arising from which would be taxable to them in Italy. The objective of the tax reporting rules is to allow the tax administration to monitor those assets and associated income and make sure that such income is properly taxed in Italy, to the taxpayers who own it, whenever the income is realized and a tax becomes due. The tax administration acknowledged that the anti money laundering definition of beneficial owner should not apply literally, but should be interpreted – and narrowed down, if required – so that it is consistent with the scope and purpose of the international tax reporting rules, as previously clarified.

The clarification is very important, in principle, and is relevant also in other situations in which the same issue would arise.

One situation concerns trusts classified as fiscally nontransparent (opaque) trusts for Italian tax purposes, which own investments located outside of Italy. Opaque trusts are those trusts which do not have identified beneficiaries with an immediate right to current distributions out of the income or principal of the trust. In that case, the income arising from the investments held in trust is attributed to and treated as income of the trust, for Italian tax purpose, and it is not immediately taxed to the beneficiaries of the trust, in Italy. Following the logic set forth in ruling 53/E, under those circumstances no duty to report the trust’s foreign assets should fall upon the trust’s Italian resident beneficiaries. Indeed, the trust beneficiaries to do not own those assets, and are not taxable on the income of the trust earned out of them.

Similarly, under the same circumstances, the settlor of the trust who does not retain any right to the principal or income of the trust, should not be subject the duty to report.

It is interesting to monitor the future developments in this area of Italian tax law, in which some uncertainty still lingers with particular regard to tax reporting of foreign assets and taxation of foreign source income of foreign trusts with Italian resident settlor and beneficiaries.

We attach below a link to resolution n. 53/E of May 29, 2019:


With its decision n. 5608 of December 10, 2018 the Italian Provincial Tax Court of Milan ruled against the (ab)use of so called “unit linked” life insurance policies for tax avoidance purposes.

The decision of the tax court refers to the latest rulings of the Supreme Court on the matter and represents a significant step towards a more decisive step towards a crack-down on a potentially abusive tax practice.

Under Italian tax law, in case of cash value life insurance policies a taxpayer is allowed to defer the payment of the tax on the increase in value of the policy until the payment of the value of the policy to the beneficiaries, upon the death of the policyholder, or to the policyholder, upon the expiration or surrender of the contract. At that time, the difference between what the taxpayer gets back and what he or she paid by way of insurance premiums is taxed as income from capital, with a fixed-rate 26 percent tax withheld directly by the issuer.

A Unit-Linked Insurance Policy is a combination of a life insurance and an investment vehicle. A portion of the premium paid by the policyholder is utilized to provide insurance coverage to the policyholder and the remaining portion is invested in equity and debt instruments. The aggregate premiums collected by the insurance company providing such insurance is pooled and invested in varying proportions of debt and equity securities in a similar manner to mutual funds. Each policyholder has the option to select a personalized investment mix based on his/her investment needs and risk appetite. Like mutual funds, each policyholder’s Unit-Linked Insurance Plan holds a certain number of fund units, each of which has a net asset value that is declared on a daily basis and varies based on market conditions and performance of the plan’s underlying investments. A portion of premium goes towards mortality charges i.e. providing life cover. The remaining portion gets invested funds of policyholder’s choice. Invested funds continue to earn market linked returns.

The Tax Court referred to the Supreme Court’s ruling n. 10333 of 2018 which upheld the decision of the Appellate Court of Milan n. 220 or 2016.

According to ruling n. 1033, in the absence of some required traits of a typical permanent life insurance policy, such as the guarantee of the payment of the principal amount of premiums upon termination of the contract and the assumption by the issuer of risk of death of the policyholder (demographic risk), the contract should be treated as an investment plan (i.e. a mutual fund) and the taxpayer should be taxed currently on the income arising from the insurance policy’s underlying investments.

Under the facts of the case, the policyholder (a well known professional soccer player) underwrote an investment plan labelled as life insurance policy and issued by a foreign company, which gave him the unlimited right to make withdrawals from or payments to the insurance plan, during the course of the contract, and the power to direct and manage the investment of the underlying assets, while the issuer’s only obligation was that of paying an amount equal to the net asset value of the underlying investments at the time of the policyholder’s death or the contractual termination of the policy.

The tax court treated the contract as a financial investment, applied the imputed rate of return provided for under article 6 of Law Decree n. 167 of 1990 (in the absence of a taxpayer’s of the actual amount of income generated by the underlying investments), and assessed a tax of euro 64,004 plus interest and a penalty in the amount of euro 76,804.80.

Italian taxpayers should consider different strategies to obtain the benefits of deferral of tax on income arising from their financial investments, such as the use of nonresident discretionary or support trusts properly planned and designed to provide adequate protection of the invested capital and desired benefits in case of death or upon retirement.

A link to the Tax Court’s decision is provided below:
CTP 10-12-2018 n. 5608)

The Italian financial newspaper “Il Sole 24 Ore” reported today that Koering, the French-owned conglomerate which controls some of the most renowned and revered luxury brands in the world, such as Gucci, Bottega Veneta, Saint Laurent, Pomellato and others associated to clothing, jewelry, bags and other luxury products, settled a tax case with the Italian tax agency pursuant to which it will pay to Italy the record amount of euro 1.250 billion in assessed and unpaid income taxes and penalties relating to the period 2011-2017.

The case originates from a criminal inquiry started by the Italian tax police (“Guardia di Finanza”) in the month of December 2017, and was closed on November 27, 2018 with the recommendation to the criminal judge to charge the current and former president and chief executive officer of the Italian company Guccio Gucci S.p.A. with the crimes of tax evasion and failure to file Italian income tax return. Under Italian criminal code, failure to file a tax return when due is independently classified as a tax crime, whenever the unpaid tax due exceed a certain threshold (currently set at euro 50,000) and is punished with imprisonment for a minimum of eighteen months up to a maximum of four years. The general manager of the company who should have filed the tax return is personally liable for the crime. The general provisions of the criminal code would still require criminal intent, but criminal investigators and judges often issue the charge for the crime, leaving it to taxpayers and prosecutors to argue during the criminal proceedings and at trial about the actual existence of the criminal intent, which is a mental state difficult to prove or disprove and often inferred form the circumstances of the case.

The facts of the investigation concern Guccio Gucci S.p.A., the Italian operating company of the group, and Luxury Goods International S.A., a Swiss company of the group based in the Canton Ticino of Switzerland (the predominately Italian language canton sitting at the border with Italy).

Years earlier, the Italian company, owner of the GUCCI brand, had licensed the brand to the Swiss company, together with the rights to exploit and manage the brand for the purpose of the global marketing, commercialization and sale of GUCCI products in Italy and worldwide. According to the investigators, however, most of the marketing activities for the distribution and sale of the GUCCI products actually took place at the premises of the Italian company in Milan. As a result, the investigators took the position that the Italian company, in fact, operated – and should be re-characterized – as a “silent” or undeclared permanent establishment of the Swiss company, and all of the profits of the Swiss company that are attributable to the activities carried out at its “silent” permanent establishment in Italy should be subject to corporate income tax there. In addition to that, the investigators also challenged the transfer prices charged between the two affiliated companies in respect of the license and use of the brand.

A permanent establishment in Italy is subject to the same corporate filing requirements as an Italian incorporated entity, and, for tax purposes, it is treated as a separate taxpaying entity with the duty to file an Italian corporate income tax return, report its Italian taxable income and self-assess the Italian corporate income tax due. int must keep Italian financial books and file a financial return which is the staring point for the calculation of its taxable income in Italy.

As reported in the news, the taxpayer settled the separate tax audit with the Italian tax agency for the amount of 897 million euro in taxes plus interest and penalties for a total amount of 1.25 billion euro, which is a record amount for similar tax cases in Italy. It is worth noting that a criminal tax case and a related tax audit are independent and follow separate paths. The settlement of the tax audit does not automatically terminate the criminal case, which will run its independent course (and will be ultimately decided by a criminal court according to its own interpretation and application of relevant tax law concepts to the facts of the case). The taxpayer’s strategy is that the prompt settlement with the tax agency (and the big bill that will be paid to the Italian Treasury), will help helping the taxpayer to prove its good faith, disprove any criminal intent and ultimately avoid harsher criminal penalties.

Koering is controlled by the French billionaire Francois-Henry Pinault and has a total revenue of 13.6 billion euro and EBITDA of 4.4 billion euro for 2018.

We do not know all of the details of the facts of the case, and we cannot elaborate on the reasons why the taxpayer did not decide to fight the criminal case and related tax audit in court. However, unless the facts were egregiously bad or investigators had found the proverbial “smoking gun”, the circumstance that the case was immediately settled at the outset is telling about the realistic approach taxpayers and their tax advisors sometimes prefer to take, when facing the pressure of a criminal inquiry often used as a tool to extract a quick settlement and the high degree of uncertainty of any possible litigation in court.

On this particular tax issue, the recent decision on the “Dolce & Gabbana” case should probably have offered more comfort and perhaps the incentive to face the inquiry and challenge the tax audit in the tax court. However, that was not the taxpayer’s ultimate decision, and, unfortunately, we will be deprived of the opportunity to hear what the tax department of the Italian Supreme Court would have, and the Court itself will miss the opportunity to right some wrongs of the past and restore Italy’s reputation in front of the international tax community.

Indeed, the attempt to re-characterize a duly incorporated entity as a branch is considered an extreme departure from a fundamental principle of law, which requires that the corporate form be respected, as long as some minimal corporate formalities are met, and is very well settled in the US legal system, where it finds its binding precedent in the decision of the US Supreme Court in the Moline Properties case (Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943).

Such an egregious departure from such a fundamental principle of law is often met with disgust and contributes to the perception of Italy as an unreliable legal system and hostile environment for international investors and multinational companies, to the ultimate detriment of the country.

By way of ruling n. 55/6/2019 filed on January 21, 2019, the Regional Tax Court of Abruzzo held that no withholding tax exemption under the EU Parent-Subsidiary Directive applies, unless the EU parent company proves that it has been “materially charged” with an income tax on the dividends in its own country of residency.

The case concerns a dividend paid by an Italian subsidiary to a EU parent company based in the Netherlands. Upon payment of the dividend, the Italian subsidiary charged the dividend withholding tax at the rate of 27 percent, as provided for under Italy’s internal tax law.

The Dutch parent then filed a petition with the tax agency’s office of Pescara, Abruzzo (in charge with international tax matters, including international tax refund claims), claiming the full refund of the withholding tax pursuant to the EU Parent-Subsidiary Directive.

According to the taxpayer, the dividend withholding tax exemption provided for under the Directive applies whenever the EU parent company is organized in one of the legal forms specifically set forth under the Directive – that is, as a taxable entity falling within the scope of – and liable to – the corporate income tax, in its own residence country. The fact that no income tax is actually paid, on the dividend received by the parent, under a participation exemption tax regime for holding companies, which exempts dividends and capital gains in the parent’s home country, should be irrelevant for the purpose of applying the Directive’s exemption.

The regional tax court (having appellate jurisdiction over Italy’s tax agency’s office in charge of international tax cases) rejected the taxpayer’s argument and held that, with no actual taxation of the dividend in the Member State of the parent, there is no double taxation and no need to apply the exemption from withholding tax in the country of source of the dividend.

The ruling is inconsistent with both the literal language and the rationale of the statute. The Directive provides that no exemption applies whenever the parent company itself, as an entity, is not liable to corporate income tax, or benefits from a tax exemption of general nature and scope. The exemption of a specific item of income does fall within the scope of this exception. The rational of the Directive is that, for the purpose of facilitating the flow of cross-border investments within the EU, the EU Member State which is the source country of the dividend should waive its taxing rights on the amount of profits repatriated to a company based in another EU Member State, after those profits have already been subject to the corporate income tax in that source country, when realized by the distributing company based there, in order to avoid an economic double taxation of the same profits, in two different Member States, upon two different affiliates entities.

The ruling, however, is in line with the most recent decisions of Italy’s Supreme Court on that issue. If appealed to the Supreme Court, it may it will give the highest court of the land another opportunity to revisit the matter. In the meantime, any tax planning structure based on the use of EU holding companies is severely at risk and under great scrutiny and potentially exposed to audits and tax assessments.

In 2015, Italy enacted a special tax regime for high skilled workers who move to Italy to work there for an Italian employer, on assignment to an Italian affiliate of a foreign multinational, or on their own as independent consultants and service providers. Eligible taxpayers (who include Italian citizens, and foreign nationals who are citizens of a country with a tax or exchange of information treaty with Italy) must not have been Italian tax residents at any time during the five years prior to their relocation to Italy, must establish and maintain their tax residence in Italy for at least two years, must own a higher degree or perform managerial or high skill functions, and must work primarily (that is, more than 183 days) in Italy. The 50 percent taxable income deduction is limited to a period of five years and does to apply to other income, not arising from employment or performance personal services.

We reported previously about the special tax regime for foreign high skilled workers in a post issued on July 14, 2018, to which we refer for more details.

The draft legislative decree with urgent measures for economic growth put forward by the Italian Government a few days ago, and referred to as the Growth Decree, would enhance the special tax regime for foreign high skilled workers in many significant respects, including the following:

– eligible taxpayers would include foreign entrepreneurs who move to Italy to carry out a trade or business;
– the taxable income exemption (extended to business income) would increase from 50 to 70 percent, and up to 90 percent for taxpayers who establish their residence in the Italian southern regions,
– the tax exemption period would be extended for additional 5 years, with a 50 percent tax exemption, for taxpayers who, in the 12 months before, or at any time during the first five years after, establishing their residence in Italy, have purchased a residential real property in Italy,
– the tax exemption would also be extended for additional 5 years, with a 50 percent tax exemption for taxpayers with at least one, or 90 percent tax exemption for taxpayers with at least three, minor dependents in Italy claimed on their income tax return.

The special tax regime for high skilled people working or doing business in Italy, coupled with the simplified and visa free procedure for the assignment of foreign personnel to Italian affiliates of foreign-based enterprises, appears to be very attractive, and coupled with the special forfait tax regime for hight net worth individuals and the new 7 percent flat rate tax regime for foreign retirees, makes Italy a very attractive jurisdiction for globally-minded people, entrepreneurs and investors and for foreign multinational groups interested in expanding their business and workforce in Italy.

The legislative process for the draft decree to be become law requires the approval of the Government, and the final passage into law by the Parliament.

With its ruling n. 25219 of October 11, 2018, the Italian Supreme Court held that the capital gain realized by a German company from the sale of its shares of stock of an Italian company is exempt from corporate income tax in Italy, pursuant to Article 13, paragraph 4 of the Tax Treaty between Italy and Germany, except in the case the German holding company has engaged in tax evasion by way of abuse of the Treaty.


Under articles 23 and 151 of the Italian Tax Code, the gain from the sale of stock of an Italian company is Italian source income, and is subject to corporate income tax in Italy to the foreign corporate seller.

However, Article 13, paragraph 4 of the Tax Treaty between Germany and Italy exempts such gain from tax, and allocates the power to tax the gain to the contracting State of which the seller is a resident.


A German company owning all of the stock of an Italian company sold the stock and realized a gain. Pursuant to an exchange of information request to the German tax authority, the Italian tax agency ascertained that the gain had not been reported on the German company’s financial statement or corporate tax return in Germany and had not been subject to tax there. As a consequence, in the absence of any actual double taxation, the Italian tax agency asserted a tax on the gain due in Italy. The Tax Court in the first instance and the Appellate Court on appeal ruled in favor of the Tax Agency.

Supreme Court’s Holding

Based on the ruling, the fact that the German company is a resident of Germany and qualifies for the benefits of the German-Italy Tax Treaty is not in dispute. According to the Court, the absence of tax on the gain in Germany does not, in and on itself, and without further evidence of abuse, authorize Italy to apply its own tax, considering that the German-Italy Tax Treaty (at paragraphed 4 of Article 13) reserves the taxing power on the gain to the country of residence of the seller.

However, the Court added that the conclusion might be different (and Italy may have a case in asserting its own taxing power on the gain) if, pursuant also to the exchange of information between the taxing authorities of the two Contracting States, it appears that the German company is an artificial arrangement that engaged in tax evasion by abusing the benefits of the Treaty.

Unfortunately, the ruling is extremely brief and does not provide any further detail. Most likely, the Italian Tax Agency did not advance the tax evasion or treaty abuse argument and based its claim solely on the absence of double taxation due to the non taxation of the gain in Germany.


A reasonable takeaway from the ruling is that the exemption of the gain from tax in the country of residence is not sufficient to prevent the application of the Treaty and allow the taxation of the income in the country of source (Italy), unless the stock holding company in the country of residence is abusive and set up solely for the purpose of getting the benefit of the tax exemption under the Treaty.

The ruling is not entirely consistent with two other rulings from the Supreme Court, which – in a different legal context – held that the withholding tax exemption for EU inter company dividends does not apply when the dividends are not tax in the country of residence of the recipient.