The Italian Supreme Court with its ruling n. 25264 of October 25, 2017 (Cassazione n. 25264 of 10-25-2017) held that actual payment of the corporate income tax in the parent company’s home jurisdiction is required for the parent company to benefit from the dividend withholding tax relief under the EU Parent Subsidiary Directive (the “EU Directive”) or Italy-The Netherlands Double Tax Treaty (the “Treaty)”.

FACTS

Under the facts of the case, an Italian company controlled by a Dutch company (organized as a “naamloze vennootschap” or N.V., which is a type of entity falling within the scope of Dutch corporate income tax) paid a dividend to its parent and applied the 5 percent reduced dividend withholding tax rate under the Italy-The Netherlands Double Tax Treaty.

The Dutch parent filed a request for refund of the 5 percent withholding tax, pursuant to the EU Parent Subsidiary Directive n. 2003/123/EC of December 22, 2003 amending Directive 90/435/EEC (EUR-Lex – 31990L0435 – EN).

The Italian tax agency assessed the full 27 percent dividend withholding tax under article 27 of Presidential Decree n. 600 of 9/30/1973, on the theory that the Dutch parent company failed to satisfy the requirements for the withholding tax relief, under the EU Directive as well as the Treaty, because (1) it had not been subject to tax in the Netherlands on the dividend it received from its Italian subsidiary, and (2) it did not submit any valid evidence that it was the beneficial owner of the dividend.

According to the Italian tax agency, “subject to tax” requires evidence of the actual accrual of the tax liability and payment for the corporate income tax, as opposed to just a potential tax liability associated with the legal form and general tax status of the entity in its home country.

The Supreme Court ruled in favor of the tax agency on the “subject to tax” issues, thereby denying the benefits of the Directive and the Treaty.

LAW

Under the EU Directive, profits distributed by a company of a EU member state to a company of another EU member state which owns at least 10 percent of the capital of the company distributing the profits, are exempt from withholding tax in the distributing company’s member state.

Pursuant to article 2 of the Directive, for the exemption to applies it is required that the recipient of the dividend is subject to corporate income tax in its home country (vennootschapsbelasting in the Netherlands).

Under article 10 of the Treaty (nethe-en), a Dutch company is entitled to a 5 percent reduced withholding tax rate on inter company dividends received from its Italian subsidiary, provided that it a resident of the Netherlands, which, in turn, requires that it is liable to tax there.

ISSUE AND RULING OF THE COURT

The case revolved around the contraction and exact meaning of the terms subject to tax, used in the Directive, and liable to tax used in the Treaty.

According to one interpretation, those terms require solely potential taxation, meaning that, based on its legal form and tax status, an entity is generally treated as a taxpaying entity falling within the scope of the corporate income tax, while the fact that it may not be actually subject or liable to a tax as a result of a participation exemption or similar tax regime applicable in its home country is not relevant.

According to another interpretation, those terms requires the actual rising of a lability for the corporate income tax in connection with the receipt of the dividends, and the actual payment of that tax.

The Supreme Court observed in its ruling that the Dutch company recipient of the dividends had furnished a tax residency certificate issued by the Dutch tax authorities, but failed to demonstrate that it actually met all the requirements for the withholding tax relief, such as the proof of the “actual payment of the corporate income tax, in connection with the distribution of the dividend”.

The ruling is not entirely consistent with the tax administration’s guidance on the issue, which we refer to below.

ADMINISTRATIVE GUIDANCE

Circular 26/E of May 21, 2009 provides clarifications on the “liable to tax” requirement that applies for the purposes of the reduced withholding tax on Italian dividends paid to EU companies.

The first clarification reads as follow: “With reference to the second requirement” (the subject to tax requirement) “it must be pointed out that the condition of passive subject of the local corporate income tax must be interpreted as a general liability to tax, which occurs in all those situations in which a company is potentially liable to a corporate income tax, even though in certain circumstances it may benefit from beneficial tax regimes that are compatible with EU legislation”. As a result, all companies or entities to which is assigned general liability for the corporate income tax should qualify for the reduction, including those entities that do not owe the tax by virtue of special tax exemption regimes linked to the type of income they earn (e.g. passive income) or the place where they operate. On the other hand, companies and entities that do not fall within the area of application of the corporate income tax, do not qualify for the reduction.”

Circular 26/E refers to Circular n. 47 of November 2, 2005, which provides clarifications on the liable to tax requirement that applies for the purposes of the exemption from withholding tax for interest and royalties paid to a EU affiliate under the EU interest and royalties directive. Circular 47/E (referred to in Circular 26/E), in the relevant part, reads as follows: “With respect to the last requirement [the liable to tax requirement], it must be interpreted as a general or potential liability to tax. Therefore, according to what is clarified above, the benefit [of the exemption from withholding tax on interest and royalties] must be considered applicable to all those companies that, despite being potentially subject to corporate income tax, in fact benefit from special tax regimes compatible with EU law”.

The tax administration with its Circular 32/E of July 8, 2011 confirmed the above interpretation of the term liable to tax, when providing guidance on the refund of past withholding taxes charged on dividends to EU companies in excess of the new 1.375% rate instated pursuant to the decision of the European Court of Justice that declared the 27% outbound dividend tax in violation of the non discrimination principle of the EU Treaty. In Circular 32/E the administration clarified that EU companies eligible for the refund include all entities that “are passive subject of the local corporate income tax. Such condition must be interpreted as a general subjectivity to the tax, and it is satisfied for all companies potentially liable for the tax, regardless of the fact that they may benefit from special favorable tax regimes compatible with EU law. As a result, the reduced rate can apply to all companies or entities to which a general liability for the corporate income tax is assigned, including those that do not pay the tax due to exemptions linked to the type of income they earn (e.g. exemption of passive income) of the place in which their activity is carried out. On the other end, foreign companies and entities that do not fall per se within the scope of the tax do not qualify.”

CONCLUSIONS

The Supreme Court’s ruling is not well explained or thoroughly elaborated. That may very well be a direct result of lack of clarify and comprehensive briefs or a defective discussion of the case on behalf of the taxpayer.

As a result, it may be prudent to wait before reading too much into it going beyond the specific case and the way in which it was litigated and argued in court.

Still, the rather harsh conclusion of the Court, holding that evidence of the actual payment of the corporate income tax in connection with the receipt of the dividends to benefit from the withholding tax relief under the EU Directive (or the Treaty), is troubling, and sufficient to raise the level of awareness on a very sensitive and not entirely settled issue of international tax law.

With its ruling n. 975 issued on January 18, 2018 Italy’s Supreme Court held that the transfer of an asset (real estate property) to an irrevocable trust falls outside the scope of Italy’s registration, cadastral and mortgage taxes (transfer taxes), charged at the aggregate rate of 10 percent, on the theory that it is a transitory step before the final transfer of the property to the beneficiaries of the trust actually occurs, at which time the transfer taxes should apply.

The ruling is consistent with a previous decision of the Supreme Court on the same issue, that is, ruling n. 21614 of October 26, 2016 (which we also commented upon on this blog).

The question is whether the ruling extends to the gift tax, which replaces the registration tax for gratuitous transfers taking place from October 25, 2006.

The ruling concerns facts occurred before the reenactment of Italy’s estate and gift tax. The issue in front of the Court was to determine whether the transfer of real property to a trust was subject to the registration, cadastral and mortgage taxes (usually referred to as transfer taxes or indirect taxes), which are charged at the rates of up to 7 percent, 2 percent and 1 percent of the value of the transferred property.

The property was transferred to an irrevocable trust that specifically identified the beneficiaries of the corpus of the trust, their shares of the principal of the trust and the time at which the trustee would be requested to distribute the trust’s assets to the trust’s beneficiaries.

The Court ruled that the transfer of the property fell outside the scope of the transfer taxes because it did not fit within any of the enumerated categories of legal arrangements to which the transfer taxes should apply, namely (1) transfers for consideration (“atti traslativi a titolo oneroso”), (2) other transfers concerning legal or contract performances with an economic value (“atti diversi aventi ad oggetto prestazioni a contenuto patrimoniale, or (3) acknowledgements (“atti di natura dichiarativa”).

According to the Court, the transfer of the property to the trustee with instructions to hold and administer it in trust in the interest of the trust’s beneficiaries, for a certain period of time and until the conditions are met to proceed with the final distribution of the property to the trust’s beneficiaries, is a transitory step that is part of a legal arrangement designed to procure the final and definitive transfer of the property to certain beneficiaries at a future time. With reference of such a legal arrangement, the Court held that the transfer taxes should apply solely at the time of the actual, final transfer of the property from the trustee to the beneficiaries of the trust.

According to one interpretation, the ruling supports the principle according to which the gift tax (which applies in lieu of the registration tax with respect to gratuitous transfers completed after the re-enactement of Italy’s estate and gift tax with effect from October 25, 2006) should apply only at the time of the final distribution of a trust’s property to the beneficiaries of the trust, when the beneficiaries eventually acquire the unconditional legal ownership rights to the property and receive the full enjoyment of the economic value of the gift, rather than at the time of the transfer of the property to the trust, when the property is temporarily held in trust and administered in the interest of the beneficiaries.

Article 2, paragraphs 47 and 49 of Legislative Decree n. 262 of 2006 (finally enacted into law by way of Act n. 286 of 2006), reinstated Italy’s estate and gift taxes, as originally instituted and governed under Legislation Decree n. 346 of 1990 effective from 1/1/1991 and temporary repealed in October 2001. For gratuitous transfers from a donor to a donee, the gift tax applies at the rate of 8 percent, in lieu of the registration tax. For real estate properties, the cadastral and mortgage tax, at the rate of 2 and 1 percent, are still due on top of the gift tax. For close family members (spouse, parent, children, grandparents, grandchildren), a lifetime exemption of up to one million euros for each beneficiary applies, and the gift tax is charged at the reduced rate of 4 percent.

The gift tax historically applied only to straightforward gifts, as defined in the Civil Code, that is, gratuitous transfers of a property or other valuable economic interests from a person – the donor – to another person – the donee, whereby the recipient of the gift, or donee, would have immediate legal rights to and enjoy the full economic benefit of the gift.

Under the original estate and gift tax statute, the application of the gift tax in the event of a transfer of property through a trust, was unclear. The transfer of a property to the trustee of a trust was not be subject to the gift tax, because the trustee, as the immediate recipient of the property, typically does not have full legal rights to and economic benefit from the property, which he administers in trust for the ultimate benefit of the beneficiaries of the trust, while the beneficiaries of the trust do not receive the property until it is distributed to them out of the trust pursuant to the terms of the trust agreement.

At the time of distribution of the property from the trustee to the beneficiaries of the trust, the gift tax would not apply because the trustee distributes the property to the beneficiaries pursuant to a legal arrangement that does not fall within the legal definition of gift that is subject to the gift tax.

The original estate and gift tax statute, resurrected in 2006, was amended with the addition of a specific reference to deeds or other legal arrangements resulting in the creation of a legal restriction to or constraint on the final disposition of property (“atti costitutivi di vincoli di destinazione”).

The main purpose of the amendment was to bring trusts within the scope of the reenacted gift tax.

The tax administration, in its administrative guidance on the application of indirect taxes to trusts (provided with Circular n. 48/E of August 6, 2007 and n. 3/E of January 22, 2008), took the position that the new category of “legal arrangements resulting in the creation of a legal restriction to or constraint on the final disposition of property” refers to and includes the transfer of a property into a trust, whereby the property is subject to the legal restrictions set forth in the trust agreement, with respect to its administration and disposition, before it can be distributed to there beneficiaries of the trust. As a result, according to the Italian tax administration’s position, the gift tax applies at the time of the transfer of the property into the trust. Later, when the property is distributed out of the trust to the trust’s beneficiaries, no second tax would apply.

The Supreme Court agreed with the tax administration in a number of decisions issued in respect of transactions taking place under the newly reenacted and amended estate and gift statute. Those decisions include ruling n. 3735 of February 24, 2015 (concerning a self settled trust subject to gift tax at the full rate of 8 percent); ruling n. 3737 of February 24, 2015; ruling n. 3886 of February 25, 2015 (also concerning a self settled trust taxed at the full rate of 8%); ruling n. 5322 of March 18, 2015 and ruling n. 4482 of March 7, 2016.

More recently the Supreme Court, when addressing cases concerning transactions completed before the reenactment of the amended estate and gift tax statues, held that in light of the temporary and transitory nature of the transfer of a property to a trust, whereby the property is placed and held in trust, and is not immediately transferred to the intended final recipient and beneficiary, outright, the registration tax at the rate of 8 percent should apply. Ruling n. 975 is the last one on the issue, following previous ruling n. 25478 of December 18, 2015 and ruling n. 21614 of October 26, 2016.

According to one interpretation, the rational of those rulings extends to the realm of the newly reenacted gift tax and con-validates the principle according to which the gift tax should apply at the time of the final transfer of the property out of the trust to its final beneficiary. According to this interpretation, the new language added to the revised gift tax statute does not create an additional stand alone category of transactions subject to gift tax but, rather, it has the sole function of making it clear that the gift tax actually applies also to gratuitous transfer of property made through a trust, as it applies to straightforward gifts.

Clearly, the narrow interpretation of the scope of the Italian gift tax with respect to transfer of properties through trusts, is inconsistent with the way in which the gift tax applies in the U.S. Under U.S. principles, generally the transfer of property into an irrevocable trust is a complete gift, which falls within the application of the federal gift tax. Simultaneously, under Italian law, according to the interpretation illustrated here above, a complete gift would occur solely at the time of the final distribution of the property out of the trust, to the trust’s beneficiaries.

As a consequence, Americans with properties held in irrevocable trusts might be inadvertently exposed to Italian gift tax, at the time the property is distributed to the beneficiaries of the trust. That would happen whenever the original settlor is resident in Italy, for Italian gift tax purpose (in which case, all of the properties held in trust, wherever located in the world, would potentially be subject to Italian gift tax, based on the tax residency or domicile of the settlor), or some or the properties held in trust are located in Italy (in which case those properties might be subject to Italian gift tax, based on the location of the property and regardless of the tax residency or domicile of the settlor).

In conclusion, trust planning for individuals who have establish or are planning to move their tax residency or domicile into Italy, or held Italian properties in trust, should be reviewed to address Italian estate and gift tax issues in a very uncertain area of law.

With the Budget Law for 2018 (Law n. 205 of December 27, 2017), Italy amended the definition of the term “permanent establishment” set forth in article 162 of the Italian Tax Code.

The term permanent establishment now covers situations in which a foreign enterprise does not have a physical nexus with Italy, but it has a regular and continuous economic presence in the country; engages in ancillary activities that are an essential component of its corse business, or operates through commissioners or other agents who do not enter into contracts in the name of the enterprise, but procure the conclusion of contracts that are eventually signed by the principal with no material modifications.

As a result of the amendments enacted with the Budget Law, the scope of the term permanent establishment as defined under domestic law is significantly expanded, creating more situations in which a foreign enterprise may be subject to tax in Italy.

The domestic law definition of the term permanent establishment does not overrule that of article 5 of Italy’s tax treaties. Under Italian constitution law, tax treaties are international law and prevail over domestic law. To the extent that a tax treaty contains a narrower definition of the term permanent establishment, the tax treaty definition applies.

The first change concerns the enactment of the economic nexus rule, pursuant to which a permanent establishment of a foreign enterprise in Italy exists whenever the foreign enterprise’s activities result in a “regular, continuous and significant economic presence within the territory of the country”. Physical presence is no longer required for the existence of a permanent establishment and the consequent taxation of a foreign enterprise in Italy. Simultaneously, the tax code provision that excluded the presence of a permanent establishment for the sole reason of the location in Italy of electronic equipment used for the collection and transmission of data relating to the sale of goods and services has been repealed.

The new provision on the economic nexus would seem to originate from and be consistent with the OECD final report on the tax challenges of the digital economy (Action 1), released under OECD’s Action Plan on Base Erosion and profit Shifting (BEPS) on October 15, 2015.

The second change concerns the enactment of an additional requirement to the negative list of activities which are excluded from the definition of permanent establishment. For the exclusions to apply, it is required that each of those activities be preparatory or auxiliary in nature. A preparatory activity precedes the enterprise’s core business activities, while an auxiliary activity supports, but is not an essential and significant part of, the activity of the enterprise as a whole.

The new provision is consistent with clarifications provided in the Commentary to Article 5 of the 2017 OECD Model Income Tax Convention, at paragraph 60(“2017 OECD Model Treaty”), and with option A of Article 13 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base erosion and Profits Shifting, signed on June 7, 2017 (“Multilateral Tax Convention”)

The third change concerns the enactment of the anti fragmentation rule pursuant to which the preparatory or auxiliary exception does not apply whenever the combination or aggregation of auxiliary or preparatory activities, together with other activities performed by the same or a closely related enterprise, in the same space or fixed place of business, constitute a permanent establishment. For the purpose of the anti fragmentation rule, two enterprises are closely related if one directly or indirectly controls the other or the two are directly or indirectly controlled by the same enterprise.

The anti fragmentation rule seems to be consistent with article 13 of the Multilateral Convention and reflects the clarifications provided in the Commentary to Article 5 of the 2017 OECD Model Treaty, at paragraph 79.

The fourth change concerns the definition of "dependent agent" permanent establishment. A permanent establishment now includes a dependent agent who habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are: a) in the name of the enterprise; or b) for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use; or c) for the provision of services by that enterprise. The new provision covers commissionare arrangements, whereby the agent does not sign contracts in the name of the enterprise, but promote the conclusions of contracts that are entered into by the enterprise without material modifications.

The new rule reflects the provisions of article 12 of the Multilateral Tax Convention, and implements the Action 7 of BEPS.

Although the new definition of the term permanent establishment in the Italian Tax Code does not overrule article 5 of Italy's existing tax treaties, Italy will move towards a renegotiation of its tax treaties pursuant to the Multilateral Tax Convention, ultimately enforcing the same concept and achieving consistency between international tax law of treaties and domestic tax law.

In the meantime, the Italian tax administration may be tempted to interpret and apply the permanent establishment provisions in Italy's current tax treaties taking into account the new rules, pursuant to a general anti abuse principle, to expand the potential taxation of foreign enterprises in Italy.

As a result of the significant reduction of U.S. corporate income tax rates pursuant to the tax reform of the TCJA enacted on December 22, 2017, the Unites States now has a lower corporate tax rate than many of its trading partners, meaning that, in many instances, the profits of foreign owned or controlled-U.S. subsidiaries shall be taxed more favorably than the profits of their foreign parent companies or affiliates in their home jurisdictions. That creates an incentive for foreign companies to channel more profits through their U.S. subsidiaries, in order to benefit from lower U.S. income taxation compared to that applicable in the parent company’s home country.

Starting in 2018, the U.S. taxes the profits of its corporations at the generally applicable corporate tax rate of 21 percent, with a preferential effective tax rate of 13.125 percent applicable on certain income deriving from foreign sales of goods and services (“foreign derived intangible income”). Those rates compare to the Italian combined corporate tax rate of 27.9 percent.

Italian companies with U.S. and international sales may benefit from a significant tax reduction by increasing their workforce and activities in the U.S. and handling more of their U.S. and internationals sales through their U.S. subsidiaries. Once the U.S. subsidiary has been taxed on its profits in the United States, it can repatriate those profits to its Italian parent virtually tax free, thanks to a substantial reduction of the inter company withholding tax rate under the U.S.-Italy income tax treaty (5 percent) and an almost complete exemption of the dividends from Italian tax in the hands of the Italian parent, pursuant to Italy’s participation exemption rules.

Under the new scenario described above, renewed attention should be given to Italy’s corporate “anti-inversion” rules. Under Italian income tax code, a company incorporated or organized in a foreign country is treated as an Italian resident company, for Italian corporate income tax purposes, and is subject to tax in Italy on its worldwide income, if it maintains its place of administration or its principle place of business in Italy. Also, a company owned or controlled by Italian shareholders, and owning or controlling a foreign company, is presumed to be an Italian resident company, unless the taxpayer proves that it is effectively managed and controlled in its own country of organization.

A company’s place of administration is the place where the company’s day to day management activities are carried out. According to the general guidelines issued by the Italian tax administration on this matter (see Protocol n. 2010/39678 of 3/19/2010 and 2010/157346 of 12/20/2010), several factors are looked at to determine a company’s place of administration, including:

– the place where the company’s directors and officers meet and vote upon company’s affairs;
– the place where the company’s directors and officers actually and regularly carry out their administration and management functions and duties for the company;
– the place where the company’s day to day legal, administrative, accounting and tax management functions are performed.

Italy’s Supreme Court ruled that a company’s place of administration is the place of effective management of the company, namely, the place where the day to day administrative activities for the company take place, shareholders’ and directors’ meetings are held, and company’s business activities are carried out, putting the company is connection with customers, business partners and third parties (see Supreme Court’s ruling n. 2869 of 2/7/2013).

The company’s place of administration should be distinguished from the place where the supervision, coordination and direction of a company’s business is performed, typically, at the headquarter of the parent or holding company. The sole fact that a company’s is wholly owned or controlled by another company, does not, in an on itself, produce the automatic effect of locating the company’s place of management at the same place as its parent’s headquarter, and day to day managements activities should not be confused with key direction, supervision and coordination activities that fall within the parent or holding’s company’s duties and functions (see ruling n. 61 of 1/18/2008 of Regional Tax Commission of Tuscany, Section XV).

A company’s principal place of business is the place where the company’s main business activities are performed. For example, a manufacturing company has its place of business where it perform most of its manufacturing activities; a marketing or selling company has its principale place of business where its principal sales office conducting most of its sales is located, and a services company has its principally place of business in the place where it performs most of its services to its customers.

Italy’s tax administration has been enforcing the place of management or principal place of business rules in situations involving U.S. companies owned of controlled by Italian companies, despite the fact that those U.S. companies were subject to a 35 percent corporate tax rate on their profits taxable in the United States, and no apparent tax saving was involved. Typically, those U.S. companies never file any income tax return in Italy. As a result, Italy’s tax administration assesses failure to file penalties, equal to minimum 120 percent and maximum 240 percent of any Italian tax due, on top of the Italian corporate income tax on all of the profits of the U.S. company. Furthermore, since no foreign tax credit is allowed under the Italian tax code when no Italian income tax return has been filed, the claim for a credit for the U.S. taxes paid by the U.S. company on its U.S. taxable profits is denied, leading to complete double taxation.

It is reasonable to expect increased enforcement activity of the place of administration rule, from the Italian tax administration, now that the corporate rate differential between Italy and the United States create a clear incentive to concentrate more profits in the United States, achieving a potentially significant tax saving.

Many small and mid size U.S. subsidiaries owned or controlled by Italian companies share their Italian directors and officers with those of their parent company, have a very limited governance structure and actual administrative activities carried out in the U.S., and perform accounting and administrative functions for their U.S. companies from Italy. Those companies should establish a more robust corporate governance, which includes local directors or officers; set up and carry out local administrative, legal, accounting and tax functions through local professionals reporting to local management; have the proper set of contracts with their parent or holding company, governing any inter company supporting administrative or commercial services they receive from their parent or other affiliates in the same group, and maintain accurate records of all functions and activities pertaining to the company’s administration performed in the United States, to rely upon in a possible audit.

Pursuant to the Tax Cuts and Jobs Act (“TCJA”) passed on Dec. 22, 2017, the U.S. will tax U.S. corporations with the following tax rates:

– 21 percent general corporate income tax rate,
– 13.125 effective tax rate on U.S. corporation’s foreign derived intangible income (“FDII”), for taxable years from 2018 through 2025;
– 10.5 percent effective tax rate on the U.S. corporation’s pro rata share of global intangible low taxed income (“GILTI”) of a controlled foreign corporation (“CFC”).

FDII is the portion of U.S. corporation’s net income (other than GILTI and certain other income) that exceeds a deemed rate of return of the U.S. corporation’s tangible depreciable business property and is attributable to foreign sales (i.e., property sold to a non-U.S. person for foreign use) and foreign services (i.e., services provided to any person outside of the U.S.). The U.S. corporation is entitled to a deduction equal to 37.5 percent of its FDII. The application of the 21 corporate tax rate on the 62.5 percent taxable portion of FDII results in an effective tax rate of 13.125 per cent (for taxable years after 2025, the deduction is reduced to 21.875 percent, equal to an effective tax rate of 16.406 percent).

GILTI is the portion of a CFC’s net income (not otherwise taxed currently to its U.S. shareholders) that exceeds a deemed rate of return of the CFC’s’s tangible depreciable business property. GILTI is included in the taxable income of U.S. corporate shareholders of the CFC and taxed at an effective tax rate of 10.5 percent. The U.S. corporation is entitled to a deduction equal to 50 percent of the amount of GILTI. The application of the corporate tax rate of 21 percent to the 50 percent taxable portion of GILTI results in an effective tax rate of 10.5 percent. The profits of the CFC that have been included into the taxable income of the U.S. corporation and taxed as GILTI can be paid as dividends without any additional U.S. tax.

A potential implication, in Italy, of the new corporate income tax rates applicable in the U.S. is the classification of United States corporations as “black listed” controlled foreign corporations subject to Italy’s anti deferral rules.

Until 2015, Italy operated its CFC rules by limiting their application to foreign corporations controlled by Italian shareholders and organized in one of the countries included in a specific list of tax favorable foreign jurisdictions, usually referred to as “black list”.

Starting with tax year 2016, the “black list” has been replaced by a general test based on a comparison between Italy’s and foreign countries’ corporate income tax rates.

The general test provides that a foreign country is considered a black-list jurisdiction, for purposes of Italy’s CFC rules, whenever its nominal corporate income tax rate is less than half of Italy’s corporate tax rates. For this purpose, reference is made to Italy’s 24 percent corporate tax (IRES) rate and 3.9 percent regional tax (IRAP) rate, which combine for a total rate of 27.9 percent.

A special test requires to take into account any special corporate tax regime applicable in a foreign country with respect to taxation of corporate profits. The term “special tax regime” is defined to include any favorable tax provision that results in a lower effective corporate income tax rate, due to exemptions or deductions that reduce the tax base for the application of the general corporate income tax rate. Exemptions or deductions with respect to profits deriving from foreign activities falls within the definition of “special tax regime”.

When a foreign country operates a corporate tax system that provides for a different tax treatment of different categories of income, such as, for example, a system in which foreign income is taxed more favorably than domestic income, an “all or nothing rule” applies pursuant to which, if more than 50 percent of the foreign corporation’s income is subject to an effective tax rate which is lower than the foreign country’s general corporate tax tax rate and less than half of Italy’s nominal corporate income tax rates, the foreign corporation is deemed to be organized in a black listed country and all of its income is treated as income of a controlled foreign corporation taxable to its Italian shareholders on a current basis. For the purpose of the all or nothing rule, a determination is required to be made on a company by company and tax year by tax year basis.

The U.S. general corporate tax rate of 21 percent does not fall below the “less than half of the Italian corporate income tax rates” standard for the general CFC test. However, the 13.125 percent effective tax rate on FDII clearly does (13.125 is less than half of the 27.9 combined Italian tax rates). As a result, when more than 50 percent of the taxable income of a U.S. corporation directly or indirectly controlled by Italian shareholders is FDII and is subject to an effective tax rate of 13.125 percent in the U.S., then all of that U.S. corporation’s income is treated as income of a CFC taxable currently to its Italian shareholders. The fact that the income derives form genuine business transactions carried out with unrelated parties does not matter.

Italian shareholders are entitled to prove that a U.S. corporation is engaged in an active trade or business, representing its principal business activity, within the United States, and exclude the application of the CFC rules. A tax ruling may (but need not) be filed and a positive response would be binding upon the tax administration.

Now that the corporate tax rate differential between Italy and the United Sates makes it advantageous, for Italian taxpayers, to conduct international business activities through their U.S. subsidiaries or affiliates, and allocate more profits to the U.S. where they would be taxed at lower rates, it is reasonable to expect increased enforcement of Italy’s CFC rules by the Italian tax administration.

Italian taxpayers should review their U.S. controlled companies and take the proper steps to make sure they do not run afoul of Italian CFC rules.

On December 22, 2017 the United States passed a new tax law referred to as the Tax Cuts and Jobs Act (“TCJA”).

Given certain changes made to the federal income tax laws by the TCJA (the “Act”), privately held businesses should reconsider their tax structure to determine whether it is more advantageous to conduct their businesses as pass through entities or sole proprietorships or, alternatively, as C corporations.

The Act permanently reduces the maximum incremental federal corporate income tax rate from 35% to a flat 21% tax rate effective for taxable years beginning after December 31, 2017, reduces the maximum incremental income tax rate on individuals from 39.6% to 37% for taxable years 2018 through 2025 (reverting to the pre-Act rates after 2025), and leaves the income tax rate on capital gains imposed on non-corporate taxpayers unchanged at 15% or 20% (25% for unrecaptured section 1250 gain).

In addition, the Act provides for a new 20% deduction for so-called “qualifying income” of businesses conducted through pass through entities or as sole proprietorships that could, where the deduction is applicable without limitation, reduce the maximum effective federal income tax rate on such income from 37% to 29.6%.

At the same time, for individuals for taxable years 2018 through 2025, the Act limits the deduction for state and local income taxes (whether or not related to a trade or business) and real property taxes unrelated to a trade or business or investment to $10,000 (without adjustment for inflation) and eliminates the deduction for miscellaneous itemized deductions (including legal and accounting fees for the determination of any tax).

In some cases, being treated as a corporation may offer a significant advantage over operating as a pass through. There are a variety of factors favoring corporate status, including the new 21% corporate tax rate, higher ordinary income rates for individuals, the availability of an unlimited deduction for state and local corporate income and property taxes, reduction in self-employment tax for shareholders who are active in management of the business, the potential for deferral of federal income taxation at the shareholder level, possible avoidance of current state and local income taxation at the shareholder level on dividend income (versus current state and local taxation of income from pass through entities regardless of the owner’s state of residence), and the exclusion of gain from the sale of qualifying small business stock.

In addition, on an international level, C corporations (unlike individuals and pass through entities) that derive income from the sale of goods or provision of services, as well as lease of tangible property or license of intellectual property, to foreign customers (for use or consumption outside of the United States), enjoy a reduced corporate tax rate of 13.125 (rising to 16.406 percent starting from 2026) on profits attributable to those sales (reduced by an amount equal to 10 percent of adjusted basis of the corporation’s tangible depreciable property), subject to a taxable income limitation. The reduced rates apply even when the goods and services are manufactured or performed in the United States.

Also, C corporations which are US shareholders of a controlled foreign corporation, are taxed currently on part of the profits derived through that corporation at the reduced rate of 10.5 percent, as opposed to the marginal rate of 37 percent that would apply to US individual shareholders.

Taken as a whole, these factors may create a bias toward operating as a C corporation, particularly where a business is growing and its earnings are being reinvested in the business, or a significant portion of the income of the business is derived from foreign sales.

On March 15, the deadline expires to retroactively elect C corporation status for the 2018 calendar year for S corporations, pass through entities and sole proprietorships, or elect to be an S corporation.

Taxpayers should address, through an in depth analysis of various scenarios, the income tax considerations of conducting business as a C corporation as opposed to as an S corporation or other pass through or sole proprietorship. In addition to the obvious federal income tax considerations, they should consider the potential application of the personal holding company and accumulated earnings taxes as well as state and local income taxes.

Italian international tax law rules provide that Italian tax residents with foreign financial accounts capable of generating foreign source income taxable in Italy, are under the obligation to disclose the information relating to those accounts to the Italian tax authorities. Disclosure is accomplished by filling out a proper section of the Italian personal income tax return, usually referred to as Section RW (“RW”). Form RW is the Italian equivalent of U.S. forms 8938 and FIN Cen 114, which are filed by U.S. citizens and resident taxpayers to report their foreign financial accounts to the U.S. tax administration (except that, generally, the scope of Italian reporting is more extensive and detailed than the reporting required in the United States).

Compliance with Italian international tax reporting rules is backed up by automatic exchange of financial and tax information between Italy and the United States which have entered into a bilateral agreement pursuant to FATCA, currently fully enforceable and running at full speed.

Nowadays, automatic exchange of information between Italian and U.S. fiscal authorities is a reality and its practical consequences cannot be overstated. In this setting, it does not go unnoticed that the more the time goes by, the more the RW reporting becomes a sensitive topic. It is for this reason that individual taxpayers who are resident in Italy, according to Italian internal law, and own or control foreign financial assets capable of generating taxable income in Italy, represent the category of taxable persons that should be extremely cautious in this regard to prevent undesirable consequences.

Failure to comply with RW reporting may lead to heavy penalties. Previous posts illustrate in more detail the scope, requirements and penalties for non-compliance. A confirmation of the current tax climate regarding RW reporting is the Italian Revenue Agency’s order n. 299737-2017, by which the Italian tax administration, relying on information available through the automatic exchange system, has sent several thousands of notices to taxpayers who appear to possess foreign financial accounts that may not have been properly reflected on their last filed Italian income tax return (relating to tax year 2016).

The notices alert taxpayers about potential issues concerning their tax compliance and ask for information before a potential audit of their personal income tax returns. Thus, in light of an increase of monitoring activities in relation to the automatic exchange of information, natural persons with foreign financial assets capable of generating taxable income, should make sure that they file an accurate and complete RW form within the prescribed deadline.

Following receipt of the notices, taxpayers who have reason to believe they may have failed to properly report their foreign financial accounts, should be aware of the opportunity to remedy potential issues, by filing an amended return within the extended deadline of one year following the deadline for the filing of the original return.

Voluntary compliance by amended return filing can help fix possible issues with reduced penalties, avoiding higher penalties potentially applicable in case of a full audit.

Taxpayers who have received such a notice should consider carefully the kind of initial response they want to send, and plan in advance any further steps to take, in order to properly handle their situation and prevent or better manage a possible deeper investigation of their tax position.

Italian taxation of foreign investments in Italian real estate is complex.

Transfer taxes charged upon the acquisition of the real estate (alternatively, registration tax or VAT) vary depending on the nature and tax status of the buyer (foreign private individual, foreign company purchasing and owning the real estate directly, or foreign individual or corporate investor purchasing and owning the real estate through an Italian controlled entity), as well as the nature and tax status of the seller (private individual vs. unincorporated business or commercial company registered as a VAT taxpayer).

Income taxes charged on rental income derived from the operation of the real estate vary depending on the character of the real estate (residential vs. commercial).

Income taxes charged upon the sale of the real estate vary depending on whether the real estate is owned directly by a foreign individual or a foreign company without a permanent establishment in Italy, or by a foreign company with a permanent establishment in Italy through which the real estate is operated in the active conduct of a business or an Italian owned or controlled entity.

Finally, taxation on distribution of profits derived from the operation of the real estate vary depending on whether the real estate investment is held through an Italian corporate vehicle owned or controlled by an EU vs a non-EU holding company, an Italian partnership, or directly by a foreign company without permanent establishment in Italy.

I. Transfer Taxes Charged Upon the Acquisition of the Real Estate.

A. General Considerations.

The purchase of real estate in Italy may subject to, alternatively, registration tax or VAT and, in addition, cadastral and mortgage taxes.The buyer normally pays the transfer taxes, although the buyer and seller are jointly and severally liable for the payment of the taxes and for any assessment by the tax authorities. VAT is also paid by the buyer, but an Italian VAT registered entity that is subject to VAT on its sales to customers, can reclaim the VAT paid on the purchase of the real estate by offsetting it with the VAT due to the tax authorities against its output operations. In some circumstances, it can claim the amount of VAT as a refund. EU-resident entities may request a refund of VAT paid if certain conditions are met. A non-EU resident entity must register for VAT and appoints an Italian VAT representative in order to recover any VAT incurred on the purchase.

B. Residential Real Estate.

Sales of residential real estate are normally exempt from VAT. Residential sales are only subject to VAT if the seller is a construction company that has constructed or renovated the property less than five years before the sale, or after five years but has elected to in the deed of sale to subject there sale to VAT. VAT is charged at the rate of 10 percent (22 percent is the property is classified as a luxury dwelling on the real estate register).

The registration tax is charged at the rate of 9 percent on the assessed value of the property, if the buyer is a private individual, or on the actual amount of the purchase price as shown on the purchase deed, if the buyer is a unincorporated business or a (foreign or domestic) commercial entity.

C. Commercial Real Estate.

The sale of commercial real estate (i.e., offices, retail properties and hotels sold separately from any associated business) is subject to VAT at the rate of 22 percent (reduced to 10 percent in case of renovated properties) if the seller is a construction company that constructed or renovated the property less than five years before the sale, or (in any event) the seller is a construction company that elected to subject the sale to VAT in the deed of sale. The sale of commercial property, whether it is exempt from VAT or not, is also subject to cadastral tax at the rate of 1 percent and mortgage tax at the rate fo 3 percent.

D. Going Concern.

The sale of commercial property part of a business is subject to registration tax at the rate of 9 percent applied to the next value of the real estate and 3 percent applied on the net value of all other assets of the business.

E. Stock of an Italian Real Estate Company.

When real estate is acquired by way of purchase of the shares of the company owning it, the transaction is VAT exempt and subject tor registration tax at the fixed amount of 200 euros.

II. Taxation of Rental Income.

A. Operation Through an Italian Corporate Vehicle.

If the real estate is leased to tenants, the rental income generated from the leases is subject to corporate income tax (IRES) at the rate of 24 percent and regional tax (IRAP) at the rate of 3.9 percent.

Taxable income for IRES purposes is the net revenue after the deductions of costs as shown in the company’s annual profit and loss account. In general, all costs relating to the activities of the company can be deducted, including net interest expenses, meaning interest payable minus interest receivable, up to an amount equal to 30 percent of EBITDA. Any excess interest expense can be carried over and deducted in any future year in which the EBITDA exceeds the net interest expense for the year. Interest due on loans secured by a mortgage over the rental property is not subject to the 30 percent limitation and is therefore fully deductible. Depreciation of property is deductible to the extent allowed by tax law. Property tax (IMU) is not deductible for IRES purposes. 10 percent of IRAP paid and IRAP due on cost of employees is deductible for IRES purposes.

In case of lease of residential real estate, gross rents are taxed without any deduction for costs, except for ordinary maintenance expenses not exceeding 15 percent of the amount of gross rents. Interest due on loans used to finance the acquisition of the real estate is deductible within the limit of 30 percent of EBITDA, while interest due on loans secured by a mortgage on the residential rental property is not subject to the 30 percent limitation and therefore is fully deductible.

The taxable income subject to IRAP is the amount of revenue after the deduction of costs as shown in the annual profit and loss account. However, not all costs relating to the company’s activities can be deducted. In particular, interest payments, cost of employees, IMU and IRES payments are not deductible.

B. Operation Through an Italian Partnership.

An Italian partnership is a transparent entity for incomer tax purposes. As a result, its income is taxed directly to its partners. In case of foreign partners, the income is taxed at the corporate rate of 24 percent plus IRAP rate of 3.9 percent. Interest is entirely deductible for purpose of computing the taxable income of the partnership, taxable to its partners, without the 30 percent EBITDA limitation.

C. Direct Operation By A Foreign Entity Without a Permanent Establishment in Italy.

Renting real estate does not automatically arise to an active trade or business, When a foreign entity operates an Italian rental property outside of the conduct of an active trade of business, gross rental income derived from the rental of the property is subject to corporate tax at the rate fo 24 percent, with no deduction of depreciation or other costs incurred in connection with the rebate of the property, expect for ordinary maintenance expenses not exceeding 15 percent of the amount of gross rents. Interest on loans obtained to finance the acquisition of the property for secured by a mortgage on the property is not deductible for corporate tax purposes.

III. Taxation of Profit Distributions.

A. Investment Through an Italian Corporate Vehicle.

Generally, distribution of profits to foreign shareholders is subject to a 26 perdent withholding tax. However, dividends paid to EU-based corporate shareholders are subject to a reduced 1.20 percent withholding tax. Dividends distributed to EU-based parent companies which qualify for the benefits of the EU parent-subsidiary directive are totally exempt from withholding tax. Italian dividend withholding tax may also be reduced by way of a tax treaty between Italy and the investor’s home country.

B. Investment Through an Italian Partnership.

Non-resident partners are subject to tax in Italy on their share of the partnership’s income, and not withholding tax applies on distributions of profits from the partnership to its partners.

C. Direct Investment By A Foreign Entity With No Permanent Establishment in Italy.

Once rental income has been taxed in Italy it can be repatriated to the foreign company without any further Italian tax.

IV. Taxation At Exit.

A. Investment Through an Italian Corporate Vehicle.

Gains derived from the sale of the real estate are subject to corporate tax (IRES) at the rate of 24 percent regardless of how much time has elapsed since its acquisition. The taxable gain is the difference between the adjusted tax basis of the property at the time of the sale (i.e., purchase price minus the depreciation deductions) and the sale price.The gain is also generally subject to IRAP at thew rate of 3.9 percent. However, if the property is sold as part of a going concern, IRAP does not apply.

Any gain derived from the sale of the stock of the Italian corporate vehicle would be fully taxable. The taxable amount of the gain would be the difference between the adjusted tax basis of the shares in the Italian vehicle and the sale price. Participation exemption rules do not apply.

In case of liquidation of the Italian vehicle owning the real estate, the Italian company would recognized a gain equal to the difference between its adjusted tax basis in the property (equal to the purchase price minus depreciation deductions) and the fair market value of the property at the time of the liquidation. Then, distributions to shareholders upon liquidation would be treated as dividends, to the extent that they come out of the profits of the Italian corporate vehicle, subject to dividend withholding tax. The execs would be taxable as a gain.

B. Direct Investment By A Foreign Entity With No Permanent Establishment in Italy.

Gains derived from the sale of the real estate are not subject to corporate tax (IRES) of the property is sold more than five years after its acquisition. If the property is sold within five years of its acquisition, IRES applies at the rate of 24 percent. Sicne decoration is not deductible, the amount of taxable gain is the difference between the purchase price and the sale price.

C. Investment Through a Partnership.

Gains derived from the sale of the real estate owned through an Italian partnership are taxed at the level of partners.

In a future post we will deal with the tax planning aspects of investing in Italian real estate through an Italian real estate investment fund or an Italian real estate investment company (RE SICAV).

With its Ruling n. 4091 of June 12, 2017, the Eighth Department of Tax Commission (District Tax Court) of Milan, Italy ruled that upon the cancellation of an inter company loan from a Dutch parent company to its Italian subsidiary, the interest accrued on the loan and deducted by the Italian subsidiary on an accrual basis, during the course of the loan, is deemed “constructively received” by the foreign parent, and is potentially subject to the Italian interest withholding tax (at the rate of 20 percent, pursuant to article 26, paragraph 5 of Presidential Decree n. 600 of 1973, recently increased to 26 percent).

However, the Tax Court also ruled that the Dutch parent company qualified as “beneficial owner” of the interest, and was eligible for the withholding tax exemption granted under article 26-quater of Presidential Decree n. 600 of 1973, which implemented the EU Directive n. 2003/49/CE (so called interest and royalties directive).

Under the facts of the case, a Dutch company extended a loan to its Italian subsidiary, after taking a loan from a Dutch subsidiary, which in turned had obtained a loan from a third party bank. After a number of years, the Dutch parent decided to unilaterally cancel the loan to its Italian subsidiary. Under Italian law, the cancellation of a shareholder’s loan does not give rise to taxable income in the hands of the borrower; rather, it is treated as a contribution to the capital of the borrower, thereby increasing the adjusted tax basis of the shareholder in its stock of the borrowing company.

The Italian Tax Agency took the position that, upon the cancellation of the loan, the interest from the loan, which had accrued and had been deducted by the Italian subsidiary during the course of the loan, was constructively received by Dutch parent and reinvested into the subsidiary, with the consequence that it was subject to the Italian interest withholding tax.

The theory of the constructive receipt of the interest, in the hands of the lender, upon cancellation of a shareholder loan, is based on a circular of the Ministry of Finance issued on May 27, 1994 with number 73/E.

Furthermore, the Tax Agency denied the benefit of the exemption from the withholding tax for interest paid between affiliated companies established in a EU jurisdiction, granted under the EU interest and royalties directive (Directive 2003/49/CE), as implemented in Italy by way of article 26-quater of Presidential Decree n. 600 of 1973. According to the Tax Agency, the strict interconnection and similarity of the terms of the back-to-back loans from the Dutch subsidiary to its Dutch parent and from the Dutch parent to its Italian subsidiary, and the lack of organizational structure at the level of the Dutch parent, excluded that the Dutch parent could qualify as beneficial owner of the interest for the purpose of the exemption.

The Tax Court sided with the Italian Tax Agency on the first issue, concerning the application of the withholding tax, and ruled that the interest was “constructively received” by the Dutch parent at the time of the cancellation of the loan, and thereby it was subject to the Italian withholding tax. The rational of the ruling is that the deduction of the interest in the hands of the Italian subsidiary, at the time of the accrual of the interest during the life of the inter company loan, must necessarily correspond to the actual receipt of the interest, in the hands of the shareholder-lender, either at the time of the actual payment of the interest, or at the time of the cancellation of the loan, whichever is earlier. Otherwise, there would be “loss” of tax along way, with the benefit of the deduction of the interest reducing the Italian tax on the subsidiary, upon accrual of the interest, on one side, without the Italian withholding tax on the interest at the time of the cancellation of the loan, on the other side.

It is worth noting that the new paragraph 4-bis of article 88 of the Italian Tax Code, enacted by way of the Legislative Decree n. n.147 of September 14, 2015, the cancellation of an inter company loan is treated as taxable income, in the hands of the borrower, to the extent that the amount of cancelled debt exceeds the adjusted tax basis of the debt (i.e. the principal amount of the loan). The result is that the borrower recognizes taxable income for the amount of of interest accrued, and not paid, under the loan. Under this new provision, the rational for the application of the outbound interest withholding tax on cancellation of an inter-company loan seems to lose value.

Instead, the Tax Court sided with the taxpayer on the issue of the Dutch parent’s eligibility for the interest withholding tax exemption under the EU interest directive. According to the Tax Court, the terms of the two back-to-back loans where sufficiently different, and the Dutch parent had the legal and economic dominion and control over the interest from the loan, thereby qualifying as beneficial owner of the interest for the purposes of the withholding tax exemption. The Tax Court noted that the interest rate under the Dutch subsidiary loan was different from the interest rate under the Italian subsidiary loan, living a margin of profits in the hands of the Dutch subsidiary, that the Italian subsidiary loan did not contain any provision requiring the Italian subsidiary to repay the loan, in the event the Dutch parent had to repay the loan to the Dutch subsidiary, and that the Dutch parent had the unconditioned right to waive its credit for the principal and interest of the loan towards the Italian subsidiary, as it actually did.

For the interpretation of the meaning of the term beneficial owner, the Tax Court referred to the OECD Commentary to the OECD Model Income Tax Treaty. Curiously, the Court did not refer to the definition of the term beneficial owner which is set forth in the EU Directive (at article 1, paragraph 4), according to which beneficial owner of the interest is the person which has the legal dominion and control over the interest and derives a direct economic benefit from it.

The decision provides some useful guidance on the tax treatment of interest arising from related party back-to-back loans, and illustrates some of the features of those loans that may be relevant in order to recognize the status of beneficial owner to the immediate recipient of the interest, to the extent that it is required to preserve certain tax benefits such as an interest withholding reduction or exemption.

With the Legislative Decree n. 90 of May 25, 2017, published on June 19, 2017 Italy finally adopted and transposed into its own legal system the EU Directive 2015/849, usually referred to as the “IV Anti Money Laundering Directive”.

One area that attracts particular attention concerns the new reporting rules applicable to trusts.

Article 21, paragraph 3 of Decree n. 90 provides that “trusts producing juridical effects relevant for tax purposes, in accordance with article 73 of the Presidential Decree n. 917 of January 22, 1986, shall be registered with a special section of the Register of Enterprises”.

Italy (which does not have domestic trust laws) recognizes and gives legal effect to trust set up and governed under foreign law, pursuant to the Hague Convention on Trust of July 1, 1985 implemented in Italy with law n. 364 of October 16, 1989.

Article 73 of Presidential Decree n. 917 (Italy’s Unified Income Tax Code) classify all trust as separata taxable entities for Italian income tax purposes. Trusts administered abroad are classified as foreign (non resident) trusts. Trusts administered in Italy are classified as domestic (resident) trusts. Foreign trusts are taxed solely on their Italian source income, while domestic trusts are taxed on their worldwide income, Trusts with identified income beneficiaries are taxed on a fiscally transparent basis (they compute their taxable income, which is then attributed to and taxed upon the income beneficiaries as designated in the trust agreement). Trusts without identified income beneficiaries are subject to Italy’s corporate income tax.

The scope of the new duty to register a trust into the Register of Enterprises, set forth in Decree n. 90, is extended to trusts which “produce relevant legal effects for tax purposes in Italy”. As a result, trusts subject to reporting include all domestic trust, foreign trusts with Italian assets or income, as well as foreign trusts with Italian settlor or beneficiaries.

Article 22, paragraph 5 of Decree n. 90 provides that fiduciaries and trustees of express trusts, which are recognized and enforceable in Italy pursuant to the 1964 Hague Convention on Trusts, shall collect and conserve sufficient and adequate and updated information on the beneficial ownership of the trust, meaning, information relating to the settlor, trustee or trustees, guardian, or any other person acting on behalf of the trustee, individual beneficiaries or class of beneficiaries, as well as any other person who exercises the control over the assets of the trust through direct or indirect ownership or other means. Trustee shall conserve that information for a minimum period of five years, and shall make it accessible to the authorities who are entitled to have access to that information for investigation purposes (typically, tax agencies in charge of tax inquiries and audits, and department of justice in charge with anti money laundering and criminal investigations). The information referred to at article 22 shall be filed electronically with the Register of Enterprises. Trustees are personally liable and subject to penalties for failure to comply with the duty to report.

Article 21, paragraph 5 of Decree n. 90 provides that the Ministry of Economy and Finance shall issue a regulation with specific provisions concerning:

a) the information to file with the register,
b) the procedure for filing and disclosure of the information to the governmental agencies which may require them, as part of tax or criminal investigations,
c) the procedure for the access to the register for review of filed information,
d) the procedure to determine the right to access the filed information,
e) the exchange of information on trusts between the Register and Tax Agency’s databases, concerning a trust’s tax code or VAT number, as well as any agreements setting up, amending or terminating a trust, or transferring assets into tor outside a trust, as they are relevant for the purpose of the application of income or transfer taxes relating to the trust.

The regulation, which has not been adopted yet, shall be very important to finalize and complete the law on new trust reporting rules. Sub paragraph e) of article 21.5 seems to suggest that also the relevant agreements concerning a trust may have to be file or disclosed. If that is the case, the reporting, which is due under the trustee’s personal responsibility, shall be quite challenging and require careful handling.