Three of the answers provided by the Italian Tax Administration to questions from taxpayers set forth in the annual tax forum for 2011 could potentially expand the scope of the Italian CFC rules and pose new challenges on Italian multinationals.
The first answer deals with the active trade of business exception to the CFC rules. The Italian tax administration in the past adopted the interpretation according to which the exception applies when most of the customers and suppliers are located in the same country in which the CFC is organized. With reference to a manufacturing CFC, according to the administration the fact that the production activities are predominantly located in the same country of the CFC is one factor, but not necessarily the sole or decisive one, that should be considered to grant the exception.
The second answer deals with the passive income test established for the application of the CFC rules to controlled foreign companies organized in non black listed jurisdictions.The administration explained that income from services performed to related parties, including contract manufacturing services, count as passive income to trigger the application of the rules.
Finally, the third answer, still dealing with the passive income test referred to above, explained that also income earned by a trading CFC from related party purchases or sales of tangible property is passive income for the purposes of the application of the CFC rules.
Italian multinationals should revise their international tax planning for their foreign subsidiaries to take into account the potential broadening of the CFC rules in accordance with the interpretation provided by the tax administration.