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.

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)”.


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.


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.


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.


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.”


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 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.

With ist ruling n. 27113/2016 issued on December 28, 2016, the Italian Supreme Court interpreted and applied the beneficial ownership provision of article 10 of the tax treaty between Italy and France, for the purpose of determining whether a French holding company, wholly owned by a U.S. corporation, was entitled to the imputed credit granted under that treaty in respect of dividends received from an Italian subsidiary.

The Italian Supreme Court held that the beneficial ownership provision of the Italy-France treaty requires that the recipient of the dividends has full dominion and control over the dividend, meaning, that it enjoys the right to receive and keep dividends, unconstrained by any legal or contractual obligation to pass the dividends on to its parent, and actually enjoys the economic benefit of the dividend, which it treats and reports as its own income on its accounting books and can dispose of without legal or contractual constraints. 

According to the Supreme Court, the fact that the French holding company did not have staff, offices and other significant sources of income, except for the dividends it received from time to time from its subsidiaries, and did not engage in any other activities except for holding the legal title to the shares of its subsidiaries, is consistent with a holding company’s typical functions and role, and does not negate the status of beneficial owner and eligibility to the tax treaty benefits.

The ruling is consistent with a previous decision of the Supreme Court, which we reported in the past on our blog, holding that beneficial owner is the person who has the legal control and economic enjoyment of the dividend (we refer to the Supreme Court’s ruling n. 10792  issued on May 25, 2016).

The interpretation of the term ‘beneficial owner’ as the person having the legal and economic dominion and control over the dividend, followed by the Supreme Court in ruling n. 27113/2016,  is also consistent with the clarification set forth at paragraph 12.4 of the 2014 Commentary to article 10 of the  OECD Model Income Tax Convention, according to which ‘beneficial owner’ is the person who has the full right to use and enjoy the dividend, unconstrained by a contractual or legal obligation to pass on the payment received to another person.

 The Supreme Court expressly rejected the notion that, in order to qualify as a beneficial owner of the dividend, the holding company is required to have a minimum level of organization, including employees and offices, and to engage in business activities generating operating receivables, aside from holding the legal title to the shares of its subsidiaries and receiving dividends therefrom.     









Continue Reading Italian Supreme Court Rules on Beneficial Ownership and Holding Companies

The application of tax treaties to fiscally transparent entities is controversial. Two requirements for the application of the benefits of a tax treaty (that is, the elimination or reduction of the source country tax on payments made by a person resident in one Contracting State, to a person resident in the other Contracting Sate) are that the person receiving the payment is a "resident" of the other contracting state, and the "beneficial owner" of the payment.

Residence is usually defined in tax treaties (typically, under article 4, paragraph 1), as requiring that a person be "liable to tax" in the other Contracting States, by reason of his residence, domicile, place of management, place of incorporation or other criterion of a similar nature (article 4, paragraph 1).

According to the OECD, whenever an entity is treated as fiscally transparent in a State, the entity is not "liable to tax" in that State, within the meaning of article 4, paragraph 1, and so it cannot be a resident thereof for purposes of a treaty. In such case, the entity’s partners or owners should be entitled to the benefits of the treaty entered into by the State of which they are residents, with respect to their share of the income of the entity, to the extent that the entity’s income is allocated to them under the tax laws of their State of residence (see OECD Commentary to the Model Tax Convention, on Article 1, paragraph 5).

The current Tax Treaty between Italy and the United States adopts a slightly different approach and assigns tax residency to a an entity that is treated as fiscally transparent entity in the United States, for the purposes of the treaty, to the extent that the entity’s income is taxed in the U.S in the hands of its parents or beneficiaries. In fact, Article 4, paragraph 1, letter b) of the Convention, with reference to partnerships, estates and trusts, provides that in the case of income derived or paid by a partnership, estate of trust, this term applies only to the extent that the income derived by such partnership, estate or trust is subject to tax in that State, either in its hands or in the hands of its partners or beneficiaries”. Article 1, paragraph 5, letter d) of the Protocol extends the same provision to fiscally transparent entities, by providing that d) The provisions of subparagraph 1(b) of Article 4 (Resident) of the Convention shall apply to determine the residence of an entity that is treated as fiscally transparent under the laws of either Contracting State.

Under the provisions referred to here above, a U.S. entity that is treated as fiscally transparent under US tax laws, receiving dividends from an Italian subsidiary, should be entitled to the 5% withholding tax on inter company dividends, provided that it satisfies the other requirement (minimum 25% ownership for a period of at least 12 months at the time of the payment of the dividends). For that purpose, the documentation provided to the Italian subsidiary must include tax certificates for both the entity and it shareholders or beneficiaries, providing that the shareholders or beneficiaries US residents and are taxed on the entity’s income in the United States.    

As for the second requirement, the term "beneficial owner" is generally not defined in tax treaties. However, the 2014 Update to the OECD Model Tax Convention issued by OECD the Committee on Fiscal Affairs on June 26, 2014 clarifies the meaning of beneficial owner as requiring that a person have "the right to use and enjoy" the income, "unconstrained by a contractual or legal obligation to pass on the payment received to another person". Sometimes, the term is interpreted as meaning that the beneficial owner is the person to whom the income is attributed for tax purposes under the tax laws of a Contracting State. 

The EU Directive 2003/49/EC of June 3, 2003 provides a definition of the term “beneficial owner” for the purposes of the withholding tax exemption of interest and royalties paid to a EU parent or affiliate corporation, according to which “A company of a Member State shall be treated as the “beneficial owner” of interest or royalties only if it receives those payments for its own benefit and not as an intermediary, such as an agent, trustee or authorized signatory, for some other person”. Circular 47/E of November 2, 2005, which at paragraph 2.3.2 clarifies that in order for a company to be considered the beneficial owner of the interest or royalties, “it is necessary that the company receives the payment as the ultimate beneficiary, not as an intermediary such as an agent, a fiduciary, or collector of the payment for another person, … and that the company receiving the interest or royalties derives a direct personal economic benefit from the income from the transaction”.

Clearly, the tax treatment of an entity in its country of organization is key to determine whether the entity, or its shareholders, partners or members, are entitled to the benefits of a treaty with respect to a parent made by a resident of the other Contracting State. The residence and beneficial owner requirements, whose meaning is not entirely free from doubt, and depends on the facts and circumstances of the particular case, call for extensive analysis of the tax classification and treatment of the entity and its owners, under the laws of their country or organization or asserted residence, as well as the organizational structure, role and functions of the entity receiving the payment. Under that scenario, the payer of the income bearing withholding agent obligations is usually under pressure, and must make sure that the documentation provided by the payee establishes with sufficient certainty the payee’s eligibility for treaty benefit.               






Italy’s tax residency for foreign taxpayers buying Italian real estate, and spending significant time in Italy for pleasure or business continues being a very critical and challenging issue. Italy assigns tax residency of individuals based on residence, which means fixed place of living ; domicile, which means main center of interests, or registration on the list of Italian resident individuals for administrative purposes. Whenever one of the three tests is met for more than 183 days in any given year, an individual is resident of Italy for Italian tax purposes for that particular year. Italian tax residency triggers worldwide income taxation and obligation to report worldwide financial and non financial assets to Italian tax authorities on taxpayer’s Italian income tax return. 

In case of tax residency under the internal laws of Italy and another treaty country, Italy applies the tie breaker provisions of article 4 of the tax treaty to resolve the double residency problem, which assign tax residency based on the location of of permanent home, center of vital interests, habitual abode or nationality. The treaty "center of vital interests" test requires a comparative analysis of the taxpayer’s contacts or ties in Italy and the other treaty country. According to one view, personal and family ties should prevail, while another interpretation gives relative weight to economic and business interests.

A recent decision of Italy’s Supreme Court, which we comment here, seems to support the second interpretation. Proof of business and economic interests abroad while living or spending significant time in Italy for personal pleasure may help taxpayer demonstrate that that she kept her center of vital interest and tax residency in her own country.

This area of Italian international tax law is in flux and needs attention. Foreign taxpayers who transfer money to Italy to purchase homes, spend regular time there, register their administrative residency in Italy at their Italian address for convenience, open Italian bank accounts to handle the funds needed to manage their Italian house and living expenses are under the radar screen on Italian tax authorities, which check the real estate database, receive automatic information about the cross border transfers of the funds and often send inquiry letters asking for explanations on the taxpayer tax position in Italy in the absence of past filed Italian income tax returns.                

Such inquiries and related audits requires careful consideration, including the provision of carefully selected and explained tax documents and information, to avoid the risk of an Italian tax residency determination that would trigger far reaching and very troubling consequences.  

Riteniamo utile segnalare una serie di situazioni che stiamo seguendo sempre più frequentemente per conto dei nostri clienti. Le imprese italiane che vendono beni e servizi a clienti americani devono porre particolare attenzione agli eventuali obblighi e oneri fiscali cui potrebbero essere soggette negli USA, anche quando non hanno una società controllata, filiale o sede secondaria sul territorio degli Stati Uniti. Infatti, salvo i casi di pura esportazione di beni senza alcun ulteriore contatto con gli USA, è altamente probabile che vi siano situazioni tali da generare tali oneri e che eventuali distrazioni possono anche essere costose.    

Continue Reading Imprese italiane con clienti e contratti negli USA: rischi e potenziali oneri fiscali