Taxation of Outbound Investments and Activities

U.S. or Italian taxpayers with investments or business operations in a foreign country are subject to tax in the foreign country, which taxes the income on the basis of source, and in their home (residence) country, which taxes them as residents on their world-wide income. In order to avoid double taxation and minimize their worldwide income tax liability, taxpayers must be able to structure their foreign investments properly and use the benefits of foreign tax credit provisions of the Italian and U.S. tax code. In this respect, we help clients navigate the intricacies of foreign tax credit rules and make sure that they get the most out of foreign tax credit benefits.

The United States operate a worldwide tax system under which domestic companies are taxed on their income from activities carried out in foreign countries, and are entitled to a foreign tax credit for any foreign income taxes paid on their source foreing income reported and taxed in the U.S. Foreign earnings of U.S.-owned foreign companies are not subject to US income tax, unless and until they are repatriated to the United States. Repatriation in form of dividends or investment in U.S. property triggers the US income tax on foreign earnings of US-controlled foreign subsidiaries.

Deferral of U.S. tax through the use of U.S.-controlled foreign companies incorporated and operating in foreign jurisdictions is denied under a battery of anti deferral rules which include controlled foreign corporations (CFC) and subpart F income rules and passive foreign investment company (PFIC) rules.

Italy operates a territorial system which provides an exemption for dividends received from foreign subsidiaries and gains from sale of stock of foreign companies owned or controlled by Italian shareholders. The exemption now applies also to earnings of foreign branches of Italian companies. The exemption is denied for gains or dividends coming from black-listed (low tax) jurisdictions. Earnings of controlled foreign companies organized in low-tax jurisdictions are taxed currently in Italy under Italian controlled foreign company rules, unless certain tests aimed at proving the genuine nature of foreign entities and their business operations and a minimum level of foreign tax are met. Italy also operates anti inversion rules pursuant to which foreign companies that are owned or controlled by Italian shareholders and effecitvely managed from Italy are deemed Italian companies subject to tax in Italy on all of their income. We advise clients on the way to benefit from the foreign earnings exemption and deal with various anti-abuse rules applicable to earnings derived from entities organized in low-tax jurisdictions.

“In this area of international tax law, we advise domestic companies and businesses on how to properly plan their outbound investments or business operations in foreign countries and taxing jurisdictions to achieve maximum tax efficiency, to report controlling interests in foreign companies in their home jurisdiction, to repatriate profits in a tax efficient way and to handle their foreign tax credit to minimize negative tax impacts”.

Our services in this area include:

  • evaluating the clients’ entitlement to foreign tax credit;
  • assisting clients in computing the amount of foreign tax credit;
  • advising clients in case of base and timing differences affecting their entitlement to and the amount of the credit;
  • devising appropriate strategies to maximize the credit and avoid or minimize excess credit or limitation positions;
  • invoking Competent Authority assistance to support the creditability of a foreign tax and our clients’ entitlement to the credit;
  • advising clients on eligibility for the exemption of foreign dividends and gains and earnings of foreign branches under Italy’s participation exemption rules;
  • advising client on the possible applciation of Italy’s anti inversion rules and place of effective management rule.