Italy operates a corporate tax system with a corporate tax rate of 27.5% (plus 3.9% of regional tax on production activities or IRAP) that applies to the business profits of foreign-owned Italian branches and Italian subsidiaries. Exchange of services, goods and intellectual property between Italian subsidiaries and their foreign parent or affiliated entities are subject to transfer pricing rules requiring that they reflect a fair allocation of profits as if they are entered into between indepedent entities.
Italian subsidiaries that are legally and economically dependent on their foreign parent may be re-characterized as a permanent establishment of the foreign parent’s group, with additional allocation of profits to the Italian subsidiary/PE, denal of deduction for payments from the Italian subsidiary/PE to its foreign affiliates, resulting in an increase of Italian taxes.
Italian courts have re-characterized foreign-owned Italian subsidiaries as permanent establishment of their foreign parent, resulting in an increase of Italian taxes, with associated interest and penalties.
Dividends from Italian subsidiaries to foreign parents are subject to a 27% withholding tax, reduced to zero under the EU parent subsidiary directive. Similarly, outbound interest and royalty payments are subject to a withholding taxes, which are eliminated under the EU interest and royalty directive. The application fo the EU directives’ withholding tax exemption is subject to an anti abuse rule codified in the statute implementing the directives in the Italian tax code, pursuant to which the exemption does not apply when the EU intermediate entity or holding company is a wholly artificially arrangement lacking economic substance and set up for the sole purpose of benefiting from the exemption.
Italian withholding taxes on outbound dividend, interest and royalty payments are eliminated under the EU directives, subject to an anti abuse rule denying the exemption in case of payments to wholly artificial EU holding companies.
A recently enacted statutory anti abuse provision, an anti tax abuse judicial doctrine dating back to the early 2000s (revolving around the concept of “wholly artificial arrangement” applied by the European Court of Justice in the Cadbury Schweppes case) and several specific statutory anti avoidance provisions targeting specific transactions, apply to prevent the improper use of the Italian tax code to obtain an unfair tax advantage by entering into a transaction that lacks sufficient economic substance or business purpose.
Italy applies a general statutory anti abuse provision, in addition to a general anti tax avoidance judicial doctrine and specific anti abuse statutory provisions targeting specific transactions, for the purpose of denying tax benefits to transaction lacking economic substance and business purpose.
Italy adopted the OECD transfer pricing reports as its own transfer pricing rules to police inter company transactions, and operates advance pricing arrangements and international tax rulings to discuss and agree in advance with the taxpayer the proper treatment of international transactions and other international tax issues such as permanent establishment, outbound payment withholding taxes, and the like.
Italy applies transfer pricing rules imported from OECD transfer pricing reports and operates advance pricing agreements and international tax rulings to resolve international tax issues.
Italy has an extensive network of tax treaties, reducing or eliminating Italian source based withholding taxes, subject to te satisfaction of various tests including the beneficial owner test aimed at denying the application of the treaty benefits every time the recipient of the income operates as an agent or conduit or does not have the complete economic enjoyment and legal right to the income for which the treaty benefit is invoked.
Italy’s extensive network of tax treaties eliminates or reduces Italian taxes for foreign treaty partners, subject to various anti abuse tests including the beneficial ownership requirement that denies the tax treaty benefits to the foreign recipient lacking legal ownership and control and economic enjoyment of the income.
EU cross border mergers and other corporate reorganizations are given not recognition treatment resulting in the deferral of the Italian corporate income tax on the gain realzied in the transaction.
Foreign investors and investment funds organized in specifically enumerated “white listed” jurisdictions are generally eligible for full exemption of certain items of financial income deriving from Italian financial investments (such as purchase of Italian issuers’ debt obligations, subsbriction of ownership units of Italian investment funds, interest from bank deposits, income from securities lending transactions and sale of purchase of financial instruments, etc.) provided that specific documentation proving the possession of the requirements for the exemption is furnished to the Italian payor.
Foreign investment funds benefit from a tax exemption on varipous categories of Italian source financial and investment income, provided that they are organzied in “white listed” jurisdiction and supply appropriate documentation to the Italian payor proving they are eligible for the exemption.
We regularly assist U.S. and foreign companies, investors and funds with Italian business and investment tax planning and advice on Italian corporate and business tax matters, Italian tax treaty issues and EU tax directives.
In this area, we provide full tax assistance to U.S. companies, investors and funds with respect to Italian business and investment tax issues, and Italian tax planning advice under EU directives and Italy’s tax treaties.
