Italian International Tax Practice
Our sophisticated Italian international tax practice is specifically dedicated
to assisting foreign individual and business clients with the full range of services on all Italian international tax matters
In Italy we assist foreign individual taxpayers to properly handle their Italian international tax issues concerning Italian tax residency and pre-immigration tax planning, Italian international tax return preparation and filing, Italian international tax audits and Italian tax court litigation, taxation of Italian source income and Italian withholding tax issues.
Italian Tax Residency Planning, Assistance and Advice For Foreign Individuals
Foreign clients who own houses in Italy, travel to and spend time there regularly, alone or with their family, for business or pleasure, need to be aware of Italian tax rules on tax residency for individuals taxpayers. Italy assigns tax residency to individuals based on one of three alternative tests: registration on the Italian register of resident individuals, regular place of abode (true home) and domicile (main center of interests). The sole fact of being registered on the Italian list of resident individuals for more than 183 days in any given year triggers Italian tax residency under Italian internal tax laws. Place of abode and domicile depend heavily on the facts and circumstances of each particular case, such as the time spent in Italy and the nature, extent and number of ties or connections with the country at the personal, family, economic and business level.
Spending time in Italy, owning houses or investments there, and establishing other connections with Italy on personal, family, economic or business level may expose to Italian tax residency. Italian tax residency is determined pursuant to facts and circumstances tests revolving around the taxpayer’s permanent home coupled with a subjective intention to remain there on a permanent basis, and his or her personal, family, economic and business contacts with Italy.
Tax residency requires careful planning and specific advice. Very often, tax audits are initiated on the tax status of foreign citizens and residents in Italy as a result of or in connection with the purchase or ownership of Italian houses or other investment assets, opening of or holding Italian bank accounts, or the transfer of money from the U.S. into Italy (that is automatically registered in the Italian tax agency’s data base).
Italian international tax audits on U.S. and foreign citizens and residents are often initiated in connection with the purchase or ownership of Italian houses, traveling to Italy and showing on the Italian list of resident individuals.
Individual international tax audits in Italy require careful advice, to make sure that the case is closed upfront and to avoid the need to go to the tax court to challenge a tax assessment. Very often, foreign tax legal, banking and tax documents must be used and properly explained to Italian tax authorities, and risks of misunderstanding and unintented outcome in the tax investigation are extremely high and dangerous. A clear understanding of foreign tax and legal information to be used in the Italian audits is crucial for that purpose.
Italian tax audits on cross border tax matters for individual taxpayers require specific expertise, proper use and presentation of foreign legal, financial and tax information, and thourgh discussion of client’s position with the Italian tax aurhority.
Litigation of an international tax case before the Italian tax courts is extremely challenging, due to strict procedural rules, limitation on appeal rights, and the tax court’s attitude generally inclined to rule in favor of tax agencies.
We assist U.S. and foreign clients with tax advice on Italian tax residency, strategic assistance in Italian international tax audits, and aggressive representation in tax court cases.
For U.S. and foreign clients whose Italian tax residency is established, we provide assistance on Italian income tax returns and international tax reporting and disclosure of non Italian assets on Italian tax return’s section RW.
We assist U.S. and foreign clients on Italian international tax reporting on their U.S. and non Italian assets on Italian income tax return’s Section RW.
In this area, we provide the following services:
Italian International Tax Reporting and Disclosure
Italian tax resident individuals are required to report on their Italian income tax retuns their financial and non fianncial assets located outside of Italy. Reportable assets include financial accounts as well as real estate and other non financial assets that are capable of generating foreign source income subject to tax in Italy. The reporting must show the initial value of the asset at the beginning of the year and the value of the asset at the end of the tax year or when it has been sold or disposed of. For bank accounts, the average value of the account during ther tax year must be shon on the return.
The duty to report applies both when a taxpayer owns a foreign reportable assets directly under her own name, and when she owns it indirectly through a trust or other entity. Under the beneficial ownesrhip rule, the reporting is due whenever the direct or indirect interest in any entity ultimately owning a foreign reportable assets equal or exceeds 20%. Depending on the nature of the taxpayer’s interest in that entity and the location of the entity in a particular foreign country, the reporting may be limited to the value of the interest in that entity, or extend to the value of the pro rata share in the underlying reportable assets owned by the entity in which the taxpayer owns her interest, each to be reported separately.
Reporting of foreign assets under the beneficial ownership rule requires careful study and consideration of the client’s position, review of client’s foreign assets and interests in foreign entities or trusts, identification of reportable values, and proper filling out of the relevan section of the Italian income tax return (so called form RW).
We regularly assist clients in the area of Italian international tax reporting under form RW of Italian income tax returns.
Italian Corporate and Business Tax Planning for Foreign Enterprises
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.
Italian Taxation of International Trusts and Estates
Italy signed and ratified the Convention on the Law Applicable to Trusts and their Recognition, concluded in the Hague on July 1, 1985. As a result, Italy incorporates into its own legal system, recognizes and enforces foreign trusts that are created and governed under foreign law, in accordance with the provisions of the Convention. Foreign trusts with Italian assets or Italian resident beneficiaries can be enforced in Italy, pursuant to the Convention and Italian law n. 364 dated October 16, 1989 entered into force on July 1, 1992 and incorporating it into Italian law.
Italy signed the 1985 Hague Trust Convention, pursuant to which it recognizes and enforces foreign trusts created under and governed by foreign law.
In 2007, Italy enacted specific provisions on taxation of trusts. The new provisions apply to trusts created and governed under foreign law and recognized in Italy under the Hague Convention on Trusts. Trusts are classified as Italian resident trusts or non resident trusts based on their place of administration or the domicile of the trustee. Trusts with beneficiaries that are not sufficiently identified are treated as separate entities subject to corporate income tax. Resident trusts are taxed on their worldwide income, while non resident trusts are taxed only on income from Italian sources. Trusts with named beneficiaries are classified as fiscally transparent entities, and the trust income’s is attributed to and taxed upon its beneficiaries regardless of its distribution. Non resident beneficiaries are taxed on their share of income from Italian resident fiscally transparent trusts (which flows through the trust and is characterized as Italian source income, regardless of the actual source of the income when earned by the trust).
Italy enacted and applies its own provisions on taxation of foreign trusts with Italian assets, settlors or beneficiaries.
Inheritance of Italian assets of a foreign estate is potentially subject to Italian inheritance laws. Italy’s international private law of conflict applies to select the law governing the relationship between and among the overall estate, its beneficiaries, executors, and assets located in Italy and the eventual transfer of the assets to the beneficiaries. An Italian inheritance filing is due in Italy, pursuant to which the Italian assets are eventually transferred to and registered under the name of the beneficiaries. Pursuant to the EU Regulation on International Successions (Regulation (EU) no. 650/2012 of July 4, 2012), the law applicable to cross border inheritances with connections to Italy is the law of the country in which the deceased had its habitual residence at the time of death. A person may choose, in a will or other testamentary instrument, the law of the country of which she is a national at the time of making the choice or at the time of death, as the governing law of the inheritance. Italian inheritance laws incorporate forced heirship ruels, granting a fixed portion of the estate to beneficiaries who are closely related to the grantor. In the absence of a valid choice referring to a foreign law, Italian inheeritance laws may apply and trigger unintended legal consequences interfering with a client’s purported succession planning conceived under her own foreign law.
International inheritances involving Italian assets or beneficiaries may be subject to Italian inheritance laws, interfering with a client’s estate planning in the absence of careful review under Italian law.
Italy operates estate and gift taxes that apply to transfer of assets by inheritance or gift. Italian estate and gift taxes apply to the transfer of Italian assets, from a foreign resident grantor to Italian or foreign beneficiaries, or to the worldwide assets transferred from an Italian resident grantor to Italian or foreign beneficiaries. The location of the assets or the residency of the grantor triggers the applciation of Italian iheritance or gift taxes. Estate and gift Tax rates vary from 4 per cent to 10 percent, with exemptions from euro 1 million to zero depending on the relation between the grantor and the beneficiary.
Italian estate and gift taxes apply to international inheritances or gifts, based on the residency of the grantor or the location of the assets.
In this extremely complicated area of law, we provide the full range of legal and tax services to U.S. clients with respect to inheritances or trusts with connection to Italy, including:
Italian International Tax Audits and Controversies
International tax audits in Italy, both for individuals and companies, are on the rise as a direct result on an increased effort on part of the Italian tax authorities to police international transactions and enhance taxable income collection and enforcement activities.
Tax audits with international tax components and issues involve both individuals and companies. For individuals, those issues mainly concern Italian tax residency and the duty and failure to report foreign assets and foreign taxable income in Italy.
For companies, those issues involve tax inversions (“esterovestizione”), taxation of foreign companies managed and controlled from Italy, current taxation of foreing income udner controlled foreign companies rules, permanent establishments, transfer pricing, withholding taxes on outbound dividends, interest and royalties.
In this area, we assist our clients with sophisticated services both in tax audits and tax procedures in front of Italian tax courts. Our main goal is to have the case resolved immediately at the administrative level, either during the pre-audit invetigation or during the tax audit procedure. When this is not possible, we aggressively pursue our clients’ position in court. Clients can count on our uncompromising support and proved experience in this field.