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Budget Law 2019: clarifications by the Revenue Office

The Italian Revenue office has provided clarifications on some updates introduced by Budget Law 2019.

  • Controlled Foreign Companies

With regard to controlled foreign companies (CFCs), the Revenue Office has provided the following clarifications:

the minimum actual taxation must be verified only with reference to IRES (tax on companies’ income), and not to IRAP (regional tax on production activities), in line with what is already provided for “white list” CFCs;

the definition of “passive income” includes intercompany sales and purchases of goods.

  • Dividends from Black List countries

With reference to the rules applicable to the distribution of dividends, the Revenue Office has clarified that dividends distributed by a foreign company and deriving from income generated in a FY in which such company operated in a black list country and subject to the rules in force at that time - rather than those in force at the moment of distribution - are not subject to full taxation.

Moreover, the Revenue Office has confirmed that dividends distributed by a conduit subsidiary company, pursuant to Directive 90/435/EC, but deriving from one or more subsidiary companies residing in black list countries, are fully taxed.

  • Transfer price – penalty protection

The Tax Authorities have provided clarifications on the so-called “Penalty protection”, i.e. the possibility to avoid applying penalties in case of false declaration, for income taxes and IRAP purposes to those taxpayers who provide the Tax Authorities with information and data useful to perform a complete examination of applied transfer prices.

To this regard, reference was made to Ministerial Decree dated 14.05.2018, art. 8, which summarizes the domestic guidelines to follow in order to implement transfer pricing regulations.

Particularly, the Penalty protection allows avoiding the application of penalties in the following cases:

When taxpayers are available to provide the Tax Authorities with data and information that are useful to perform a complete examination of applied transfer prices, even if the economic analysis carried out by the company and by the Tax Authorities show different results;

When the documentation prepared by the taxpayer simplifies inspections and, more generally, the discussion aimed at identifying the actual arm’s length value applied to the sale/purchase of goods and/or services.

Black list costs

The Italian Court of Cassation, within a case of tax audit carried out on a company operating in maritime transport, confirmed the need, in order to deduce black list costs, to prove the inherence of costs incurred, as well as the effective occurrence of the economic operation. Particularly, there must be a demonstration of the effective economic interest of the resident company, not in the operation itself but rather in carrying out such operation with that company established in the black list country.

Taxation of foreign pensions

The Revenue Office has provided clarifications on the tax treatment of the “New State Pension” paid in the United Kingdom to individuals being tax resident in Italy.

A taxpayer had voluntarily paid social security contributions in the UK and, after meeting the necessary requirements, received the relevant pension. Contributions paid in the UK were not included in the tax return and therefore not deducted from the income being taxable in Italy.

The Revenue Office confirmed as follows:

Since the taxpayer is tax resident in Italy, the world-wide principle applies, therefore the taxable income includes pensions received abroad, further to income produced in Italy.

The double tax treaty between Italy and the UK (art. 18) provides that pensions and other similar remuneration paid in consideration of past employment to a resident of Italy shall be taxable only in Italy.

The Tax Authorities has also confirmed that the “New State Pension”, introduced for male taxpayers born after 6 April 1951 and for female taxpayers born after 6 April 1953, is qualified as the pensions considered by art. 49, para. 2 of TUIR (Italian consolidated act on income tax) and, therefore, subject to the rules applied to tax employment income.

Voluntary payments to State Pension cannot be qualified as complementary pension funds’ contributions, only because they were not deducted from the Italian taxable base and as qualified as voluntary (i.e. not related to actual period of work in the UK).