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Corporate inversion  

On 28 May 2019, the Supreme Court issued the sentence n. 14527/2019 to alleged Italian tax residence of a foreign entity.

In particular, the Court pointed out the need to carry out a careful analysis of the effective place of a company, since the evaluation of the Italian tax residence cannot be based only on relative presumptions.

The dispute arose from a substantial inspection by the Revenue Office which found out that a Dutch company had been fictitiously incorporated abroad with the only aim of benefitting from the favourable tax regime on dividends set forth by the Treaty against double taxation between Italy and the Netherlands and from the tax exemptions of dividends in force in the Netherlands.

The Court of second instance presumed that the specific case involved an alleged Italian tax residence of the foreign entity, since, although the parent company had its registered office in Netherlands, its actual residence was in Italy and this was proved by the fact that the parent company’s directors were resident in Italy.

Specifically, the Court of second instance deemed that there was no evidence of the Dutch residence of the company basing on the following elements:

  • The directors were resident in Italy or in the UK;
  • The actual activity of the company concerned the management of class shares;
  • The actual management of the company was carried out in the Netherlands (actual place of the Board of Directors’ and Shareholders’ meetings);
  • The inspectors found out that the company was not actually resident in Netherlands;

The Court of Cassation deemed the above reconstruction as groundless, claiming that the tax residence in Italy of a passive holding company cannot be presumed only based on the fact that directors are Italian (actually, some of them were English) and that the holding activity is limited to the management of class shares. On the contrary, the exhibition of corporate documents attesting the execution of Board of Directors’ and Shareholders’ meetings, as well as the availability of premises for this purpose were deemed as sufficient evidence to exclude that the Dutch company was resident in Italy.

Residence of foreign holding companies

Judgment of the Supreme Court dated 21 June 2019, n. 16697 concerns the identification of the place of activity of a foreign company, which is necessary to establish the correct location of the tax residence, in order to avoid any alleged Italian tax residence of the foreign company.

The judgment confirmed the settled principle according to which the place of activity - deemed both as an internal and a conventional criterion to determine the residence of legal entity - is in the country where the management and decisional activity is carried out, and this can be different from the country in which the company has its registered office.

The main innovation in the above judgment concerns the fact that, although the analysed situations were not so different, it was different from the judgments issued for the Dolce & Gabbana case.

In particular, Judgment n. 16697 overturned the thesis: the office in Amsterdam was considered as a “merely fictitious office having only tax purposes”, basing on the limited size of the premises and the merely operational activities performed.

Foreign royalties and patent box

In Principle n. 15 dated 29 May 2019, the Revenue Office provided some clarifications on the correct calculation of foreign tax credit, basing on the provisions included in international Conventions, with reference to royalties deducted from taxation in the exercise where the option for the “patent box” regime is applied.

In particular, the Revenue Office clarified that the exclusion of foreign income from the income taxable in Italy - and, therefore, the fact that foreign income is not included in the total income - implies the impossibility to determine the tax credit, subsequently, even in the case of a deduction from taxation of part of foreign income following the application of the patent box regime.

Transfer Pricing – intercompany adjustments

The Supreme Court, in judgment n. 16948/2019 filed on 25/06/2019, issued some clarifications on transfer pricing adjustments with reference to transaction intercompany and with foreign companies.

In particular, it specified that this issue concerns only transactions with foreign companies, since the Italian tax law does not provide any regulation that allows such evaluation within intercompany transactions between Italian companies.

Reference was made to art. 5 of Legislative Decree n. 147/2015, which specifies that the transfer pricing regulation and the related evaluation of the arm’s length value does not apply to intercompany transactions between Italian companies.

In particular, it was clarified that intercompany transactions can be evaluated as non-compliant with the arm’s length principle:

  • If costs borne by a company are excessive or unproportioned, threatening the compliance with the inherence principle;
  • If profits are excessively limited, thus implying the possibility of a price concealment.

The Court excluded that the Tax Authorities can carry out an assessment on transfer pricing if it is applied between companies residing in the same country.

Foreign company without office in Italy 

The Revenue Office, in reply to tax ruling n. 312 of June 2019, clarified that a foreign company that does not have a permanent establishment in Italy cannot act as withholding tax agent and therefore does not have to apply withholding taxes on the amounts paid to Italian employees.

The specific case concerned a Spanish-law company which carried out the management and administration of securities of resident and non-resident persons in Spain. The company had decided to hire an employee resident in Italy to promote its institutional activity and to monitor business opportunities. To this purposes, it engaged a third party to comply with social security, insurance and tax fulfilments related to the working activity that the employee should have carried out in Italy.

Self-declaration to benefit from the “Patent box” regime

The Patent Box regime exempts from tax a percentage of a taxpayer’s income from intellectual property (IP) for which an appropriate election has been made.

Art. 4 of Law Decree dated 30 April 2019, n. 34 (so-called Decreto Crescita) introduced the possibility from companies opting to calculate autonomously the economic contribution of the IP in their tax return instead of filing a tax ruling application, by indicating the required information as a proper documentation prepared in compliance with the instructions provided in the Measure of  the Director of the Revenue Agency n. 658445/2019 dated 30 July 2019.

The option (i) must be notified in the tax return relevant to the tax period in which the company intends to benefit from the regime, (ii) has an annual duration, and (iii) is irrevocable and renewable.

Once the option is exercised, the benefit - which consists in a downward tax adjustment to be included in the tax return - must be divided into three equal annual instalments, to be indicated in IRES/IRAP returns relevant to the tax period in which the option is exercised and the following two years.

Documents needed to benefit from the tax regime

As concerns the FYs preceding the year in which the Decreto Crescita came into force, those taxpayers who, pursuant to the Patent Box regulation, autonomously determined the eligible income and indicated it in the tax return, must notify the documentation required by this Measure via certified email or registered mail RR, addressed to the competent Office depending on its tax domicile, as long as such notification is sent before the formal acknowledgement of any supervision activity on the favourable regime.