EU & Italian International Tax Law Blog

Italy Reinforces its Foreign Assets Reporting Rules

Marco Rossi — Wed, 10 Feb 2010 08:37:11 -0500

In connection with the enactment and operation of its (third) tax shield (a special program of voluntary disclosure of foreign investments and earnings), due to elapse on April 30, 2010, Italy is reinforcing its rules on reporting foreign assets on Italian tax returns.

With Circular n. 43/E of October 10, 2009, Italy's tax administration adopted a new guideline according to which all foreign assets must be reported on the special R-W section of the Italian tax return, including those assets which currently do not generate any foreign source earnings taxable in Italy, but are potentially able to generate such earnings in the future.

On February 1, the Italian tax administration approved the new income tax return forms for 2010 (for individuals and unincorporated business) and issued instructions for the preparation of the return that confirm the above guideline.

As a result, from tax year 2010 all assets held abroad must be declared on the Italian tax return, including personal assets which do not produce any income such as foreign vacation homes, yachts, jewelery, art collectibles. Previously, only foreign assets which actually generated foreign source income taxable in Italy (such as foreign bank accounts and financial instruments) had to be reported.

Compared to the United States and other countries, Italy operates very sophisticated rules on reporting foreign investments. The obligation to disclose foreign assets is set forth in article 4 of legislative decree n. 167 of 1990, according to which "foreign investments which may generate foreign source income taxable in Italy must be reported on tax return".

Foreign assets are reported on section RW of the income tax return. Section RW is divided in three parts. Part I includes any transfer of money from Italy to a foreign country made in connection with a reportable foreign investment. Part II included foreign to foreign transfers connected with reportable foreign investments. Part III includes the value of foreign assets held at year end.

Penalties for failing to report have been increased and can be assessed between a minimum of 10 up to a maximum of 50 percent of the value of unreported foreign assets. Also, all unreported foreign assets are deemed to originate from unreported taxable income and penalty for failing to report income and pay tax on it can be assessed from a minimum of 100 to a maximum of 400 percent of the unpaid tax.

E&Y Italian Desk in New York Comments on New US-Italy Treaty

Marco Rossi — Wed, 23 Dec 2009 08:33:03 -0500

The Italian Desk of Ernst & Young in New York has published comments on the new US-Italy Tax Treaty. The new Treaty entered to force with the exchange of instruments of ratification on December 17, 2010.

Italy Extends Statute of Limitation for Foreign investments and CFCs

Marco Rossi — Wed, 23 Dec 2009 08:21:11 -0500

Italian parliament passed a new law which extends the statute of limitation for assessment of taxes due on income arising from foreign investments and controlled foreign companies.

The general statute of limitation period is five years from the year in which the return is filed. The special statute of limitation for income from foreign assets and controlled foreign companies is extended to nine years.

The new measure is part of the package of measures which includes and extension of deadlines for the tax amnesty and voluntary disclosure of undeclared foreign assets to February 28, 2010 (with tax of six percent) and April 30, 2010 (with the tax increased to seven percent).

Italy Extends Deadline for Voluntary Compliance Program

Marco Rossi — Fri, 18 Dec 2009 10:41:49 -0500

On December 17, 2009 the Italian Government passed a decree which extends the deadlines for the Italian voluntary disclosure program.

The new deadlines are February 28, 2010 and April 30, 2010. Taxpayers who repatriate or regularize their undeclared foreign assets within February 28, 2010 pay a 6 percent flat tax on the fair market value of the repatriated or regularized assets. Taxpayers who repatriate or regularize their undeclared foreign assets within March 31, 2010 pay a flat 7 percent tax.

According to the latest statistics, foreign assets in excess of E 100 billion have been declared pursuant to the current voluntary disclosure program enacted in September this year.

In connection with the unreported foreign assets disclosure program, new penalties have been enacted for failure to report foreign investments. The new penalties are equal to minimum of 200 to a maximum of 400 percent of the unpaid tax on unreported foreign investments and 50 percent of the fair market value of the unreported foreign assets.

Also, any foreign asset which has not be reported is deemed to be unreported income subject to tax.

New Italy-U.S. Tax Treaty Enters Into Force

Marco Rossi — Thu, 17 Dec 2009 09:53:33 -0500

The pending 1999 U.S.-Italy Tax Treaty entered into force on December 16, 2009, when Italy and the United States exchanged the instruments of ratification.

The new U.S.-Italy Tax Treaty (PDF) is effective from February 1, 2009, for income subject to withholding tax and from January 1 2010, for all other provisions of the treaty.

The 1999 U.S.-Italy Tax Treaty remained pending for ten years due to certain general anti abuse provisions for the application of the reduced withholding tax rates on dividends interest and royalties, and some other issues concerning the exchange of information provision of the treaty and the arbitration procedure to resolve treaty disputes. Italy waived the anti abuse provisions by means of the exchange of diplomatic notes in April 2006 and February 2007 and ratified the treaty in April 2009.

The new treaty includes provision on the creditability in the United States of the Italian Regional Tax on Production Activities (IRAP), the application of the US branch profits tax and new withholding tax rates on dividends, interest and royalties, plus a limitation of benefits provision in the protocol.

The new withholding tax rates are 5 percent for inter-company dividends (namely, dividends paid to a company which owned at least 25 percent of the stock of the distributing company for more than twelve months), 10 percent on interest and zero percent on royalties from copyrights.

The International Tax Institute, Inc. Launched Its New Website

Marco Rossi — Sun, 13 Dec 2009 22:27:09 -0500

For practitioner and professionals active in the international tax arena, it is interesting to know that the International Tax Institute, Inc. has launched its new web site (www.internationaltaxinstitute.org).

Founded in 1961, the International Tax Institute, Inc. is a non-profit organization run by tax professionals to benefit the international tax community. It provides continuing education led by top tax professionals as well as government policy-makers.

Its core program is a series of monthly luncheon seminars, which are available to members and non-members. It provides New York State Continuing Legal Education Credits to lawyers, and New York State Continuing Professional Education Credits to accountants.

It is a membership organization comprised of the top global accounting and law firms, as well as boutique international firms. Individual memberships are also available. Non-members are welcome at all its programs.

OECD Releases Report on Granting of Treaty Benefits with Respect To The Income of Collective Investment Vehicles

Marco Rossi — Sun, 13 Dec 2009 07:32:15 -0500

The OECD Committee on Fiscal Affairs has released as a discussion draft a Report on “The Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles”(PDF) which contains proposed changes to the Commentary on the OECD Model Tax Convention dealing with the question of the extent to which either collective investment vehicles (CIVs) or their investors are entitled to treaty benefits on income received by the CIVs. The Report is a modified version of the Report “Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles” (PDF) of the Informal Consultative Group on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross-Border Investors (“ICG”) which was released on 12 January 2009. In that original Report, the ICG addressed the legal and policy issues specific to CIVs and formulated a comprehensive set of recommendations addressing the issues presented by CIVs in the cross-border context.

The Committee referred the recommendations by the ICG to its Working Party 1 (“WP1”) on Tax Conventions and Related Questions (the Committee’s subsidiary body responsible for changes to the OECD Model Tax Convention) for further consideration. The Report by WP1 which the Committee has now released as a discussion draft is the result of the subsequent work on these recommendations. The main conclusions and recommendations of the Report are similar to those in the ICG Report, with some modifications that reflect the varied experiences of the WP1 delegates. Like the ICG Report, the WP1 Report therefore analyses the technical questions of whether a CIV should be considered a “person”, a “resident of a Contracting State” and the “beneficial owner” of the income it receives under treaties that, like the OECD Model Tax Convention, do not include a specific provision dealing with CIVs (i.e. the vast majority of existing treaties). Further, the Report includes proposed changes to the Commentary on the Model Tax Convention to reflect the conclusions of the Working Party with respect to these issues.

Although these proposed changes to the Commentary will clarify the treatment of CIVs, it is clear that at least some forms of CIVs in some countries will not meet the requirements to claim treaty benefits on their own behalf. Accordingly, the Report also considers the appropriate treatment of such CIVs under both existing treaties and future treaties.

With respect to existing treaties, the Report concludes that, if a CIV is not entitled to claim benefits in its own right, its investors should in principle be able to claim treaty benefits. The Report reflects different views regarding whether such a right should be limited to investors who are residents of the Contracting State in which the CIV is organised, or whether that right should be extended to treaty-eligible residents of third States. In any event, administrative difficulties in many cases effectively prevent individual claims by investors. Accordingly, the Report concludes that countries should adopt procedures to allow a CIV to make the claim on behalf of investors.

With respect to future treaties, the Report endorses the ICG recommendation that the Commentary on Article 1 of the Model Tax Convention should be expanded to include a number of optional provisions for countries to consider in their future treaty negotiations. Inclusion of one or more of these provisions in bilateral treaties would provide certainty to CIVs, investors and intermediaries. The favoured approach for such a provision would treat a CIV as a resident of a Contracting State and the beneficial owner of its income, at least to the extent that its investors would themselves be eligible for benefits from the source country, rather than adopting a full look-through approach. Because different views were expressed in both the ICG and WP1 on the issue of whether treaty-eligible residents of third countries should be taken into account in determining the extent to which the income of a CIV should be entitled to treaty benefits, the proposed Commentary includes alternative provisions that adopt different approaches with respect to the treatment of treaty-eligible residents of third countries. The proposed Commentary also includes an alternative provision that would adopt a full look-through approach, under which the CIV would make claims on behalf of its investors rather than in its own name. The look-through approach would be appropriate in cases where the investors, such as pension funds, would have been eligible for a lower, or zero, rate of withholding had they invested directly in the underlying securities.

The Committee invites interested parties to send their comments on this discussion draft before 31 January 2010. Comments should be sent electronically (in Word format) to jeffrey.owens@oecd.org.

No Participation Exemption in the Absence of Active Business

Marco Rossi — Fri, 11 Dec 2009 07:44:31 -0500

On August 18, 2009 Italy's tax administration issued resolution n. 226/E (published only on December 6, 2009), which concerns the application of the Italian participation exemption rules to gains from sale of stock of an intellectual property holding company (Rul_ 226_E - Aug_ 18, 2009.PDF).

Italy operates a very favorable participation exemption regime, pursuant to which 95 percent of the amount of gains realized from the sale or exchange of stock is exempt from tax. The remaining 5 percent is taxed at the corporate tax rate of 27.5 percent (equivalent to an effective tax rate of 1.375 percent). The exemption applies also to gains from the sale of partnership interests or participating financial instruments that are treated as stock for tax purposes (for an analysis of Italy's participation exemption rules, see Italy's Participation Exemption Rules.PDF).

One of the requirements of the participation exemption is that the company whose stock is sold is engaged in the conduct of a commercial enterprise (as defined in the commercial code). The commercial code definition of commercial enterprise is very wide in scope. Under the tax code, any activity conducted by a commercial company is deemed to be a commercial activity generating business income.

Under the facts of the resolution, an Italian company owns 50 percent of stock of a Dutch B.V., who holds intangible properties (trademarks and trade names). The Dutch holding company is responsible for the registration and legal protection of the intangible properties and licenses those properties to other affiliated companies and third parties in exchange for royalties.

In the resolution n. 226/E, the tax administration clarified that the active business requirement for the participation exemption must be interpreted strictly and is not met when the activity of a company is limited to the mere holding of the legal title to intellectual property and licensing of that property to affiliated companies. To benefit from the exemption the company must be engaged in an active licensing business, which includes actively managing and developing the intangibles by way of research and development activities and its active licensing to third parties.

The distinction between passive intellectual property holding activity, which does not qualify for the exemption, and active licensing business, which qualifies for the exemption, depends of the facts and circumstances of each specific case. For this reason, the tax administration, after clarifying the general principle that applies to the matter, refused to rule on the specific case submitted by the taxpayer.

Italy Cracks Down on Tax Havens

Marco Rossi — Fri, 13 Nov 2009 11:11:28 -0500

In connection with the enactment of its own tax amnesty (which permits the repatriation or regularization of undeclared foreign investments with the payment of a very generous 5% flat tax on the fair market value of the undeclared assets), Italy is cracking down on tax havens, especially those across the border such as Switzerland, Liechtenstein and San Marino. Current estimates of the Italian tax administration suggest that more than 35 percent of Italian investments in Switzerland are being repatriated under the amnesty, and more are expected to come and sit permanently in Italy after the repatriation procedure (for which the deadline is set at December 15).

Recently, it has been reported that Italian tax agents under cover visited several Swiss banks taking pictures of clients coming in and out the banks, and have increased the controls at the border for Italians moving in and out of Switzerland.

As a result of Italy's strong action, Switzerland is now working on a revised proposal to the EU for the enactment of a new back withholding in exchange for Swiss banks customers privacy. Under the new proposal, Switzerland would negotiate with each EU member state a new back up withholding tax, that could be as high as 30 percent and would apply on savings from Swiss accounts of residents of other EU Member States. The proceeds from the withholding tax would go to the resident state of the Swiss bank account holder. In exchange for the back-up withholding, Swiss banks would not be forced to give up the bank secrecy and reveal the names of their customers.

Italy's reaction to the proposal has been rather skeptical so far. The approach of the Italian government is that first the tax amnesty procedure is completed, and then the due consideration will be given to any possible solution to the problem of those Italian individual investors who have decided to keep their undeclared funds offshore. A new provision in the Italian tax code now presumes that any money kept offshore comes from undeclared income for which Italian taxes are due, and the penalty has been increased to up to 400 percent of the amount of unpaid taxes.

Liechtenstein, on the other side, is negotiating a new exchange of tax information treaty with Italy, after several other similar treaties have been signed with a number of other EU Member States.

MQR&A Announces New International Tax Counsel

Marco Rossi — Fri, 25 Sep 2009 10:57:41 -0500

We are pleased to announce that Elettra Menarini has joined our firm as international tax counsel on US-Italy matters. Elettra is admitted in Italy (2003) and California (2006). She specializes in international tax and corporate law and shall provide legal and tax advice for US-Italy cross border transactions.

Elettra Menarini was born and raised in Bologna, Italy. She graduated from the Alma Mater Studiorum University of Bologna receiving her Italian law degree (Laurea in Giurisprudenza) in 1999. Ms. Menarini obtained a Certificate in Intellectual Property law from the University of California San Diego in June 2004 and a Diploma in Taxation form the University of San Diego School of Law in 2007. She is currently enrolled in the LLM in International Taxation at the University of New York. Ms. Menarini is admitted to practice law in Italy and in California.

Ms. Menarini started working as an attorney in Bologna, Italy in 1999 where she worked for the Law Firm FRS Studio Legale Associato in the field of litigation, commercial law and intellectual property. In 2006 Ms. Menarini moved to San Diego, California where she worked for three years in the law firm Procopio,Cory, Hargreaves and Savitch LLP in the field of international taxes assisting in international tax planning and related international matters, particularly with Mexico and U.S.-Mexican legal matters. She assists in the development of business transactions, worldwide investment and financing structures, planning for worldwide income, estate and inheritance taxes.

Ms. Menarini is a member of the Taxation Section of the State Bar of California and of the San Diego County Bar Association. She is also a member of the American Intellectual Property Law Association (AIPLA) and the Italian Bar Association.

New Tax Amnesty Takes Effect on September 15

Marco Rossi — Wed, 16 Sep 2009 09:19:05 -0500

The new tax amnesty recently enacted by the Italian parliament took effect on Sept. 15. Taxpayers have time until April 15, 2010 to apply.

The amnesty applies to individuals and pass through entities which held undeclared foreign accounts and investments outside of Italy as of December 31, 2008.

Taxpayers can declare (and leave abroad) or repatriate the foreign accounts and investments and avoid any applicable tax and civil penalties by paying a tax at a flat rate of 5% on the amount of the reported foreign accounts or investments.

To apply for the amnesty, taxpayers shall file a form with a bank or other Italian qualified financial intermediary, on which they will report the assets that they want to declare or repatriate. The bank or financial intermediary, in turn, will file the form with the payment of the tax with the tax administration. The form does not contain any personal information on the filing taxpayer. Therefore, the amnesty is completely anonymous.

Any future audits on the amounts that are reported on the form is not allowed and administrative penalties for the violation of the rules on reporting cross-border transfer of assets and foreign investments are permanently forgiven.

Similar amnesties enacted in 2001 and 2003 generated a repatriation of 59.8 and 14.9 billion euros, with a tax revenue of 1,4 and 0.6 billion euro (at 2.5 and 4% tax rate), with 56 and 51% of the declared money coming from Switzerland. The estimated amount of declared or repatriated foreign assets that is expected from the new amnesty is 60-90 billion euro with a tax revenue of 3-45 billion euros.

Italy Amended its CFC Rules

Marco Rossi — Fri, 11 Sep 2009 07:06:44 -0500

Italy amended its CFC rules with effect from 1/1/2010.

Under the new provisions, the active business exception to the CFC rules applies only when the controlled foreign company carries on a business in the local market of the country in which the company is established, and it never applies to companies more than 50 percent of whose income is passive income (dividends, interest, gains and income from services to affiliated entities).

Also, the CFC rules apply to foreign companies that are established in white listed jurisdictions, when (1) the foreign company is subject to an effective income tax in its own country of organization that is less than 50 percent of the Italian income tax on its profits, and (2) more than 50 percent of the foreign company's income is passive income (dividends, interest, gains and income from services to affiliated entities.

As a result of the changes, many tax planning structures for Italian companies ding business abroad shall have to be revisited. In particular, many EU holding companies used by Italian companies to handle their outbound investments may become CFC and their income could become taxable currently upon their Italian shareholders in Italy.

With Law n. 102 of August 3, 2009 Italy amended its controlled foreign companies rules (CFC rules) in several important respects. As a result of the changes, deferral of Italian tax on foreign income will be much more challenging.

In general, Italian CFC rules apply to controlled or connected foreign companies established in low tax jurisdictions listed in a ministerial decree (so called black list). A controlled or connected foreign company is a foreign company in which Italian shareholders (individuals or companies) own more than 50% of the voting stock or a sufficient share of voting stock to exercise a significant level of control over the company. If the above conditions are met, the Italian shareholders are taxed currently on their share of the profits of the CFC (adjusted under Italian law).

The first two changes concern the active trade or business exception to the rules. Formerly, the CFC rules would not apply if the CFC was engaged in a real industrial or commercial activity in the country in which it was established. For this purposes, as clarified by the tax administration in several rulings on this issue, the CFC should have a sufficient organization in the foreign country of establishment, including premises, equipment and personnel, as required for the effective conduct of its trade or business. The economic location of the business of the CFC was not relevant. Therefore, a trading company organized in the British Virgin island, with a sufficient organization (office, personnel, telephone lines), which purchased goods from the Italian parent and sold them to customers around the world, was not subject to the CFC rules.

Under the new rules, for the exception to apply it is necessary that the economic activity of the CFC is carried out in the local market of the country in which the CFC is established. Therefore, there must be a direct connection between the business of the CFC and the local economy or market of the country in which the CFC is organized. In the former example, if the CFC sells its goods primarily to customers located in the country in which it is organized, the exception would apply.

Pursuant to the second change, the active trade or business exception will not apply to companies more than 50 percent of whose income is passive income. For this purpose, passive income includes dividends, interest, capital gains, royalties and income from intra group services (that is, services provided to affiliated entities).

The third change extends the application of the CFC rules to foreign companies that are not established in black listed jurisdictions, when two tests are met: (1) the foreign company is subject to an effective tax in its country of residence which is less than 50 percent of the Italian tax that would apply on its profits, and (2) more than 50 percent of the profits of the foreign company are passive income. For this purpose, passive income includes dividends, interest, capital gains, royalties or income from services to affiliated companies. For the tax test, reference is made to the effective foreign income tax rate that applies on the foreign company's profits, compared to the Italian rate. The provision extending the application of the CFC rules to companies organized in non-black listed countries under the above circumstances does not apply if the taxpayer can prove that the foreign company is not a wholly artificially arrangement designed to obtain a reduction in taxes.

The changes to the CFC rules are going to severely impact the planning structures of many Italian companies. In particular, holding companies in the EU controlled by Italian shareholders are now CFC subject to CFC rules, and their income (dividends and stock gains from operating subsidiaries) is potentially subject to full taxation upon the holding company's Italian shareholders in Italy.

The new rules are effective for tax years beginning on or after January 1, 2010.

Circular 26/E of May 21, 2009 Provides Guidance on EU Dividends Withholding Tax

Marco Rossi — Mon, 25 May 2009 17:04:25 -0500

Italy's tax administration issued circular n. 26/E of May 21, 2009 (Circ_26E/2009.pdf), which provides clarifications on the application of the reduced withholding tax on EU dividends.

EU dividends are dividends paid to companies that are resident in a EU Member State or in a State that belongs to the European Economic Area and is included in a special list of approved countries (white list). EU dividends distributed out of earnings and profits accumulated in tax years which began on or after January 1, 2008 are subject to the reduced 1.375 percent withholding tax.

Circular 26/E clarifies that the provision which allocates dividends in reverse chronological order beginning first with profits accumulated in older tax years does not apply. Therefore, the distributing company is free to allocate the distribution to profits accumulated in tax years which began on or after 1.1.2008 and apply the reduced withholding tax.

Also, circular 26/E clarifies that the recipient of the dividend qualifies for the reduced withholding tax if it organized as a company subject to a corporate tax under the laws of its State of residence, even though it does not actually pay any tax as a result of a exemption that is compatible with EU law or is granted in connection with the particular nature of the entity's income (e.g., passive income earned by investment companies).

Therefore, investment funds organized as companies in their state of residence, but not subject to tax on their invstment income (such as certain Luxembourgh or Irish investment funds), could qualify for the reduced EU dividend withholding tax rate.

Overview of Italian withholding taxes on dividends.

Italian-source dividends paid to non-resident persons (other than those attributable to a permanent establishment of the non resident person in Italy) are subject to 27 percent withholding tax. The tax applies both to portfolio and inter-company dividends paid to companies or individual shareholders. The tax rate is reduced to 12.5 per cent for dividends paid on on a special class of non-voting stock (saving shares).

If the recipient of the dividend is a resident of a treaty country, the withholding tax is reduced typically to 15 percent, for portfolio dividends, and 5 percent, for inter-company dividends, under tax treaty.

The recipient of the dividend can apply for a refund of the tax paid in its own State of residence on the dividend received, for an amount not exceeding 4/9 of the Italian withholding tax (or 12 percent of the 27 percent withholding tax). Proof of payment of the foreign tax can be provided by means of a certificate issued by the foreign tax authority.

Dividends paid by an Italian subsidiary to a EU parent company that qualifies for the benefits of the Parent-Subsidiary Directive are free from withholding tax. For the directive withholding exemption to apply, the recipient company must be a company resident in a EU member state subject to corporate income tax in its own state of residence and must directly own at least 10 percent of the stock of the distributing company for 12 consecutive months at the time of the payment of the dividend (for the text of the EU Parent-Subsidiary directive, see DIR CE 1990_435.pdf).

Dividends paid to an Italian company are not subject to withholding tax. The recipient company is taxed on 5 percent on the amount of the dividend at the ordinary corporate income tax rate of 27.5 percent. The result is an effective tax rate on dividends equal to 1.375 percent.

The reduced EU dividend withholding tax.

The European Court of Justice in its judgments issued on December 14, 2006 in the case C-170/05 (Denkavit Internationaal) and on November 8, 2007 in the case C-379/05 (Amurta), and the EFTA Court in its judgment issued on November 23, 2004 in the case E-1/04 (Focus Bank ASA) ruled that EU Member State's national laws which subject outbound dividends to a less favorable tax treatment than the treatment applicable to domestic dividends violate the freedom of establishment clause of the EC Treaty.

This was the case of Italy, which subjected outbound dividends to 27 percent withholding tax (reduced to not less than 5 per cent under tax treaties), compared to the 1.375 percent effective tax applicable to domestic dividends.

In order to eliminate that discrimination and bring Italian law in compliance with the EC Treaty, Italy with the budget law for 2008 enacted new provisions (now included in article 27-ter of the Presidential Decree n. 600 of 1973) according to which dividends paid to a company that is resident of the EU Member State or a state that is part of the EEA and is included in the white list are subject to withholding tax at the reduced rate of 1.375 percent. This equalizes the treatment of EU outbound dividends and domestic dividends.

The reduced rate applies to dividends on shares of stock, or payments under financial instruments or other contractual arrangements that are constituted entirely of profits of the issuer or contracting party and are characterized as dividends for tax purposes.

Requirements for the reduced rate.

The reduced withholding tax rate applies to profits distributed to companies and other entities subject to a corporate income tax. Individual shareholders, partnerships and other fiscally transparent entities do not qualify.

Furthermore, the recipient of the dividend must be resident of a EU Member State or of a State that is part of the European Economic Area and is included in the white list. At the moment, the only Member State of the EEA that is also included in the white list is Norway. Iceland and Liechtenstein, which are part of the EEA, are not included in the white list.

Therefore, in order to qualify for the reduced rate two requirements need to be satisfied: the residency requirement and the subject to tax requirement. The residency requirements is tested under the tax laws of the State of the recipient.

Subject to tax requirement.

With reference to subject to tax requirement, circular 26/E clarifies that the test is satisfied every time the recipient is a separate entity for tax purposes and is generally liable for a corporate (entity level) tax under the laws of its own State of residence, even though it in fact does not pay any corporate tax as a result of an exemption that is compatible with EU law.

Circular 26/E makes reference to paragraph 2.2. of circular n. 47 of November 2, 2005 (Circ_ 47E of 2_11_2005.pdf), which provides a similar clarification with respect to the same requirement that applies for the purposes of exempting from withholding tax the interest and royalties paid by a EU affiliate to to a EU parent company pursuant to the interest and royalties directive 2003/49/CE (2003_49_EC of 3 June 2003 (ENG).pdf.

Circular 26/E further clarifies that the subject to tax test is met even though the recipient entity does not pay any corporate income tax on its income in its own State of residence, due to an exemption that is granted in connection with the nature of its income (like, for instance, in the case of exempt passive income of investment companies), or in connection with the source of the income (like, for instance, in the case of companies that are exempt from tax on earnings derived through foreign branches).

Procedural aspects.

For the reduced withholding tax to apply, the payee must provide to the payer a certificate issued by the tax administration of the recipient's EU Member State of residence, certifying that the recipient is resident of that state and is liable for a corporate income tax under the laws of its State.of residence.

The payee can obtain the certificate of payment of the dividends from the payer in order to claim a tax credit for the Italian withholding tax in its own state of residence.

Entry into force.

The reduced withholding rate applies to dividends paid out of profits accumulated in tax years beginning after the tax year that is in course as of December 31, 2007. Therefore, for calendar year taxpayers, the reduced withholding tax applies to dividends distributed out of profits accumulated in the year 2008 and thereafter.

For the above purposes, the provision that allocates the dividends to profits reserves accumulated to older tax years in reverse chronological order does not apply.

The payer shall notify the payee the tax year to which the distributed profits is allocated, and whether and to what extent the distribution is made out of profits of 2008 or following years, and subject to a reduced rate, or our of profits of 2007 and prior years, and subject to the ordinary tax rates.

The payer shall also keep separate profits accounts for the allocation of the dividends in order to determine the appropriate tax rate.

Italian Supreme Court Held That Burden of Proof in Tax Avoidance Cases is Upon Taxpayers

Marco Rossi — Mon, 04 May 2009 18:14:38 -0500

The Italian Supreme Court in judgment n. 8487 issued on April 8, 2009 held that taxpayers bear the burden to prove that a transaction is entered into for legitimate economic reasons beyond the mere possibility to obtain tax benefits.

The above decision contradicts a previous ruling, n. 1465 of January 21, 2009, in which the Court placed yon the tax administration the burden of proof that a transaction lacks economic substance and is entered into for the essential purpose of obtaining a tax advantage.

Judgment n. 8487 concerns a case in which an Italian company transferred the stock of a wholly owned subsidiary to its parent, as part of a reorganization which was designed to enable the parent to go public.

Under those circumstances, Italian law taxed the gain realized from the transfer of stock of the lower tier subsidiary to the parent to a reduced 10% tax, instead of corporate income tax at ordinary rate. Eventually, the parent was not publicly traded.

The Court applied the anti avoidance provisions of article 37-bis of Presidential Decree n. 600 of 1973 and held that, for those provisions to apply, it is sufficient that a even a single contractual transaction or legal arrangement that is legitimate, on its face, is used in a way that is inappropriate or abusive, and is essentially entered into for no valid economic reasons except for obtaining a tax advantage.

That interpretation, according to the Court, is supported by the Italian constitution, which does not permit tax avoidance.

According to the Court the taxpayer has the burden to prove the specific economic reasons that justify the transaction, in order to be granted the contemplated tax benefits.

The above decision is the last of several decisions issued in the last few months on the topic of tax avoidance and demonstrates that this area is in a constant flux and needs constant monitoring.

New Law Targets Tax Abuse of Repos, Securities Lending Transactions

Marco Rossi — Sun, 03 May 2009 21:48:59 -0500

A new law (Decree n. 5 of 2009 enacted on Feb. 11, 2009 and finally approved by the Parliament on April 9, 2009) targets the tax abuse of sale and repurchase agreements (commonly referred to as repos) and securities lending transactions.

According to a new provision added to article 2, par. 2 of Legislative Decree n. 461 of November 21, 1997, in case of sale and repurchase agreements or securities lending transactions, or any other arrangements having the same or equivalent economic effects, the repo buyer or borrower is entitled to a tax benefit such as credit for withholding taxes or foreign taxes or other similar benefits in respect of the securities transferred or loaned, only if the repo seller, lender or beneficial owner of the securities would be eligible for those tax benefits had it retained the legal ownership of the securities.

A similar provision denies to the repo buyer or borrower of the securities the benefit of the participation exemption for dividends paid on the securities transferred or loaned unless the repo seller or lender would be entitled to it.

Finally, Tax Code article 109, par. 3-bis provides that a loss from sale of stock is non deducible, to extent of the amount of dividends paid on the stock during the 36 months preceding the sale.

The new law establishes that transactions entered into prior to the enactment of the new provisions, can still be challenged under the general anti abuse rules of article 37/bis of Presidential Decree n. 600 of 1973.

Italian Government Is Preparing a New Tax Amnesty

Marco Rossi — Thu, 09 Apr 2009 22:00:13 -0500

The Italian government is working at a bill which would enact a new tax amnesty. The bill should be introduced to the Parliament as early as next week.

Based on certain anticipations on the contents of the new bill, undeclared foreign earnings that are reported and repatriated would be subject to 10% flat tax. Unreported foreign earnings that are reported but reinvested or kept abroad would be subject to a higher tax. In either case, the tax would apply in lieu of any other taxes due on the undeclared earnings and would definitely settle the taxpayer's position.

A similar amnesty was enacted in 2001-2022, together with tougher rules on failure to report foreign bank accounts and other foreign investments that can generate foreign income taxable in Italy. That tax amnesty had a limited success and in general foreign earnings remained significantly unreported.

Tax Administration Rules on Taxation of Foreign Stock Options

Marco Rossi — Sat, 04 Apr 2009 08:58:58 -0500

In ruling n. 92/E of April 2, 2009 Italy's tax administration ruled that stock received through the exercise of stock options granted by a foreign company is income taxable in Italy, if the options are exercised after the taxpayer has moved to Italy and become a resident of Italy for tax purposes, even though the stock options vested mainly in respect of services performed outside of Italy when the taxpayer was not resident of Italy for tax purposes.

The taxpayer argued that a portion of the stock options which vested in respect of services performed outside of Italy when the taxpayer was not a resident of Italy has no connections with Italy and should be excluded from Italian tax.

The tax administration held that all of the stock is taxable in Italy since received when the taxpayer had become resident of Italy for tax purposes, and a credit would be granted for any foreign taxes charged on stock attributable to services performed in a foreign country.

Under the facts of the ruling, the taxpayer worked as an employee of a UK company from October 1, 2004 to September 30, 2007. On October 1, 2007 he moved to Italy where he started working for the Italian parent company of the group. On February 28, 2005 he was granted stock options that would vest in three years. On March 3, 2008, he exercised the options and received the stock.

The taxpayer argued that the sock represented a compensation for services performed between Feb. 28, 2005 and March 1, 2008, when the options vested, including services performed in the UK from Feb. 28, 2005, to October 1, 2007, when the taxpayer was a resident of the UK for tax purposes.

As a result, according to OECD principles on taxation of stock options, the value of the stock should be divided into two portions:

- one portion, which accrued in respect of services performed in the UK between Feb. 28, 2005 and September 30, 2007;

- another portion, which accrued in respect of services performed in Italy, between October 1, 2007 and March 3, 2008.

According to the taxpayer, the first portion should be treated as income for services performed outside of Italy by a non resident individual and should be excluded from Italian tax. Alternatively, Italian tax code article 51, paragraph 8-bis should apply, according to which income of a taxpayer who performs services outside of Italy on continuing basis and as the exclusive object of his employment is limited to a conventional amount determined by way of ministerial decree. The conventional amount would absorb the value of the stock, which would not be separately taxable.

The tax administration disagreed and held that the entire amount of stock is taxable in Italy, because the taxpayer is taxable on a cash basis, and the stock is income received when the taxpayer was resident in Italy for tax purposes.

The provision of tax code article 51, paragraph 8-bis applies exclusively to taxpayers who work abroad but maintain their tax residency in Italy, which is not the case for the taxpayer in the ruling.

The tax administration agreed that, if the UK charges any tax on stock attributable to services performed in the UK, the taxpayer will receive a credit in Italy which would offset the Italian tax and avoid double taxation.

Italy Authorized the Ratification of the New U.S.-Italy Tax Treaty

Marco Rossi — Tue, 24 Mar 2009 05:40:00 -0500

The Italian parliament on March 3, 2009 enacted law n. 20 which authorizes the ratification of the new U.S.-Italy tax treaty signed in 1999.

Law n. 20 of March 3, 2009 was published on the Official Gazette on March 18, 2009 and is now into force. The U.S. had ratified the treaty on December 28, 1999.

The new treaty will enter into force at the time of the exchange of the instruments of ratification. It will apply and take effect for taxable periods beginning on or after January 1, 2010 and for withholding taxes on payments made or accrued on or after the first day of the second month following the date of entry into force. A grandfathering provision allows a taxpayer to elect for the application of the old treaty for a period of 12 months following the entry into force of the new treaty, should the old treaty result in a better treatment.

The new treaty reduces the withholding tax rates on dividends, interest and royalties; authorizes the collection of a dividend equivalent tax on the repatriated profits of a branch, includes a provision limiting the benefits of the treaty to certain qualified residents of the other contracting state, addresses the creditability in the U.S. of the Italian regional tax on production activities, and provides that the competent authorities of the two contracting states may agree to refer a case to special arbitration procedure if they fail to reach an agreement within two years of the date on which the case was referred to one of them.

Background

The current U.S.-Italy tax treaty entered into force on December 30, 1985. On August 25, 1999 Italy and the U.S. signed a new treaty and protocol (the "1999 Treaty"). On November 5, 1999 the U.S. Senate consented to the ratification of the 1999 Treaty, subject to a reservation and understanding.

The reservation required the elimination of following language which appears as the final paragraph of the withholding tax provisions of articles 10 (Dividends), 11 (Interest), 12 (Royalties) and 22 (Other Income):

"The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation of assignment of the" (respectively, shares or other rights; debt claim, rights, and rights) "in respect of which the" (respectively, dividend, interest, royalties and income) "is" (are) "paid is to take advantage of this Article by means of that creation or assignment".

That language established the so-called main purpose tests aimed at tackling possible abuses of the treaty or treaty shopping arrangements.

The understanding concerned the exchange of information provision of Article 26, which, according to the U.S. Senate, should grant to the competent authorities of the two contracting states the authority to obtain or provide information held by financial institutions, nominees, or persons acting in an agent or fiduciary capacity, or respecting interests in a person.

President Clinton signed the U.S. instrument of ratification on December 28, 1999, subject to the above mentioned reservation and understanding. The reservation required approval from the Italian government, which held the ratification process in stand by.

The 2006-2007 Exchange of Diplomatic Notes

By way of diplomatic note n. 291 of April 10, 2006, the Embassy of the United States of America reiterated the above-mentioned conditions to the ratification of the 1999 Treaty.

The Italian Minister of Foreign Affairs issued a note on February 27, 2007 by means of which it formally agreed with the reservation requiring the deletion of the main purpose tests and the understanding on exchange of information.

That step eventually paved the way to the final ratification of the new treaty.

The Italian Law Authorizing the Ratification of the Treaty

Eventually, the Italian Parliament enacted law n. 20 of March 3, 2009 which authorizes the Italian Minister of Foreign Affairs to exchange the instrument of ratification of the new treaty.

Effective Dates and Grandfathering Provision

The 1999 Treaty enters into force on the date on which the instruments of ratification are exchanged.

In general, the 1999 Treaty shall apply to taxable years beginning on or after the the first day of the year in which it entered into force. Therefore, if the instruments of ratification are exchanged in 2009, the Treaty shall take effect for taxable years beginning on or after January 1, 2010.

In the case of withholding taxes at source, the 1999 Treaty shall apply to payments made or accrued on or after the first day of the second month following its entry into force. Therefore, if instruments of ratification are exchanged on March 24, 2009 the Treaty shall apply to withholding taxes due on or after May 1, 2009.

A grandfathering provision allows a taxpayer, for a period of 12 months following the entry into force of the 1999 Treaty, to elect for the application of the 1985 Treaty should it provide a more favorable tax treatment.

Highlights of the New Treaty

Under the 1999 Treaty, the withholding rates on dividends are 5 percent for inter-company dividends (that is, dividends paid to a person owning at least 25 percent of voting shares of the payer for at least 12 months as of the time of the declaration of the dividends) and 15 percent for portfolio dividends. Dividends paid by a US RIC are subject to 15 percent withholding. Dividends paid by a US REIT may be subject to 15 percent withholding only if specific requirements are met.

The withholding rate on interest is reduced to 10 percent.

Royalties for patents and software are subject to a 5 percent withholding and all other royalties are subject to 8 percent withholding rate.

The 1999 Treaty authorizes the application of a branch profits tax. Italy does not have a branch profits tax. However, all Italian companies operating in the U.S. through a branch shall be subject to the U.S. branch profits tax.

Article 23 of the 1999 Treaty (Elimination of Double Taxation) contains specific provisions for the computation of the amount of the foreign tax credit in the U.S. for Italian regional tax on production activities (IRAP) paid to Italy.

Article 2, paragraphs 1-5 of the Protocol to the 1999 Treaty contains the new limitation of benefits provisions of the treaty.

A Memorandum of Understanding signed with respect to article 25 of the 1999 Treaty (Mutual Agreement Procedure) provides that the competent authorities may agree to invoke arbitration in a specific case, if they fail to reach and agreement within two years of the date on which a case was submitted to one of them. The Memorandum of Understanding sets forth the main aspects of the arbitration procedure and refers to the EU Convention on Arbitration Proceeding in transfer pricing matters and the US tax treaty with Germany.

The 1999 Treaty also contains specific provisions on application of treaty benefits to income derived or paid by partnerships or other fiscally transparent entities.

Italian Supreme Court Rules on Application of Tax Treaty Benefits to Partnerships

Marco Rossi — Mon, 16 Mar 2009 18:17:20 -0500

The Italian Supreme Court issued an important decision concerning the application of tax treaty benefits to partnerships.

The judgment (n. 4600 of 2009) will be deposited soon and we will publish it with additional comments as soon as it is available.

Under the facts of the case, a US Limited partnership received the payment of a dividend from an Italian company. A Japanese fund, member of the US limited partnership, claimed the reduction of the Italian withholding tax on the dividend pursuant to the Italy-Japan tax treaty. The Italian dividend withholding tax rate is 27 percent. The Italy-Japan treaty reduces it to 10 percent for inter-company dividends (paid to shareholders owning at least 25 percent of voting shares of the payer) and to 15 percent for portfolio dividends.

Italy's tax administration rejected the treaty claim on the ground that the Japanese fund is not the legal recipient of the dividend. The treaty grants the benefits if "the recipient" of the dividend is a company that qualifies to treaty benefits.

In the case at hand, the US LP, which was the recipient of the dividend, was transparent and did not qualify for treaty benefits under the US-Italy treaty, while the Japanese fund was the final economic owner but not the legal recipient of the dividend.

The Court accepted the position of the tax administration and observed that other Italian treaties, granting treaty benefits to a treaty partner who is the beneficial owner of the dividend, would command a different result.

Italian Tax Administration Clarified Tax Treatment of Debt Obligations Issued by Italian SRL's

Marco Rossi — Mon, 09 Mar 2009 12:24:15 -0500

With ruling n. 54/E of March 3, 2009 the Italian Tax Administration clarified the treatment applicable to debt instruments issued by Italian limited liability companies. According to the ruling, the instruments can be characterized as debt obligations and enjoy the same tax treatment of debt obligations issued by joint stock companies, namely a reduced 12.5 percent tax on interest and complete exemption for certain foreign investors, if the requirements established in the code for this purpose are met.

Article 2483 of Italian Civil Code (as amended with law n. of January 17, 2003) provides that limited liability companies (SRLs) can issue debt instruments to finance their operations of investments, subject to certain limitations. Previously, only joint stock companies (SPAs) could issue debt instruments.

Debt instruments issued by SRLs cannot be offered to the general public and can be subscribed only by professional investors (banks, insurances and financial institutions). If sold to private investors in the secondary market, the seller is liable in the event the buyer fails to make the payments required under the instrument. Seller's secondary liability can be eliminated by way of an agreement between seller and buyer.

The entity's articles or organization or certificate of formation must expressly provide for the possibility that the entity issues debt instruments and confer the power to issue debt instruments either upon the members or the managers, as well as establish the terms of the issuance including the number and amount of the instruments, issuance procedures and voting requirements.

The tax administration in ruling n. 54 clarified that, for tax purposes, debt instruments issued by SRLs are characterized as debt obligations if they satisfy the definition of debt obligation contained in article 44, paragraph 2, letter (c)(2) of the tax code, according to which three tests must be met:

- the instrument is part of a series of transferable instruments issued under same or similar terms pursuant to a single economic transaction;

- the instrument provides for the unconditional reimbursement of an amount that is at least equal to its issue price or face value, with or without payment of interest or other remuneration, and

- the instrument does not confer to the holder any power to control or participate in the management of the issuing enterprise or the transaction pursuant to which it has been issued.

If the three tests are met, the debt instrument is a classified as a debt obligation.

Interest paid under a debt obligation is subject to 12.5 percent withholding tax, provided that the maturity date of the instrument is at least 18 months or longer and the interest rate does not exceed the official discount rate increased by 2/3rd (or 200% is the instruments is regularly traded in a regulated securities market). In all other cases, the withholding tax rate is 27 per cent.

For interest paid to private individuals or foreign investors who hold the instruments outside of a trade or business that is part of an Italian permanent establishment, the 12.5 per cent is a final tax.

However, for debt obligations held by non resident investors who are resident or organized in certain approved jurisdictions (white-listed countries), interest is totally exempt from tax.

Interest on debt instruments that fail to qualify as debt obligation is subject to the ordinary 27 percent tax rate and is not eligible for the foreign investors exemption.

In the light of the above, for foreign investors the characterization of the instrument as debt obligation is particularly important in order to qualify for the exemption.