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05 August 2011
The rules on controlled foreign companies in Article 167 of the Corporate Tax Act state that as long as certain conditions are met, profits realised by a foreign enterprise are deemed to be imputed to the Italian ultimate shareholder and are therefore taxed in Italy, even if no dividend distribution takes place.
General provisions on controlled foreign companies were introduced in 2001 and initially applied only to foreign subsidiaries based in blacklisted countries.
In general, the controlled foreign company rules can be disregarded if, through a ruling procedure, the resident taxpayer demonstrates (among other things) that the foreign subsidiary carries on a business activity in the market in which it is established. According to Circular 51/E, which was issued in 2010, the presence of an actual business organisation in the foreign market in question is insufficient in itself for a positive ruling; rather, the Italian ultimate controlling shareholder is required to show that the foreign entity participates in the economy of its host state or territory within the meaning of the European Court of Justice's decision in Cadbury Schweppes.
The controlled foreign company rules can also be avoided if the group's effective tax burden is equal to or greater than the tax burden under the Italian regime (ie, 27.5%).
Since January 1 2010 the rules have applied to foreign subsidiaries that are established in whitelisted jurisdictions if:
On May 26 2011 the tax authorities issued Circular 23/E, which provides new guidelines on the application of the controlled foreign company rules to foreign companies in jurisdictions that are not tax havens. On the subject of the tax rate test, the circular states as follows:
The tax authorities will apply a strict interpretation in the event that an Italian controlling company does not verify the tax rate and the passive income tests in detail. Where both tests are met, the authorities will apply the controlled foreign companies provision to the whitelisted controlled entity in a specific tax year. In this case the Italian taxpayer should file a ruling request for the regime in question to be disapplied in subsequent years, even if the conditions for the application of the controlled foreign companies provision are not verified further. This position appears to be inconsistent with the wording of Article 167 of the act.
For further information on this topic please contact Marco Abramo Lanza, Simona Zangrandi or Franco Pozzi at Studio Legale Tributario Biscozzi Nobili by telephone (+39 02 763 6931), fax (+39 02 780 146) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
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