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Italy: Substitute tax on financing agreements executed outside the territory of Italy

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Giuliano Foglia


Marco Emma

The Italian tax authorities issued stringent guidelines in respect of the 0.25% substitute tax generally applicable to medium and long-term financings granted by banks (through agreements formed within the territory of Italy. In principle, the territorial requirement for the application of the substitute tax is the same set forth for registration tax: The 0.25% tax applies on agreements formed within the territory of the state. The meaning of the Italian expression "formati … nel territorio dello stato" has never been officially clarified, so far, by Italian tax authorities. Therefore a certain degree of uncertainty exists on the scope of application of the above mentioned territorial requirement.

In this contest, the Lombardy Revenue Agency's Head Office (Agenzia delle EntrateDirezione Regionale Lombardia) in 2008 addressed to its local offices instructions aimed at challenging (as a tax-avoiding practice) financing transactions entered into through agreements executed by the parties outside the territory of Italy even though (i) the parties to the financing agreement are both resident in Italy; (ii) the financing agreement is drafted in Italian language and is governed by Italian law; (iii) the financing is granted for operations that will be occurring in Italy (the financing produces effects only in Italy).

With ruling No. 20/E of March 28 2013, the Italian tax authorities have now clarified that the choice of entering into medium and long-term loan agreements outside the territory of Italy (even when the financing is granted for operations that will be occurring in Italy, is governed by Italian law and the parties are both resident in Italy) should not per se constitute "abuse of law": In fact, for such purposes, it is necessary a further element, which lacks in these situations – that is the distorted use of a (formal) legal instrument with the sole purpose of obtaining an undue tax advantage.

However, on the other hand the tax authorities took a new restrictive position on the scope of application of the expression "agreements formed...within the territory of Italy".

The concept, as explained in the ruling, is connected with the process of formation of the agreement between the parties, and it is far from the concepts of execution or signature.

More in detail, when analysing the tax regime of financing transactions, it must be ascertained whether the financing agreement was formed within the territory of Italy.

In the view of the tax authorities, the moment and the place in which the financing agreement are formed must be identified, even without a formal execution of the relevant deed, with the moment and the place where the main elements of the relevant agreement are in substance already agreed upon by the parties: In the event that the negotiations were carried out in Italy and that results from certain circumstances (such as a term-sheet entered into in Italy or similar documents), the financing agreement must be deemed as formed within the territory of Italy, regardless of the fact that the place of the formal execution of the same agreement is outside of Italy.

On such basis, even though the ruling explicitly relates to financing transactions (i) in which both the parties are resident in Italy, (ii) whose effects shall be produced in Italy and (iii) governed by Italian law and subject to Italian courts' jurisdiction, it may not be excluded a priori the risk that also financing transactions in which just some (not all) of the three elements above are present may be challenged by the Italian tax authorities on the grounds of the principles expressed in the ruling. For any financing transactions, therefore, the set of documents (also preliminary papers) shall represent a crucial issue for tax purposes: A deep analysis, also under a civil law standpoint, should be carried out to determine whether, based on such preliminary documents, the agreement is already formed (and binding between the parties) or not.

Moreover, the principles stated by the ruling may be utilised by competent tax offices also to assess financing transactions occurred in the past, to which the substitute tax was not applied.

In general, the taxpayer liable for the payment of the substitute tax is the bank granting the loan (either Italian or non-Italian banks, acting through a facility office, or directly, if so authorised, in Italy). However, under common practice the tax, pursuant to the relevant agreement, is borne by the borrower.

In the event of an assessment based on the principles set forth by the mentioned ruling penalties ranging from 120% to 400% of the difference between the substitute tax due and the tax actually paid would apply as the case may be.

Giuliano Foglia (foglia@virtax.it) and Marco Emma (emma@virtax.it)

Tremonti Vitali Romagnoli Piccardi e Associati

Tel: +39 06 3218022 (Rome); +39 02 58313707 (Milan)

Website: www.virtax.it

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