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Italy: Italian Cabinet approves the Internationalisation Decree’s tax package: Simplification for CFC and black-list cost rules


Giuliano Foglia
Marco Emma
Among several tax measures introduced by the Italian Cabinet's final draft 'internationalisation' decree (see our Italy update in the June Issue), the following outstanding amendments to 'black-list' costs and CFC rules seem to seize the opportunity to set simpler tax rules for those who intend to invest in Italy, in accordance with the purpose of the ongoing broad tax reform.

The draft decree, in fact, simplifies the rules subordinating the deduction of black-list costs to certain tight demonstrations and formalities. Pursuant to the new rules, costs incurred (from fiscal year 2015) to actually acquire goods and services from black-list suppliers would be freely deductible up to the limit of the fair market value of the transaction, determined according to OECD's guidelines. Any transaction value exceeding such arm's-length 'safe harbour' limit shall be deductible only if the taxpayer provides evidence about its effective economic interest in such transaction and about its genuine execution. The existing obligation to demonstrate that the black-list supplier carries out an effective business activity will be lifted. In any case, transactions with black-list suppliers shall be expressly reported in the annual income tax return.

Substantial changes and simplifications have been introduced also in relation to CFC rules. First, the scope of application shall be limited to controlled companies only, while affiliated foreign companies (that is, companies owned for at least 20% or 10% in the case of listed entities) will no longer be subject to CFC legislation. The ruling procedure to obtain exemption from application of CFC rules in relation to foreign subsidiaries shall no longer be mandatory: the Italian parent company shall evaluate the opportunity to ask for an optional ruling for such purposes. Alternatively, existence of the conditions for the exemption (that is, satisfaction of the 'activity' test or the 'subject-to-substantial-tax' test) may be demonstrated also in case of tax audit. In this respect, possession of foreign subsidiaries falling within the scope of the CFC rules will be specifically flagged in the annual tax return.

Finally, according to the decree, Italian parent companies subject to full taxation on dividends and capital gains derived from participations in black-list subsidiaries that were not subject to CFC rules because of their actual industrial or commercial activity, will benefit from an indirect tax credit for foreign taxes paid by the relevant black-list subsidiary, subject to certain circumstances.

Further simplifications and advantages in relation to both the above mentioned tax regimes (black-list costs and CFC) will be granted to companies opting, upon certain conditions, for a new cooperative compliance programme. Taxpayers adopting adequate internal audit procedures to know, monitor and manage their tax risks may, in fact, participate in a cooperative compliance programme to have the opportunity to (i) agree with the Revenue Agency a common evaluation of potential tax risks before filing the tax returns; (ii) enter into quicker and ad-hoc tax ruling procedures (for example, to determine arm's-length value for black-list cost deduction purposes); and (iii) benefit from further tax advantages.

Giuliano Foglia (foglia@virtax.it) andMarco 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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