The Italian Supreme Court, with decision No. 14527/2019 published on May 29 2019, ruled on a new case of tax residence of a foreign company which, after inspection, was deemed to be in Italy. The takeaways from the Supreme Court are the following:
The residence of a company must be identified by referring to Article 73, paragraph 3, of the Presidential Decree No. 917/1986 (Income Tax Code). The provision refers to the presence in Italy, for most of the fiscal year, either of the registered office or of the place of effective management.
Additionally, the place of effective management is the place where management activities of the entity are carried out and the directors' meetings take place. Besides, it is the place appointed, or permanently used, for the centralisation of corporate bodies in order to manage internal and external relationships and then provide inputs for the activity of the entity.
The tax residence of the directors is not of itself a proof of the entity's tax residence. Nevertheless, directors' tax residence could be assumed as a presumptive element for tax residence of the company (unless the taxpayer provides contrary evidence) from the year 2006, when Article 73, paragraph 5 of the Income Tax Code entered into force.
The mere activity of participations management performed by a company could be consistent with the nature of a holding company. Therefore, such activity could not be considered as a presumptive element to qualify a company fictitiously constituted abroad.
The case at stake started from a request submitted by a Dutch company (ABV) regarding the reimbursement of withholding tax paid in Italy by its Italian subsidiary on dividends distributed for the fiscal year 2001. Italian tax authorities initially accepted the request of the ABV and paid back the withholding tax. However, after subsequent checks from the competent local tax office, the reimbursement initially granted was then challenged, arguing that the ABV had been incorporated in the Netherlands exclusively to benefit from the favourable fiscal dividend regime provided by the Italian-Netherland double tax treaty and from the Dutch tax regime concerning the exemption of dividends from taxable income.
The taxpayer appealed against this last position of the tax office before the Provincial Tax Court which ruled in favour of the former as the deadline to ask for the reimbursement of the withholding tax back had already expired at the time of the checks of the local tax office. In turn, the local tax office appealed before the Regional Tax Court. This court overturned the decision of the first degree judge and affirmed that: (i) the terms to challenge the reimbursement initially granted after automated controls had not expired, (ii) the ABV was not tax resident in the Netherlands since its directors resided in Italy and in the UK and (iii) the ABV did not perform any economic activity in the Netherlands.
By aligning its ruling with other decisions concerning cases of relocation abroad (for example, see decisions no. 7739/2012, 2869/2013, 33234/2018 and 33235/2018), the Supreme Court rejected the decision of the Regional Tax Court. Specifically, the decision identified a lack of in-depth analysis which, if conducted, would have ascertained that the place of effective management of the ABV was effectively located in the Netherlands, where meetings of the board of directors physically took place and where the entity had dedicated premises where management activities were conducted.
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