Decision no. 31772/2019 announced by the Supreme Court on December 5 2019 has evoked further discussions into the ongoing ‘abuse of law’ dialogue concerning tax authorities and entrepreneurs in Italy. Tax authorities had regarded a group’s reorganisation to be elusive, claiming that it should have been carried out through alternative procedures, which may have resulted in higher taxes for the group.
The delicate point from this case was focused on the extent to which tax authorities and courts may question business decisions taken by the taxpayers at a strategic and entrepreneurial level by leveraging anti-avoidance rules. On this matter, the Supreme Court judges stated that: “it is not an issue of reviewing or restricting the constitutional principles of corporate freedom and economic initiative, imposing specific restructuring measures on the taxpayer (omission) just because this would involve a greater tax burden”. Conversely, it is “to highlight the existence of possible alternative ways of carrying out the same economic operation, which have to be reasonable from economic and market perspectives".
This judgement seems to present the tax authorities and courts with an extensive power to lawfully examine the transactions carried out by the entrepreneur and challenge those choices that they do not consider reasonable from an economic perspective. Although this could in principle constitute a valid solution to prevent and contrast those behaviours which are actually artificial and not grounded from a business perspective, the risk emerging from this perspective is that tax authorities may arbitrarily invoke the ‘abuse of law’ principle and leverage widespread power every time they deem it convenient for tax collection purposes.
It should be observed that the relevance of the ‘abuse of law’ dialogue and the deriving powers for tax authorities and courts has been debated several times over the years. The leading principle that has predominantly emerged has been that those authorities do not have the power to question the reasonability, the appropriateness and the convenience of the decisions taken by the entrepreneur in carrying out its business. In particular, this has been the stance as authorities cannot demand the taxpayer to adopt a legal form of procedure instead of that lawfully chosen, and judgements are only based on valuations of economic or strategic nature.
In 2006, when the Halifax plc judgement (EU Court of Justice no. C-255/02 dated February 21 2006) was issued, the EU Advocate General observed that taxpayers may choose to structure their business in a way to limit their tax liability. It was added that there was no law provision obliging the taxpayer to handle a deal in a way to ensure the highest amount of taxes possible was paid in the involved jurisdictions.
More recently, the same Supreme Court (Decision no. 31613, dated December 6 2018) with reference to a similar controversy concerning a group restructuring, upheld the Veneto regional tax court judgement, based on which the decisions lawfully taken by the entrepreneur were considered unquestionable, in accordance with the ‘freedom of economic initiative’ principle. Moreover, the judges affirmed that ”when the tax authorities indicate how economic operators must behave in order to achieve a specific purpose, they take on a role which is not their own and does not justify the assessment”. Therefore, the alternative juridical instruments or procedures which the tax authorities list as preferable options to achieve the same results “would only represent a different view of the case to which the taxpayer is not obliged to comply”.
In conclusion, this Supreme Court judgement rather looks like a step backwards on this matter, bringing the situation back to a time when many group reorganisations were halted in Italy. During that period, groups were often left waiting for valid economic reasons to be provided for the delays, and answers sometimes seemed distant from the alternatives which the tax authorities has supposedly considered more suitable (and also more expensive from a tax perspective).
