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Italy Introduces a Penalty Protection Regime for Hybrid Mismatches: Trick Or Treat?

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Italy Introduces a Penalty Protection Regime for Hybrid Mismatches: Trick Or Treat?

Anti-hybrid legislation consistent with A.T.A.D. 2 has been in effect in Italy for fiscal years beginning on or after January 1, 2020. But towards the close of last year, legislation was enacted under which penalty relief is available as of the 2023. The key to obtaining relief is the “hybrid dossier,” which is submitted to the tax authorities and provides full disclosure of the hybrid transactions, the relevant laws in Italy and the other country, and the reasoning why the anti-hybrid penalties are inapplicable. While the new rules clearly apply beginning with the 2023 fiscal year, retroactive relief back to the 2020 fiscal year is allowed, provided one hurdle is overcome. Retroactive relief is available if, and only if, Italian tax authorities “have not started a tax audit, investigation activities, or other similar actions for those fiscal years.” It is understood that Italian tax authorities have already begun to notify targeted taxpayers with questionnaires. In their article, Federico Di Cesare, a Partner of Macchi di Cellere Gangemi in Rome and Milan, and Dimitra Michalopoulos, an Associate in the tax practice of Macchi di Cellere Gangemi in Rome, explain the legislation, address the content of the hybrid dossier, and address the most important issue for many taxpayers: have Italian tax authorities taken action similar to a tax audit by the circulation of the questionnaire?

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Effect of Ruling No. 288/2023 – Italian Anti-Hybrid Rules Attack the 2020 Swiss Corporate Tax Reform

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Effect of Ruling No. 288/2023 – Italian Anti-Hybrid Rules Attack the 2020 Swiss Corporate Tax Reform

Sometimes, anti-abuse provisions are applied by tax authorities because of what happened in the past, not the present, much like a classic vendetta. This is what happened to an Italian subsidiary of a Swiss company that benefitted from the principal company regime in Switzerland. That regime presumed the existence of a deemed P.E. outside of Switzerland and the allocation of profit to the deemed P.E. The regime was repealed with effect as of January 1, 2020, and replaced by a relatively normal tax regime, with one specific transition rule. The Swiss parent was entitled to a tax-free step-up in the goodwill of the deemed P.E. which could be amortized over 10 years, allowing a tax benefit for the Swiss company. In April of this year, the Italian tax authorities issued tax ruling no. 288/2023 to an Italian subsidiary of a Swiss company that previously benefitted from the principal company regime. It now was taxed under Swiss law in a straightforward way, but with the amortization benefit. In the ruling, the Italian tax authorities determined that the amortization deduction constituted a hybrid mismatch because the goodwill was not purchased. The result is that the Italian subsidiary cannot reduce sales by the related cost of inventory purchased from its Swiss parent. Federico Di Cesare, a Partner of Macchi di Cellere Gangemi, and Dimitra Michalopoulos, an Associate in the tax practice of Macchi di Cellere Gangemi explain the basis of the ruling and strongly suggest that it is not grounded on the existing provisions of the Italian anti-hybrid rules. Sounds like classical vendetta in the context of the A.T.A.D.

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