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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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News From Italy – Recent Updates to Inbound Workers Regime and Register of Beneficial Owners

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News From Italy – Recent Updates to Inbound Workers Regime and Register of Beneficial Owners

This month, the good news regarding special tax regimes in Italy relates to the flat tax. No changes are expected to the regime as Italy finishes its legislative session. The €100,000 flat tax remains intact. Good news also exists for the lesser known Pensioners Regime that imposes a 7% substitute tax on all pension payments paid on non-Italian source pension income if certain conditions are met. However, cutbacks in benefits and more stringent standards for qualification have been announced regarding the Inbound Workers Regime. In addition, the Register of Beneficial Owners of enterprises with legal personality, private legal entities, trusts, and similar legal arrangements has become operational at local Italian Chamber of Commerce offices. Andrea Tavecchio, the Founder and Senior Partner of Tavecchio & Associati, Tax Advisers, Milan, and Alessandro Carovigno, a chartered accountant at Tavecchio & Associati, Tax Advisers, Milan, explain the revisions to the Inbound Workers Regime and the information that must be filed with the Beneficial Owner Register. They also address the persons obligated to file with the Register and the persons who have access to the information filed with the Register.

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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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Italy: New Clarifications Concerning the Taxation of Trusts and Beneficiaries

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Italy: New Clarifications Concerning the Taxation of Trusts and Beneficiaries

Tax authorities in much of Europe look at trusts as a tax gimmick used by the wealthy as a tool to dodge taxes. However, trusts are commonly used as a tool in estate and succession planning in connection with generational transfers of family assets and businesses, the achievement of charitable purposes, and the protection of vulnerable individuals. In this context, the Italian tax authorities released Circular Letter No. 34/E in October, providing guidance on several key issues surrounding trusts. It provides many important clarifications making trusts more attractive for individuals resident in Italy and international families having one or more beneficiaries resident in Italy or wishing to relocate to Italy. Andrea Tavecchio, the Founder and Senior Partner of Tavecchio & Associati, Tax Advisers, Milan, and Riccardo Barone, a Partner at the same firm, explain how Italian tax authorities will treat various types of trusts in a logical way.

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Italian Supreme Court Issues a Landmark Decision on the Entitlement to the Foreign Tax Credit

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Italian Supreme Court Issues a Landmark Decision on the Entitlement to the Foreign Tax Credit

A common error among tax advisers is the expectation that tax law in a foreign country is applied in a straightforward way. For example, if a tax treaty provides that a foreign country will provide a foreign tax credit for taxes imposed by the other country, it seems clear that foreign tax will be reduced by that credit. Regrettably, this is not always the case. Francesco Capitta, who is Of Counsel to Facchini Rossi Michelutti, Studio Legale in Milan, and Andrea D’Ettorre, who is an associate at the same firm, explain that, in Italy, a decision of the Supreme Court was required in order to allow an Italian resident individual to reduce Italian tax by a foreign tax credit for U.S. income taxes withheld on U.S. source dividend income. Remarkably, there was a logical reason for the denial, but it was invalidated in the case.

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Tax Competition Between Member States of the European Union – An Academic View

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Tax Competition Between Member States of the European Union – An Academic View

In May, the European Commission lost its second case in the E.U. General Court when Amazon’s tax arrangement in Luxembourg was found to be onside as to rules prohibiting illegal state aid among Member States. A companion case was issued the same day in which the penalty asserted by the European Commission was upheld. These cases bring the Commission’s record before the Court to two wins and three losses, with three cases in progress. For those readers asking why Commissioner Vestager continues to bring these cases, the answer is explained by Professor Pietro Boria, of Sapienza University of Rome. A new electorate has arisen in Europe that is multinational in its scope and led by a governing body answerable to all Member States. Parochial interests that existed through the end of the 20th Century no longer control. Tax policy is no longer the realm of national governments.

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New Italian Transfer Pricing Regulations Affect Multinational Enterprises

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New Italian Transfer Pricing Regulations Affect Multinational Enterprises

Italian transfer pricing documentation rules were introduced in 2010. The system affords taxpayers the possibility of penalty protection for transfer pricing adjustments, provided that qualifying transfer pricing documentation is maintained by the taxpayer. Late in 2020, new regulations were introduced. The new regulations contain several important changes for multinational enterprises based in Italy or having an Italian member. Marco Valdonio, a partner of Maisto e Associati, Milan, and Mirko Severi, an associate of Maisto e Associati, Milan, explain the principal revisions to the Italian rules. They address the changes that broaden the scope of companies required to maintain a master file, reductions in the scope of the exception to annual filing for certain local members of a foreign-based multinational group, and changes to the content of both the master file and the local file.

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D.A.C.6 – The Italian Way

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D.A.C.6 – The Italian Way

In their article entitled “D.A.C.6 – The Italian Way,” Fabio Chiarenza and @Carmen Adele Pisani of Gianni & Origoni, Rome, address the Italian rules implementing D.A.C.6. In comparison to advisers in other Member States who point out the areas in which guidance is sorely missed, the authors are able to take a deep dive into already issued Italian guidance, giving examples of how the guidance works in real life.

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Insights Vol. 5 No. 8: Updates & Other Tidbits

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Insights Vol. 5 No. 8: Updates & Other Tidbits

This month, Rusudan Shervashidze, Neha Rastogi, and Nina Krauthamer look at several interesting updates and tidbits, including (i) potential tax reasons for Cristiano Ronaldo’s move to Italy, (ii) a law suit brought by high-tax states against the U.S. Federal government in connection with the T.C.J.A. limitations on deductions for state and local taxes, (iii) the finding of the European Commission that the aid given to McDonalds by the Luxembourg government did not constitute illegal State Aid, and (iv) a successful F.A.T.C.A. prosecution against a former executive of Loyal Bank Ltd.

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Joint Audits: A New Tool for Cross-Border Tax Evasion

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Joint Audits: A New Tool for Cross-Border Tax Evasion

When a large corporate taxpayer receives an audit notification letter from the tax authority in its country of residence, the taxpayer typically knows what to expect: a lengthy process of documenting and defending its tax position. It also knows the process under domestic law for appealing adverse tax adjustments, and if cross-border issues are raised, it knows how to take advantage of Mutual Agreement Procedures between competent authorities under an income tax treaty. The full process can take years to resolve. Now, however, a pilot program between German and Italian tax authorities empowers a joint cross-border audit team to conduct a single joint audit of cross-border operations between the two countries. The joint audit is intended to be more effective for resolving issues of double taxation in cases involving complex facts related to (i) transfer pricing issues, (ii) residency or permanent establishment issues, and (iii) aggressive tax planning schemes. Marco Orlandi of Ludovici Piccone & Partners, Milan, examines the actual process followed in the pilot program and comments on whether the goals of the joint audit have been achieved.

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A New Definition of Permanent Establishment in Italian Domestic Income Tax Law

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A New Definition of Permanent Establishment in Italian Domestic Income Tax Law

Italian domestic tax law has adopted the permanent establishment (“P.E.”) concept when determining whether business profits of a nonresident are taxable in the absence of an applicable income tax treaty.  Earlier this year, changes to the definition of the term broadened the scope of activity constituting a P.E.  Effective January 1, 2018, (i) a digital P.E. is treated as a fixed place P.E., (ii) the scope of the specific activity exemption has been scaled back, (iii) an anti-fragmentation rule has been adopted applicable to groups of companies, and (iv) the scope of an agency P.E. has been broadened. Stefano Loconte and Linda Favi of Loconte & Partners, Milan, explain the new rules.

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Circular Letter No. 25/E Clarifies Italy’s New Carried Interest Regime

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Circular Letter No. 25/E Clarifies Italy’s New Carried Interest Regime

Early last year, the Italian government announced new rules regarding favorable taxation of carried interests.  Graduated tax rates and social charges would be replaced by a flat 26% tax on investment income.  Towards the end of the year, guidelines were published by the Italian tax authorities providing significant clarifications on the scope, requirements, and conditions under the new tax regime.  Andrea Tavecchio and Riccardo Barone of Tavecchio Caldara & Associati, Milan, examine how the new regime will work in practice.

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Circular Letter No. 17/E Clarifies Special Tax Regime for Italian “New Residents”

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Circular Letter No. 17/E Clarifies Special Tax Regime for Italian “New Residents”

Late last year, the Italian government enacted a new regime designed to entice wealthy individuals into becoming tax residents.  In late May, operating rules for the new tax regime were announced.  In broad terms, the regime imposes an annual tax charge of €100,000 in lieu of tax imposed at standard rates and an exclusion from inheritance and gift tax on foreign assets.  Andrea Tavecchio and Riccardo Barone of Tavecchio Caldara & Associati in Milan, Italy explain the details of the new regime.

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Caveat Dominus: A Comparison of Post-Employment Entitlements in the U.S. and Italy When Executive Employment is Terminated Without Cause

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Caveat Dominus: A Comparison of Post-Employment Entitlements in the U.S. and Italy When Executive Employment is Terminated Without Cause

When companies expand business operations across the Atlantic Ocean, various cultural differences between the U.S. and Europe come to the fore.  The most noticeable are found in the area of employment, and among those are expectations of the rights of employers, employees, and executives at the time of termination of employment.  George Birnbaum of the Law Offices of George Birnbaum P.L.L.C. and Ariane Rauber and Fabio Tavecchia of Palmer Studio Legale compare and contrast employee rights in the U.S. and Italy.

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Italy Introduces a 15-Year Preferential Tax Regime for Wealthy Individuals Taking Up Tax Residence in Italy

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Italy Introduces a 15-Year Preferential Tax Regime for Wealthy Individuals Taking Up Tax Residence in Italy

As non-domiciled (“Non-Dom”) residents of the U.K. scramble to restructure in light of the new rules for persons holding Non-Dom status for more than 15 years, Italy has adopted new measures to attract high net worth individuals.  The rules are clearly derived from the Non-Dom rules in the U.K., but the weather is better.  Fabio Chiarenza of Gianni, Origoni, Grippo, Cappelli & Partners explains the new provisions.

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A Year of Guest Features

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A Year of Guest Features

This month, we reminisce on the best of 2016, with articles contributed by guest authors from around the world.

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Italy Modernizes Tax Treatment of L.B.O. Transactions

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In a Circular Letter issued in March by the Agenzia delle Entrate, the Italian tax authority, rules were issued providing for rational tax treatment of costs and gains arising in the context of leveraged buyout transactions.  Luca Rossi and Marina Ampolilla of Studio Tributario Associato Facchini Rossi & Soci explain the changes and bring good news to investment bankers and their clients.

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The Italian Voluntary Disclosure

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INTRODUCTION

Italy has a long history of tax amnesty programs established under a broad variety of names and rules. Interestingly, every new program has been described as “the last chance” for tax evaders to comply with the Italian tax code. It is no wonder that, as in all prior cases, Italy’s most recent voluntary disclosure program (the “V.D.”) has been defined as the “last call.” Having said that, and sensitive to prior performance, we firmly believe that for a wide range of reasons the V.D. will truly be the last opportunity for Italian citizens and residents to get their tax matters in order.

One indicator is heightened criticism of the typical Italian de facto tolerance toward tax evasion, which is now being blamed for the country’s ongoing economic crisis. Accordingly, the war against tax havens, as initiated by the U.S. under F.A.T.C.A. and subsequent inter-governmental agreements, has changed the way the whole world approaches such matters. Today, there is a new sensitivity toward tax compliance and no discernable government or media tolerance towards tax avoidance.

In addition, a different approach is now being taken with respect to tax amnesty matters. In the past, there was a sort of “reward” for the penitent evaders. Such individuals were granted the opportunity to regularize their positions by paying a low flat-rate extraordinary tax. The V.D. is different. Under the new provisions of the Law n. 186, dated December 15, 2014, (the “V.D. Act”), a taxpayer who enters the V.D. procedure (“V.D. Applicant”) will be required to pay every single euro of unpaid tax; the only benefit lies in the reduction of penalties, which are less than those applicable in an ordinary tax audit procedure.

Proposed Legislation for Italian Patent Box Regime

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Currently. the O.E.C.D. and E.U. are finalizing new rules for the design of acceptable tax regimes for intangible property (“I.P.”) box companies – a tax benefit that is seen by the E.U. as a form of illegal state aid. Germany, France, Spain, and Italy are seen as the champions of the new regulations. However, Italy recently introduced its own I.P. tax incentive plan, known as a “patent box regime.” Stanley C. Ruchelman and Kenneth Lobo examine Italy’s incentive program, in light of the O.E.C.D. and E.U. attacks on such regimes.

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