With Legislative Decree 142 of 29 November 2018, the government transcribed the EU Anti-tax Avoidance Directive (2016/1164/EC) into Italian law. The decree’s new managed foreign corporation (CFC) guidelines are applicable from the financial yr following that in development on 31 December 2018 (ie, from 2019 for calendar-12 months taxpayers).
Italian CFC law
Under the brand new Article 167 of the Tax Code, an overseas jurisdiction is deemed to be tax privileged if the subsequent situations are met:
the effective tax fee (any reference to a nominal tax rate not applies) inside the foreign jurisdiction (ie, the overseas effective tax rate) is lower than 50% of the tax that might have been charged had the employer been resident in Italy (ie, the inner virtual tax fee); and
multiple-third of the corporation’s revenue derives from ‘passive profits’ – specifically:
hobby and other earnings deriving from the monetary property;
royalties and every other earnings deriving from IP use;
equity investments (capital profits or dividends);
earnings from monetary leasing;
coverage, banking, and different monetary sports;
sales deriving from intra-institution offerings; or
the sale of products with little or no delivered monetary price. (1)
In light of the above, the latest tax rules introduced by means of Legislative Decree 142 have eliminated the distinction among a tax haven CFC and a white list CFC. The decree has therefore unified the phrases under which the CFC policies follow if the abovementioned situations are collectively met independently from the USA in which the business enterprise is resident for tax purposes.
The new definition of ‘control’
Legislative Decree 142 extends the idea of ‘control’ to include:
‘earnings control’ (ie, the Italian controlling entity is entitled to receive extra than 50% of the overseas employer’s profits); and
‘juridical control’, as provided for underneath Article 2359 of the Civil Code. An employer is deemed to be below juridical manage if:
any other agency without delay or circuitously holds the general public of votes on the shareholders’ assembly;
another business enterprise immediately or not directly has enough votes to exercising a dominant impact within the shareholders’ meeting; and
the company is under the dominant effect of some other company by way of virtue of a specific contractual dating.
An exemption from the new CFC regulations is to be had to controlling companies that may prove that a real commercial enterprise is accomplished by way of the overseas entity in any other jurisdiction by a manner of neighborhood personnel, system, different assets, and premises, also by an advance ruling from the Tax Authority. Thus, the advance ruling is optionally available and the exemption can be proven via the taxpayer at some stage in a tax assessment.
Where those safe-harbor situations are duly met, the following dividend disbursed by a CFC will benefit from a 50% exemption in addition to a foreign tax credit score computed at the last 50% taxable dividend.