Applicability Of Italian CFC Rules Extended

by Ulrika Lomas, Tax-News.com, Brussels

29 July 2009

The official publication of the decree containing the Italian government’s latest economic package of measures has confirmed the extension of anti-avoidance CFC (controlled foreign company) rules beyond the confines of tax havens.

Originally, the CFC rules applied to entities controlled by Italian taxpayers and resident in countries with a preferential tax regime. The latter definition was modified from 2008 to include countries not on a so-called “black list”; countries which did not allow an adequate exchange of information, and where the level of taxation was significantly below the equivalent Italian tax rates.

Article 13 of the new decree now extends the rules to all locations where the effective tax suffered by the CFC is less than half of that which would have been payable if it had been subject to Italian taxation (27% in the case of company profits in Italy), and where more than half of its income is represented by financial services, in their widest sense.

Additionally, if the above conditions apply, it is now the taxpayer who must prove that the foreign entity is not “artificial” – above all, that it pursues a real commercial activity. The Italian taxpayer must initiate an appeal to the Italian tax authorities together with all the necessary information. Sanctions for non-compliance have also been increased.

This extension of the CFC rules has been presented by the government as part of a concerted effort, both nationally and internationally, to reduce Italy’s underground economy and to work with other countries in applying OECD guidelines to reduce cross-border tax avoidance.