Italian Authorities Rule On Transactions With 'Blacklist' Countries

by Ulrika Lomas, for LawAndTax-News.com, Brussels

21 April 2004

An advance ruling issued last month has clarified the position of the Italian tax authority with regard to the deductability of expenses in transactions undertaken by Italian companies with entities resident in countries which are included on Italy's 'blacklist' of tax haven jurisdictions.

According to reports in the Mauritian media, the ruling was requested by an Italian firm which had made purchases from a Mauritius-based supplier, and believed that it should be permitted to deduct expenses incurred during the transactions for the purposes of calculating its Italian tax liability.

Under Italian rules, in order to ensure the deductability of expenses in such cases, the Italian taxpayer must demonstrate either that the foreign entity is carrying on commercial or industrial activities, or that the transaction between the two firms has taken place for sound business reasons.

In the case of the Italian company in question, although documentation regarding the Mauritian party was provided, the tax authority argued that this merely proved the official existence of the supplier, not the type of business that it carried out.

However, the transactions between the two companies were shown to meet the sound business purpose test, and the Italian firm was therefore informed that the related costs would be deductible.

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