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Amongst its discoveries this year of various schemes devised by Italian companies and individuals to evade taxes, the Italian Revenue Agency has now disclosed another in the form of cross-border stock lending.
The scheme used in this instance has involved the lending of shares, utilizing foreign companies in eastern Europe and the islands of Madeira. More than 200 small and medium-sized Italian companies, concentrated in the Lombardia, Emilia Romagna and Veneto regions, are known to have been involved.
In the first few months of this year alone, the operation of the scheme, in its various forms, is said to have cost the Italian tax authorities more than EUR300m (USD380m) in direct taxes.
All of the companies involved entered into contracts with external counterparties that had no actual economic effect, but that generated substantial fiscal benefits. The plan, in its main variant, entailed the signing of a contract of stock lending with an eastern European company over shares held in a company resident in Madeira.
Alongside that contract is placed another in which a commission is payable by the Italian company dependent on whether the Madeiran company pays a certain level of dividend. Both sides are already aware of what the result will be: the Italian company loses the “bet” on the amount of dividend, and pays the commission.
However, the commission payable to the eastern European company is always equal to, or slightly above, the dividend received from the company in Madeira, so that the effect on the Italian taxpayer of this zero-sum game economically is of substantial benefit fiscally. While the commission payable is fully deductible against the Italian company’s taxable income, the dividend received is taxable for only 5% of its amount.
The Revenue Agency points out that the above is only one of the many variations on this and other schemes which are daily becoming more sophisticated.
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