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Italy: Clarification of Aspects of Taxation of Resident Entities in Black-Listed Jurisdictions

(Nov. 9, 2010) The Italian Tax Authority (Agenzia delle Entrate, ITA) issued Ministerial Circular No. 51/E on October 6, 2010, to clarify the rules on controlled foreign corporations (CFCs) found in Law No. 102/2009 and also to clarify the tax regimes that apply to inbound dividends derived from and costs incurred by resident entities in black-listed countries. (OGGETTO: Disciplina relativa alle controlled foreign companies (CFC) – Dividendi provenienti e costi sostenuti con Stati o territori a fiscalità privilegiata – Chiarimenti, CIRCOLARE N. 51/E (Oct. 6, 2010),
; Legge 3 agosto 2009, n. 102, “Conversione in legge, con modificazioni, del decreto-legge 1º luglio 2009, n. 78, recante provvedimenti anticrisi, nonchè proroga di termini e della partecipazione italiana a missioni internazionali,” 179 GAZZETTA UFFICIALE (Aug. 4, 2009) (Supplemento ordinario n. 140), available at

The black-listed countries are tax havens or jurisdictions considered to have a privileged tax regime because their level of taxation is significantly lower than that applied in Italy. (Emanuela Santoro, Tax Authorities Issue Ministerial Circular No. 51/E: New CFC Regime Clarified, TNS ONLINE (Nov. 1, 2010), International Bureau of Fiscal Documentation (IBFD) online subscription database; the blacklist appears in the Ministry of Finance Decree of Nov. 21, 2001, Individuazione degli Stati o territori a regime fiscale privilegiato di cui all'art. 127-bis, comma 4, del testo unico delle imposte sui redditi (cd.”black list”), 273 GAZZETTA UFFICIALE (Nov. 23, 2001), available at


Under Law No. 102, the application of safe harbor rules (parameters for taxpayers to observe to ensure favorable, or avoid unfavorable, tax treatment) “can be avoided if the resident taxpayer proves, inter alia, that the foreign entity predominantly carries on an actual industrial or commercial activity in the state or territory in which it is located.” (Santoro, supra.) Circular No. 51/E states that this will be the case provided that the foreign entity is economically and socially integrated with the market in that territory, making the clarification that it is not enough just to have a real business organization presence in that market. The Law provides that CFC rules may be disregarded if a group's effective tax burden is comparable to (equal to or higher than) the Italian tax burden of 27.5%. According to the Circular, the calculation of that effective tax rate must take into account “only the actual income taxes due,” disregarding deferred taxes and tax losses accrued before the new CFC regime's entry into force. (Id.)

In connection with passive income, the scope of the CFC rules was expanded under Law No. 102 to cover countries not officially on the black list; namely, to any jurisdiction in which the following two conditions are met: 1) a CFC's effective tax is 50% lower than the Italian tax on the same income in the same taxable year and 2) a CFC “derives more than 50% of its proceeds from passive income or intra-group activities.” (Id.) The Circular makes the clarification that the purpose of this provision is to avoid localization of profitable assets in jurisdictions whose effective tax rate is lower than the Italian tax rate through the use of foreign companies not set up to conduct real business activity.

A third clarification set forth in the Circular has to do with advance rulings. A taxpayer must apply to Italy's Ministry of Finance for an advance ruling in order to avoid application of the CFC rules. The Circular states that “the ruling must be filed in time to obtain the answer from the ITA within the deadline for filing in the annual income tax return,” i.e., by June 1, 2011, to avoid the rules' application to tax year 2010, if the taxpayer's tax year coincides with the calendar year. (Id.)

Inbound Dividends

In addition, Circular No. 51/E clarifies the tax regime applicable to inbound dividends directly or indirectly distributed by companies resident in black-list states or territories. The applicable law provides that such dividends are fully taxable (i.e., the 95% exemption regime for Italian recipients will not apply). The Circular states, with a view to preventing triangular schemes, that “dividends distributed by a European subsidiary, which in theory may benefit from the [European Union] Parent-Subsidiary Directive (90/435), are fully taxable in Italy” if: 1) they are derived, wholly or in part, from black-listed countries and 2) shares are held in a foreign company through the subsidiary in order to avoid the less favorable tax regime, so that the subsidiary is merely a conduit company. (Emanuela Santoro, Tax Authorities Issue Ministerial Circular No. 51/E: Tax Regime Applicable to Inbound Dividends Derived from Black Listed Countries Clarified, TNS ONLINE (Nov. 1, 2010), IBFD online subscription database.)

The Circular indicates that a case-by-base approach is to be used in determining whether such an abusive triangular scheme exists. The Circular addresses in addition situations in which such EU conduit companies also distribute dividends derived from companies of white-listed countries, acknowledging the lack of specific rules on the subject in the Italian tax law. (Id.)

Deductibility of Expenses

Finally, Circular No. 51/E also clarifies the tax regime applicable to costs incurred in black-listed countries by Italian resident entities. Article 110(10) of the Income Tax Code “limits the deductibility of expenses and other deductible items if they relate to transactions between a resident and a company or professional resident in a state or territory not included in the white list.” (Emanuela Santoro, Tax Authorities issue Ministerial Circular No. 51/E: Tax Regime Applicable to Costs Incurred in Black Listed Countries Clarified, TNS ONLINE (Nov. 1, 2010), IBFD online subscription database.) According to the Circular, “resident entity” includes the permanent establishment in Italy of a foreign entity; “'resident in a state or territory not included in the white list' includes the permanent establishment of an Italian entity or of an entity resident in a white-list country”; and “expenses” include all kinds of costs and expenses, e.g., depreciation/amortization and capital losses. (Id.)

The expenses are not deductible unless the resident entity proves that the non-resident entity conducts “real business activity” or that the transactions “had a real business purpose and actually took place.” The Circular includes a (non-exhaustive) list of elements to be considered in a “real business purpose” test, e.g., elements such as price and delivery conditions. The Circular also makes a clarification on the prices paid to black-list suppliers in terms of their qualifying as having a “real business purpose.” (Id.; see also Wendy Zeldin, Italy: Rules on Controlled Foreign Corporations and Tax Havens Tightened, GLOBAL LEGAL MONITOR (Sept. 28, 2009), //