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Tax Alert (Italy) – Budget Law For 2018 Introduces Major Developments To Domestic Tax System

This is the fourth of a series of posts on the major developments introduced by Law No. 205 (enacting the Italian Budget Law for 2018),

Individual taxation – Modification of black-list criteria for CFC purposes: taxation of profits accrued and distributed in different fiscal periods and under different rules

The Italian CFC rules have been revised several times over the last years. Specifically, legislation on the criteria to identify a CFC varied from (i) a list of privileged jurisdictions issued by the Ministry of Finance with Ministerial Decree of 21 November 2001 (provision in force until 31 December 2014), (ii) amendments to the aforementioned, by Ministerial Decrees of 30 March 2015 and 18 November 2015 (provision in force from 1 January 2015 to 31 December 2015), and (iii) the “nominal tax rate” criteria in the foreign jurisdiction (provision in force from 1 January 2016).

For a CFC recognized as such according to Italian criteria, profits of the non-resident subsidiary are allocated to the Italian resident shareholder in proportion to the equity interest. Thus, when the subsidiary distributes dividends to the Italian resident shareholder, these dividends are not included in the taxable income of the shareholder and, therefore, are not taxed in Italy up to the amount that has already been taxed under the Italian CFC rules.

Budget Law for 2018 has clarified the tax treatment applicable to dividends deriving from CFCs. The new regulation stated that dividends accrued until 31 December 2014 (when the subsidiary was established in a jurisdiction not listed in the Ministerial Decree of 21 November 2001) but distributed from 1 January 2015 onward (when the non-resident subsidiary, due the changes of CFC rules, vice-versa resulted tax resident in a privileged jurisdiction), shall not be considered as black-list dividends even though the payment incurred in a moment in which the CFC legislation recaptured the foreign subsidiary within its provision. The same rule applies to dividends accrued in fiscal years closed after 31 December 2014 and paid to the Italian shareholder in any subsequent year where the CFC legislation applies.

Entry into force of Law No. 205 of 27 December 2017: 1 January 2018.

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