U.S. Impact Of Federal Tax Reform From Italy’s Perspective: Renewed Attention On Italy’s Anti Inversion Rules

As a result of the significant reduction of U.S. corporate income tax rates pursuant to the tax reform of the TCJA enacted on December 22, 2017, the Unites States now has a lower corporate tax rate than many of its trading partners, meaning that, in many instances, the profits of foreign owned or controlled-U.S. subsidiaries shall be taxed more favorably than the profits of their foreign parent companies or affiliates in their home jurisdictions. That creates an incentive for foreign companies to channel more profits through their U.S. subsidiaries, in order to benefit from lower U.S. income taxation compared to that applicable in the parent company’s home country.

Starting in 2018, the U.S. taxes the profits of its corporations at the generally applicable corporate tax rate of 21 percent, with a preferential effective tax rate of 13.125 percent applicable on certain income deriving from foreign sales of goods and services (“foreign derived intangible income”). Those rates compare to the Italian combined corporate tax rate of 27.9 percent.

Italian companies with U.S. and international sales may benefit from a significant tax reduction by increasing their workforce and activities in the U.S. and handling more of their U.S. and internationals sales through their U.S. subsidiaries. Once the U.S. subsidiary has been taxed on its profits in the United States, it can repatriate those profits to its Italian parent virtually tax free, thanks to a substantial reduction of the inter company withholding tax rate under the U.S.-Italy income tax treaty (5 percent) and an almost complete exemption of the dividends from Italian tax in the hands of the Italian parent, pursuant to Italy’s participation exemption rules.

Under the new scenario described above, renewed attention should be given to Italy’s corporate “anti-inversion” rules. Under Italian income tax code, a company incorporated or organized in a foreign country is treated as an Italian resident company, for Italian corporate income tax purposes, and is subject to tax in Italy on its worldwide income, if it maintains its place of administration or its principle place of business in Italy. Also, a company owned or controlled by Italian shareholders, and owning or controlling a foreign company, is presumed to be an Italian resident company, unless the taxpayer proves that it is effectively managed and controlled in its own country of organization.

A company’s place of administration is the place where the company’s day to day management activities are carried out. According to the general guidelines issued by the Italian tax administration on this matter (see Protocol n. 2010/39678 of 3/19/2010 and 2010/157346 of 12/20/2010), several factors are looked at to determine a company’s place of administration, including:

– the place where the company’s directors and officers meet and vote upon company’s affairs;
– the place where the company’s directors and officers actually and regularly carry out their administration and management functions and duties for the company;
– the place where the company’s day to day legal, administrative, accounting and tax management functions are performed.

Italy’s Supreme Court ruled that a company’s place of administration is the place of effective management of the company, namely, the place where the day to day administrative activities for the company take place, shareholders’ and directors’ meetings are held, and company’s business activities are carried out, putting the company is connection with customers, business partners and third parties (see Supreme Court’s ruling n. 2869 of 2/7/2013).

The company’s place of administration should be distinguished from the place where the supervision, coordination and direction of a company’s business is performed, typically, at the headquarter of the parent or holding company. The sole fact that a company’s is wholly owned or controlled by another company, does not, in an on itself, produce the automatic effect of locating the company’s place of management at the same place as its parent’s headquarter, and day to day managements activities should not be confused with key direction, supervision and coordination activities that fall within the parent or holding’s company’s duties and functions (see ruling n. 61 of 1/18/2008 of Regional Tax Commission of Tuscany, Section XV).

A company’s principal place of business is the place where the company’s main business activities are performed. For example, a manufacturing company has its place of business where it perform most of its manufacturing activities; a marketing or selling company has its principale place of business where its principal sales office conducting most of its sales is located, and a services company has its principally place of business in the place where it performs most of its services to its customers.

Italy’s tax administration has been enforcing the place of management or principal place of business rules in situations involving U.S. companies owned of controlled by Italian companies, despite the fact that those U.S. companies were subject to a 35 percent corporate tax rate on their profits taxable in the United States, and no apparent tax saving was involved. Typically, those U.S. companies never file any income tax return in Italy. As a result, Italy’s tax administration assesses failure to file penalties, equal to minimum 120 percent and maximum 240 percent of any Italian tax due, on top of the Italian corporate income tax on all of the profits of the U.S. company. Furthermore, since no foreign tax credit is allowed under the Italian tax code when no Italian income tax return has been filed, the claim for a credit for the U.S. taxes paid by the U.S. company on its U.S. taxable profits is denied, leading to complete double taxation.

It is reasonable to expect increased enforcement activity of the place of administration rule, from the Italian tax administration, now that the corporate rate differential between Italy and the United States create a clear incentive to concentrate more profits in the United States, achieving a potentially significant tax saving.

Many small and mid size U.S. subsidiaries owned or controlled by Italian companies share their Italian directors and officers with those of their parent company, have a very limited governance structure and actual administrative activities carried out in the U.S., and perform accounting and administrative functions for their U.S. companies from Italy. Those companies should establish a more robust corporate governance, which includes local directors or officers; set up and carry out local administrative, legal, accounting and tax functions through local professionals reporting to local management; have the proper set of contracts with their parent or holding company, governing any inter company supporting administrative or commercial services they receive from their parent or other affiliates in the same group, and maintain accurate records of all functions and activities pertaining to the company’s administration performed in the United States, to rely upon in a possible audit.

Have a question? Contact Marco Rossi.

Your comments are always welcome!

I am a U.S. and Italian tax counsel and focus on U.S. and Italian international tax and business law. My firm, Marco Q. Rossi & Associati (MQR&A), which I founded in 1998 and established as a U.S./Italy cross border practice in 2005, is a boutique law firm operating out of New York, Miami and Los Angeles and with local offices in Italy (Genoa and Milan) and the United States (Pittsburgh and Scottsdale).

I was born and educated in Italy where I graduated in law in 1990. I earned an international tax LL.M. degree from New York University School of Law and set up my New York office in 2005.

I assist international individuals and companies engaged in international investments or business transactions in the United States and the E.U. or doing business on a global basis, and foreign clients doing business or investing in or with Italy or the U.S. I also assist U.S. and Italian individuals relocating abroad on a permanent basis or for temporary working assignments, and foreign individuals working in the U.S. or Italy.

I travel between New York, Miami and Los Angeles, which serve as the international headquarters of the firm for our international and U.S. based clientele, and divide my time between the US and Italy working at our Italian offices that serve as our local base for Italian clients operating in the United States and U.S. clients engaged in Italian-E.U. legal and tax matters.

My major practice areas are international legal and tax planning for global firms; tax planning for foreign-owned U.S. and Italian businesses; transfer pricing and tax treaties planning; corporate and commercial transactions; holding company and fiduciary services for foreign investors and international groups, cross border mergers and acquisitions, immigration or expatriation planning for individuals relocating abroad or in Italy and the U.S., international tax reporting and compliance.

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1 comment on “U.S. Impact Of Federal Tax Reform From Italy’s Perspective: Renewed Attention On Italy’s Anti Inversion Rules”

  • Thanks for this.

    Another good article which considers the U.S. corporate tax regime from the “outside looking in” rather than the “inside looking out”.

    As the incentives to operate “foreign based businesses” through U.S. domestic corporations increase (largely through the lowering of U.S. tax rates), the more likely that “foreign governments” will respond to protect their tax bases.

    But over and above tax rates …

    With little U.S. reporting of “foreign entities” (the USA has not joined CRS) and no reciprocal reporting under FATCA, the USA has increased it’s attractiveness as a destination for “foreign capital”.

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