New CFC Rules for Foreign Companies
On 1 July 2009, Decree no. 78/2009 was issued introducing stricter rules with respect to the Italian Controlled Foreign Companies (CFC) regime. Taxand Italy considers the conditions of the new CFC rules for foreign companies.
Before these new rules were enacted, Italian CFC regulations – according to which Controlled Foreign Companies are treated as “transparent entities” and their profits are attributed to the Italian person (company or individual) who controls the CFC – were applicable only when the foreign entity was a resident of a tax haven included in a “black list”.
Now, Decree no. 78/2009 has broadened the scope of the CFC rules to include entities located in any jurisdiction – not only in a tax haven – provided the following two conditions are met:
a) the CFC is subject, in its own country, to an effective rate of taxation which is at least 50% lower than the tax rate that would have been applicable had it been resident in Italy
b) the CFC derives more than 50% of its revenues from the management, holding, or investment in securities, shareholding, credits or other financial assets, from the disposal or licensing of intellectual property rights, or from the performance of intra-group services (including financial services).
Regarding the first requirement, the Italian resident controlling person should first determine the taxable profits of the CFC and then verify if the tax burden of the CFC is lower than 50% of the tax rate that would have been applicable had the company been resident of Italy.
Regarding the second requirement, the Italian resident controlling person should verify whether the “passive income” and revenues from intra-group services exceed 50% of total revenues.
The Decree does provide for a special safeguard clause pursuant to which the CFC rules will not be applicable notwithstanding that the company meets the conditions outlined above. The resident shareholder can in fact demonstrate, by applying for an advance tax ruling, that “the setup of the CFC in the foreign country is not artificial and it is not aimed at obtaining any undue tax advantage”. This provision is a clear acknowledgement of the ECJ’s Cadbury Schweppes judgment, (ECJ, 12 September 2006, Case C-196/04).
As a consequence of the introduction of the new CFC regime, Italian taxable persons (individuals or companies) which control foreign entities should review the impact of these new rules in relation to their existing structures.
Your Taxand contacts for further queries are:
T. + 39 02 7260591
T. + 39 02 7260591