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Deductibility of Expenses Incurred with Suppliers in Black Listed Countries

22 Jun 2011

Italian Tax law limits the deductibility of expenses incurred by Italian companies with entities resident in black listed state or territory. This provision means costs are not deductible unless the Italian company proves, alternatively, that its supplier carries on a real business activity or that the relevant transaction had a real business purpose and actually took place. Taxand Italy reviews the provision and how this will impact countries that have a tax treaty with Italy.

The anti avoidance legislation may conflict with the specific non-discrimination clause set forth in some double Tax Treaties signed by Italy. In particular, tax treaties in force with the Philippines, Singapore, Switzerland and the United Arab Emirates contain such kind of non-discrimination clause.

The clause states that a contracting state may not impose limitations on the deductibility of costs paid to an enterprise of the other contracting state when such limitations do not apply to costs borne in domestic transactions, as such being deductible under the same conditions as if they had been paid to a resident in Italy. For the countries mentioned a conflict between the non-discrimination clause set forth in the relevant Double tax treaty and the domestic anti-avoidance provision on the deductibility of expenses occurs.

Recent decision of the Tax Court of Milan has supported the interpretation according to which the non discrimination clause set forth in tax treaties shall prevail on the domestic anti-avoidance law. Consequently according to the decision of the Tax Court the Italian company has been granted the deduction of costs incurred with respect to a supplier based in South Korea.

Taxand's Take

The above decision is among the very first decisions of tax courts that, taking into account opinion of Italian scholars, allows the deductibility of costs incurred with companies in black listed countries in the event Italy has entered into with such countries a double tax treaty containing a "deduction non discrimination" clause.

Your Taxand contacts for further queries are:
Guido Arie Petraroli
T. +39 02 7260591

Cristina Periti
T. +39 02 7260591


Taxand's Take Author