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Italy Removes Cyprus and Malta from Blacklist

29 Sep 2010

The Italian Ministry of Finance has amended certain Ministerial Decrees, the result of which is to remove Malta and Cyprus from the country's "blacklist" of tax havens. Taxand Italy provides the details around this move and Taxand Cyprus and Taxand Malta give their feedback on the benefits for investors.

On 27 July 2010 the Ministry made appropriate changes to all three lists (Ministerial Decree 4 May 1999; Ministerial Decree 23 January 2002; Ministerial Decree 21 November 2001) of countries considered to have tax systems which favour the avoidance of taxation concerning (i) the residence of individual taxpayers, (ii) the tax legislation about controlled foreign companies (CFCs) and (iii) the non-deductibility of corporate costs and expenses. The details of these Decrees and impacts of the amendments are provided below.

1. Ministerial Decree 4 May 1999 - Residence of individual tax payers
This Decree is strictly connected with the part of the Italian Income Tax Code which states that if an Italian transfers his residence in countries or territories listed in the Decree, he will have a presumed continued residence in Italy.

Due to the amendments mentioned above and of the fact that Cyprus and Malta are also members of the European Union with full "ordinary fiscal status", with effect from this tax year, those Italians who have attempted to transfer their residence in Cyprus or Malta will no longer have a continued presumed residence in Italy.

2. Ministerial Decree 23 January 2002 - Controlled Foreign Companies (CFC)
Under CFC legislation, profits of a non-resident entity are deemed to be profits of an Italian resident (individual or company) if:

  • the resident controls, directly or indirectly, the non-resident entity
  • the non-resident entity is resident in a tax haven as defined in the blacklist issued by the Ministry of Finance with the Ministerial Decree of 23 January 2002.

The profits of the foreign controlled entity are taxed at the resident's average tax rate.

The application of the CFC rules can be avoided if the resident company proves that the non-resident entity predominantly carries on an actual business in the country or territory in which it is resident, or that the participation in the non-resident entity does not achieve the localisation of income in tax haven countries or territories.

With effect from tax periods starting on or after 1 January 2007, the CFC rules are also extended to "related entities", i.e. those in which the Italian resident directly or indirectly holds a profit entitlement exceeding 20% (10% in the case of listed companies).

Now, the above described rules will not be applicable to subsidiaries or related entities resident in Malta and Cyprus.

3. Ministerial Decree 23 January 2002 - Non deductible costs
This Decree is related to the anti-tax-haven legislation provided by the Italian Income Tax Code which states that costs and expenses are not deductible if they arise from transactions with companies resident in a non-European Union (EU) Member State with a preferred tax regime.

The Ministry of Finance, by Ministerial Decree of 23 January 2002, issued a list of countries and territories with a preferred tax regime.

The deduction is allowed, however, if the resident company can prove that the non-resident company actually and mostly carries a business activity, or that the transactions have a business purpose and have in fact been concluded.

VAT Reporting
The changes to the lists are also significant and will impact the new Italian VAT reporting requirements that were announced in April, for all "risky" import and export transactions above EUR 50,000, particularly those transacted with countries considered not to have a sufficient level of tax information exchange.

Under the new rules, the details of transactions in goods and services from companies or individuals having an establishment, residence or domiciled in those blacklisted countries will have to be forwarded electronically to the Italian Revenue Agency (the arrangements have been delayed from 31 August 2010 until 2 November 2010).

On the basis of the last disposal issued by the Tax Authority, it is clear that the above described VAT reporting duties will not be applied to transactions carried out by Italian entities with Cyprus and Malta companies.

Taxand's Take

Due to the amendments of the Decrees on 27 July 2010, the tax anti-avoidance rules will no longer be applicable, for expense deduction purposes, to the costs arising from transactions with company's resident in Cyprus and in Malta.

For Cyprus, the result of the above, especially coupled with the amendment of the double tax treaty of the two countries is expected to give a boost to the use of Cyprus as an intermediary holding company jurisdiction by Italian corporations. Especially with regard to investments in the Central-Eastern European countries, India and China, Cyprus has the potential to maximise the return on investments of Italian companies. With a rich portfolio of DTTs with the above countries Cyprus enables the investor by pulling his/her profits by way of dividends, interest and royalties with zero or low withholding taxes. Incoming dividends are tax free in the hands of the Cyprus Holding Company and can then be distributed onwards to the hands of the Italian parent together with interest and royalties, without any Cypriot withholding tax.

Below a table with the various withholding rates of tax on the 3 types of income arriving in Cyprus from investments in the above countries:

*This positive development should encourage more flows of capital and investment between the two countries and increased use of Maltese vehicles for tax planning and structuring. Malta currently has a double tax treaty in force with Italy which was signed on 16 July 1981." Taxand Malta

Your Taxand contacts for further queries are:
Guido Arie Petraroli
T. +39 02 7260 591

Fulvio Sogni
T. +39 02 7260 591

Eylem Philippou
T. +357 22 699 222

Walter Cutajar
T. +356 2730 0045

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