jurisdiction
Introduction
The substance criteria of entities established in Italy does not tend to be a troublesome area, given that the establishment of foreign entities in Italy is generally based on commercial and productive reasons. Instead, the Italian tax authority often challenges the delocalisation of profits / activities toward foreign entities, and the application of the more favourable regime provided by the EU Directive in the lack of a beneficial owner requirement for the recipient. To prevent these behaviours, Italy has strictly implemented controlled foreign company (“CFC”) rules, and there have also been several cases derived from tax challenges related to the beneficial owner issue.
ATAD 3 is introducing more detailed criteria to identify substance rules, useful both for domestic and cross border cases.
Tax residence criteria
According to corporate income tax rule, an entity is deemed tax resident in Italy if, for more than half of the fiscal period, it has in Italy ether i) a registered office; or ii) the effective place of management; or iii) the place of day to day management.
'Substance' criteria
None at present.
General requirements
None at present.
Activities
At present, no specific requirements.
Employees
No specific requirements.
Premises
No specific requirements.
Bank account
No specific requirements.
Substance reporting obligations?
At present, no specific requirements.
Substance criteria applied to a foreign entity?
Substance criteria applicable to foreign entities are provided by the CFC rule implemented in Italy. As a general rule, foreign entities fall within the CFC provision if they have low level of taxation and their proceeds are mainly based on passive income, unless they are able to prove they carry out an effective economic activity, through the use of personnel, equipment, assets and premises.
In this respect the tax authority has provided a list of some indicators of ‘substance’, such as bills, organisation charts, employee’s insurances, rent agreements for business premises and bank accounts with local banks. In addition, specific indicators are also provided for holding companies, such as actual decision-making powers for directors, a description of the intercompany economic-financial relations specifying the consistency and the type of transactions, and also assets and liabilities involved.
ATAD 3
The adoption of ATAD and the equalisation of criteria for ‘substance’ will be useful for the interpretation of all relevant EU provisions to prevent misleading approaches and behaviour.
