Article 110(10) and (11) of the Italian tax code provides that no deduction is allowed to Italian persons for costs and expenses derived from transactions with entities in non-EU states or territories as listed in a black-list unless:
- the foreign person carries on an actual commercial activity (first exception); or
- the transactions have an actual business purpose (second exception); and have been executed.
In addition, the deduction of expenses paid to black-listed entities is subordinated to a disclosure in the yearly corporate tax return as a separate item.
The rule applies irrespectively from the fact that the transactions are carried out with independent counterparts (i.e., outside the group).
With Circular Letter No. 51 of October 6, 2010, the Italian tax authorities commented on the two exceptions making clear the following:
Pursuant to the new CFC rules (see the CMS Tax Connect Flash of November 23, 2010), Italian taxpayers who intend to invoke the commercial exception are now required to prove that the business activity carried out by the CFC is permanently and continuously connected with the local market, i.e, the local market is the place where goods and/or services are acquired and/or sold by the CFC (so-called “market link”).
On the first exception, the Circular Letter No. 51 points out that, while it can represent good evidence, the “market link” requirement under the CFC rules is not requested to prove that the foreign person carries on an actual commercial activity. This clarification changes the position sustained in the Ruling No. 100 of April 8, 2009. As a matter of fact, in the mentioned ruling the Italian tax authorities denied the possibility to rely on the first exception on the assumption that a Swiss supplier did not carry on its activity in the Swiss market.
On the second exception, the Circular Letter No. 51 indicates that, in order to evaluate the actual business purpose, all elements should be taken into considerations (i.e., an higher price is not sufficient to disregard the deduction).
Among the elements specifically mentioned by the Italian tax authorities, the Circular letter No. 51 recognizes that organizational, commercial and manufacturing constraints, e.g., the existence of a centralized procurement group company supplying all subsidiaries, may induce the Italian client to carry on the transaction with the concerned counterpart.
Fabio Ararmini, PartnerFabrizio Alimandi, AssociateCMS Adonnino Ascoli & Cavasola Scamoni