Italy: Is CFC regime compliant with EU law, tax treaties?

Italy: Is CFC regime compliant with EU law?

Tax professionals in Italy have filed a complaint with the European Commission asserting that the Italian controlled foreign company (CFC) regime—in particular, provisions applicable to CFCs that are not located in “black list” countries—is contrary to standards under the EU Treaty.

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The complaint against the CFC regime was filed after a December 2015 decision of the Italian Supreme Court, in which the high court found that the Italian CFC regime is compliant with the EU freedom of establishment principle.

Summary

The CFC regime, under Italian tax law, provides that an Italian resident taxpayer is subject to tax on income realized by certain CFCs in which the Italian taxpayer directly or indirectly holds the majority of votes or exercises a dominant influence. The CFC regime applies to

  • CFCs located in “black list” countries
  • CFCs located in countries not on the “black list” if: (1) the CFC’s effective tax rate is less than half of the effective tax rate in Italy; and (2) the CFC’s income is mainly “passive”—e.g., dividends, interest, royalties—or the income originates from related-party transactions

There are provisions that allow for a taxpayer to be exempt from the CFC regime, and to prove that it is eligible for exemption from the CFC regime under safe harbor provisions.

The case decided by the Italian Supreme Court in December 2015 involved an Italian company with a subsidiary located in Cyprus (which, at that time, was a “black list” country). The Italian taxpayer asserted, among other contentions, that the CFC regime infringed on the EU principle of proportionality and that the CFC regime contravened the permanent establishment provision under the Italy-Cyprus income tax treaty.

The Supreme Court concluded that the Italian CFC regime was compliant with EU standards and did not contradict the income tax treaty provisions. 

Following the high court’s decision, a complaint was filed in March 2016 with the EC against the Italian CFC regime. 

 

Read an April 2016 report [PDF 527 KB] prepared by the KPMG member firm in Italy: Italian CFC regime compliant with EU law and double tax treaties

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