Italian Tax Considerations When Doing Business In Italy

As a foreign company starting a business in Italy it is important to consider the Italian tax system, rates and recent changes which may affect the amount of corporate  Italian income tax that will have to be paid.

In the Italian legal system the following criteria will be important to the Italian authority in deciding whether your business will come under the Italian Tax system:

• place of legal seat
• place of management
• principle place of business

If one or more of the above are within Italy then the company will be subject to taxation not just on incomes within Italy but on its worldwide income and with this comes the added consideration of double taxation. For these reasons we can see why it is imperative to have the right accounts in place to avoid investigations by the Italian authorities, Giambrone can advise you on this.

Rules to establish tax residency for the purpose of Italian income tax are set out in Tax Code 73(3). In this the legal seat is the registered office as it appears registered with the Italian Register of Enterprises. However it has been known for Italian courts to refer the place of legal seat as where the actual seat of superior management is. This is usually where the main strategic, administration and direction of the company takes place. Ascertaining the above can involve in-depth investigations collecting information on all elements and factors of a business by the Italian authorities which can be complex. As a result of this, besides clearly abusive cases, legal seat is usually taken as the registered office of the business, place of management is where the directors meet and do business and place of business as the home state of the business.

How Do Anti–Inversion Laws Change Italian Income Tax Rule?

These Italian Tax systems have however been open to abuse and to stop companies doing most of their trade in Italy and avoiding Italian income tax by having offshore foreign holding companies Italy enacted special Anti-Inversion Rules. According to paragraph 5 of Tax Code section 73, the place of management will be presumed to be in Italy if the holding company directly controls an Italian domestic company resident in Italy or the majority of the board of directors controlling directly or indirectly the company/holding company are residents of Italy. The concept of control in this scenario can be a difficult one to ascertain but is defined with reference to the definition of ‘controlled company’ as set out in the provision of  Italian company law, article 2359(1) Italian Civil Code. Control is deemed to be so if ownership of a sufficient amount of votes at the shareholders ordinary meeting is present and a dominant influence can be exercised because of this majority voting power and/or because of specific contractual relationships or arrangements that might be in place. It is also worth noting that votes owned through fiduciary companies and conduits are also counted in this case.

With these Anti-Inversion Laws the emphasis to establish income tax residency in a foreign country rests on the tax payer. The tax payer is asked by the Italian authority to provide evidence to support that effective management is not located in Italy but abroad. In this proof a real link must be established between the company and the country of claimed business ‘residence’ for Italian tax purposes.

It has been argued that such requirements create obstacles which make it difficult for foreign companies to do business in Italy. Since uncertainty in definitions and requirements for companies to provide explicit documentation can be time consuming and also a long and drawn out process. With this in mind it is worth talking to an expert in Italian income tax law.

There have been claims that these rules violate, amongst others, the EU law of free movement of capital. The European Commission however does not agree, saying that Italian income tax laws are designed to combat clear cases of tax evasion whilst allowing authentic cases to defend the law’s residency presumption to the authorities.

Do you have a business that trades with Italy, or are you thinking of starting a business there? Want further clarification of these rules? Make an initial contact with Giambrone and your enquiry will be passed on to one of our team of english-speaking specialist lawyers.