European and International Tax Law - CFC and Non-Resident Controlled Entities (Italy)

Article 167: CFC Rules – Scope, entities, and taxation

• Purpose and scope of Article 167

  • Applies to natural persons and to the persons referred to in Articles 5 and 73(1)(a), (b), (c), and, with respect to their Italian permanent establishments (PE), to the persons referred to in Article 73(1)(d). It covers the Italian PE that controls a non-resident person as defined in paragraphs 2 and 3.
  • This article targets non-resident controlled entities (NREs) and the income attributable to Italian residents or PEs that “control” them.
  • Articles referenced for context:
  • Article 5: resident partnerships; income attributed to quotaholders regardless of actual payment.
  • Article 73(1)(a): resident companies (e.g., S.p.A., S.r.l.).
  • Article 73(1)(b): resident private/public entities that are not companies and that carry on exclusively or mainly an economic activity.
  • Article 73(1)(c): resident private/public entities that are not companies and the trust which does not carry on economic activity as exclusive or main activity.
  • Article 73(1)(d): non-resident companies.
  • In sum, Article 167 covers the Italian PE that controls a NOT-resident person as defined by para. 2 and 3.

• Paragraph 2 – Definition of non-resident controlled entities (NREs)

  • An undertakings, company or entity not resident in Italy is deemed an NRE if, directly or indirectly, it is controlled by a person referred to in paragraph 1 by one of the following conditions:
  • a) Direct or indirect control via the means described in Article 2359 of the Civil Code (including through trust companies or intermediaries) by a person referred to in paragraph 1.
  • b) More than 50% of the participation in their profits is held, directly or indirectly, through one or more subsidiaries per Article 2359 of the Civil Code or through a trust company or intermediary, by a person referred to in paragraph 1.

• Paragraph 3 – Additional non-resident controlled entities (deemed NREs)

  • For the purposes of this Article, the following shall also be deemed to be non-resident controlled entities:
  • (a) Permanent establishments abroad of the persons referred to in paragraph 2.
  • (b) The permanent establishments abroad of resident persons who have opted for the arrangements referred to in Article 168-ter.

• Paragraph 4 – Conditions for applicability: Tax Rate and Passive Income tests

  • The rules apply if the non-resident controlled entities jointly fulfil the following conditions:
  • a) They are subject to effective taxation of less than 15%: the effective taxation is defined as the ratio between the sum of current taxes payable and the deferred tax assets and liabilities recorded in their annual financial statements and the pre-tax profit for the year as shown in those financial statements.
    • The annual financial statements must be audited and certified by professionals authorized in the foreign state where the NRE is located, and their results are used by the controlling entity’s auditor for the opinion on the annual or consolidated financial statements.
    • If the condition in the preceding sentence is not met or the effective taxation is less than 15%, the controlling entities must verify that the NREs are subject to an effective taxation lower than half of that which they would have been subject to had they been resident in Italy, determined per procedures established by order of the Director of the Italian Revenue Office (Agenzia delle Entrate).
  • b) More than one-third of the income earned by the NRE falls into one or more “passive income” categories: 1) interest or any other income from financial assets; 2) royalties or any other income from intellectual property; 3) dividends and income from disposal of equity interests; 4) income from financial leasing; 5) income from insurance, banking and other financial activities; 6) income from transactions involving sale or purchase of goods with little or no added economic value, carried out with entities that directly or indirectly control the NRE, are controlled by it, or are controlled by the same entity that controls the NRE; 7) income deriving from services with little or no added economic value, performed for entities that directly or indirectly control the NRE, are controlled by it, or are controlled by the same entity that controls the NRE;
    • For identifying services with little or no added economic value, account shall be taken of the indications contained in the decree of the Minister of Economy and Finance issued pursuant to paragraph 7 of Article 110.
    • The phrase “one-third” is to be interpreted as a share of income: ext{Share of income} \,\ge\, \tfrac{1}{3} .

• Tax Rate Test — Actual vs Domestic Virtual Tax Rate

  • The Tax Rate Test compares the actual (foreign) tax rate with the domestic (Italian) virtual tax rate.
  • Definitions:
  • Actual tax incidence (foreign): the tax actually paid abroad by the NRE on its taxable base and pre-tax profit, including current taxes payable and any deferred tax assets/liabilities as reported in the financial statements.
  • Domestic virtual tax rate: the Italian tax that the foreign controlled company would have paid in Italy on the same taxable base, determined in accordance with Italian domestic tax rules, relative to the pre-tax profit (as reported in the financial statements).
  • Formal representation (conceptual):
  • ext{Actual tax rate (foreign)} = rac{ ext{Current taxes payable} + ext{Deferred tax assets and liabilities}}{ ext{Pre-tax profit}}
  • ext{Domestic virtual tax rate} = rac{T{ ext{Italy}}}{P} where $T{ ext{Italy}}$ is the Italian tax on the same taxable base and $P$ is the pre-tax profit.
  • If the foreign effective taxation is not below the threshold or if the domestic virtual tax rate is not met, the CFC rules may apply as per para 4.

• Paragraph 5 – Exceptions where the CFC rule does not apply

  • The provisions shall not apply if the person referred to in paragraph 1 proves that the NRE carries on an effective economic activity through the use of personnel, equipment, assets, and premises.
  • The taxpayer may apply to the Revenue Agency under Article 11(1)(b) of Law No. 212 of 27 July 2000.
  • For taxpayers under the collaborative compliance regime in Article 3 of Legislative Decree no. 128/2015, the ruling referred to in the second period may be submitted regardless of verification of the conditions in paragraph 4, letters a) and b).

• Paragraph 6 – Imputation of income when conditions are met

  • If the conditions for applicability are met, the income realized by the NRE is imputed to the persons referred to in paragraph 1, in the taxable period of the latter, proportionally to their share in the profits of the NRE.
  • If there is indirect participation through resident entities or PEs in the territory of Italy, the income is attributed to those entities in proportion to their respective shareholdings.

• Paragraph 7 – Tax base for imputed income (corporate taxation rules and exceptions)

  • For the purposes of paragraph 6, the income of the NRE shall be determined in accordance with the provisions applicable to corporate income tax for the entities referred to in Article 73, with the following exceptions and references:
  • Excluded: Articles 30 of Law No. 724 of 23 December 1994; 2, paragraph 36-decies of Decree-Law No. 138 of 13 August 2011 (converted, with amendments, into Law No. 148 of 14 September 2011); 62-sexies of Decree-Law No. 331 of 30 August 1993 (converted, with amendments, into Law No. 148 of 29 October 1993); 86, paragraph 4, of the Consolidated Text; and related cross-references (as listed in the original wording).
  • In short: the income is taxed under corporate income tax rules with specified statutory exemptions.

• Paragraph 8 – Separate taxation of imputed income

  • Income imputed and determined under paragraphs 6 and 7 is subject to separate taxation at the average rate applied to the income of the person to whom it is imputed, and in any event not lower than the ordinary corporate income tax rate.

• Paragraph 9 – Deduction for foreign taxes paid

  • From the tax determined under paragraph 8, deduction is allowed for income taxes paid abroad definitively by the non-resident person, under Article 165, within the modalities and limits set forth there.

• Paragraph 10 – Treatment of profits distributed by NREs

  • Profits distributed by non-resident controlled persons are not included in the income of the persons referred to in paragraph 1 up to the amount of income taxed under paragraph 8, including in prior periods. In the case of a non-resident collective investment undertaking, taxes paid in Italy by the persons referred to in paragraph 1 are added to the fiscally recognized cost of the units of the undertaking.
  • Taxes paid abroad on profits not included in the formation of income under the first sentence may be deducted, up to the amount of tax determined under paragraph 8, reduced by the amounts allowed under paragraph 9.

• Paragraph 11 – Notice and opportunity to respond before assessment; reporting obligation

  • The Revenue Agency, before issuing a notice of assessment or additional tax, must serve the interested party a notice allowing him to provide evidence within ninety days for the disapplication of the provisions of this Article pursuant to paragraph 5.
  • If the evidence is not deemed suitable, the Revenue Agency must provide specific reasons in the notice of assessment.
  • Regardless of the outcomes of tax appeals under paragraph 5, the person referred to in paragraph 1 must report in the income tax return the holdings of participations in non-resident controlled entities referred to in paragraphs 2 and 3 if the conditions in paragraph 4, letters a) and b) occur.

• Paragraph 12 – Exemption and audit considerations

  • The exemption provided for in paragraph 5 does not need to be proven during an audit if the taxpayer has obtained a positive ruling on the matter; however, the Revenue Agency retains the power to check the truthfulness and completeness of the information and evidence provided in that context.

• Paragraph 13 – (Note from the source text)

  • The content on page 13 reiterates the application of para. 12 and ensures alignment with the ruling process and audit powers; the exact wording in the transcript ends with a reference to a quoted clause about paragraph 12, confirming audit rights and ruling relevance.

• Practical implications and notes

  • Purpose of CFC rules: prevent tax deferral or minimization via foreign entities with low or zero Italian taxation.
  • Interaction with international tax compliance regimes (e.g., collaborative compliance) and the Revenue Agency’s audit powers.
  • The framework requires transparent documentation, including audited foreign statements and cross-border tax computations, to determine if imputation and separate taxation apply.
  • Entities should monitor definitions of passive income and ensure correct classification under the seven listed categories to assess CFC exposure.
  • When the CFC rules apply, income attribution and tax treatment may differ from standard Italian corporate taxation, creating potential double taxation or cross-credit considerations (deductions for foreign taxes, treatment of foreign taxes in a unified Italian framework).

• Connections to foundational principles and real-world relevance

  • This material reflects common international tax policy design: anti-deferral, substance-based taxation, and alignment with economic activity rather than mere ownership.
  • Encourages substance over form (para 5), where actual economic activity can override presumption of taxation; aligns with OECD BEPS concepts.
  • Implications for multinational group planning, transfer pricing considerations, and reporting obligations across jurisdictions.

• Ethical, philosophical, and practical implications

  • Balances corporate tax planning with anti-avoidance objectives; aims to ensure fair taxation where economic activity occurs.
  • Highlights the importance of transparency, proper documentation, and regulatory compliance in cross-border corporate structures.

• Notation and key formulas

  • Passive income threshold: more than one-third of income falls into passive categories
  • ext{Share of passive income} \ge \tfrac{1}{3}
  • 15% effective tax threshold for NREs
  • ext{Effective Taxation} = rac{ ext{Current taxes payable} + ext{Deferred tax assets and liabilities}}{ ext{Pre-tax profit}} \
    < 0.15
  • Domestic vs foreign tax rate concepts (as described above)

• Quick reference table: key paragraphs

  • Para 2: Definition of NREs (control via ownership or direct/indirect participation > 50%)
  • Para 3: Additional NREs (PEs abroad; PEs of residents with Article 168-ter arrangements)
  • Para 4: Conditions (a) < 15% effective taxation; (b) > 1/3 passive income)
  • Para 5: Exemption if genuine economic activity is proven
  • Para 6: Imputation to Italian residents/PEs proportional to shareholdings
  • Para 7: Tax base rules with listed statutory exceptions
  • Para 8: Separate taxation at average rate, not below ordinary rate
  • Para 9: Deduction for foreign taxes under Article 165
  • Para 10: Treatment of distributions and related deductions; foreign taxes alignment
  • Para 11: Audit procedures and reporting obligations
  • Para 12: Exemption validation during audits and ruling processes

• Summary takeaway

  • Article 167 sets up a framework to tax the economic effects of cross-border ownership where Italian residents or PEs control non-resident entities with low effective taxation and/or significant passive income, by imputing the NRE’s income to the Italian holders and applying Italian tax rules with specific exceptions and deductions. It also provides exceptions when there is real substance and activity in the relevant jurisdiction and a process for administrative review and compliance.

• References to further reading and practical steps

  • Review Article 167, Articles 5, 73(1)(a)-(d), and Article 168-ter for context on resident vs non-resident statuses and arrangements.
  • Examine the specific passive income categories (1–7) and the decree provisions cited for identifying value-added services.
  • Understand the procedural steps for notices of assessment, evidentiary submissions within 90 days, and reporting requirements in the annual tax return.

• Exam-ready bullets to memorize

  • CFC applies to Italian PEs controlling non-residents; threshold tests: (i) effective tax rate < 15%, (ii) > 1/3 passive income.
  • Two tests to compare rates: Actual foreign taxation vs Domestic (Italian) virtual taxation.
  • If conditions are met, impute NRE income to Italian holders proportionally to their profits share.
  • Tax base is determined with corporate rules, with important exceptions; imputed income taxed separately at an average rate, not below standard rate.
  • Deductions for foreign taxes apply; distributions may not be fully included in Italian income but foreign taxes can be credited under limits.
  • There is an evidentiary and procedural safeguard: 90-day evidence window before assessment; potential for rulings under specific regimes.