THE DECREE IMPLEMENTING THE ATAD DIRECTIVE AND THE NEW CFC TAX REGIME

Published 11 October 2019 by Carmini e Associati Studio Legale

Recent Legislative Decree no. 142/2018, published in the Official Journal on 28th December 2018, implemented Directive no. 2016/1164, so-called ATAD 1 (Anti Tax Avoidance Directive), modifying and/or introducing several and heterogeneous tax measures.

Among several innovations, this decree, rewriting art. 167 of the Consolidated Text of the Laws on Income Tax, has completely revised the tax regime of foreign companies controlled by resident parties, so-called “CFC” (Controlled Foreign Companies).  Essentially these regulations aim, and aimed also in the previous version, at combating tax avoidance and erosion of the tax base, caused by the income allocation at controlled entities established in foreign states with a privileged tax regime and, consequently, subject to a preferential tax regime in comparison with the national one.

The amendment of the definition of “control” is the most evident innovation introduced by this decree.  Indeed control is the first requirement for the application of the CFC regime (this new definition has significant consequences also in terms of taxation of dividends and capital gains from privileged tax regime states, as explained in a subsequent analysis on this matter). The previous legislation extended the application of the CFC regime only to foreign entities controlled by a resident party in accordance with art. 2359 of the Italian Civil Code, while now, in compliance with the provisions of the ATAD, resident parties that participate in profits of foreign entities for more than 50% are considered as controlling parties. As mentioned this provision has enlarged the scope of the CFC regime.

Where the control requirement was met, the previous regulations would have provided for differentiated provisions for foreign parties established in countries with privileged tax regime (so-called CFC Black) of the one part and for parties established in a Member State or in a state other than the so-called Black (CFC White) of the other part. This two-way division has been eliminated. The new version of art. 167 of the Consolidated Text of the Laws on Income Tax provides for unitary regulations for both cases. In particular, the CFC regime is now applicable where foreign parties, regardless of the state of residence, satisfy both of the following conditions:

  • they should be subject to effective taxation lower than the 50% of what they would have been subject to if they had been established in Italy;
  • over a third of their revenues should be included among the revenues listed in the new version of art. 167 of the Consolidated Text of the Laws on Income Tax, which, on this point, literally reflects the list in the ATAD (all these revenues are called “Passive Income”; this category, according to this provision, comprises various types of revenues, from interest incomes to low value-adding intra-group services).

The reduction of exemptions from the application of the CFC regime is another important amendment of this regime, introduced by the implementing decree. Indeed the number of exemptions has been reduced from three (two for the Black CFC and one for the White ones) to one. Now the controlling party can avoid the application of the CFC regime, demonstrating, also through an application under Art. 11 of Law No. 212 of 27th July 2000, that the controlled foreign party carries out an effective economic activity, using personnel, facilities, assets and spaces.

Unlike the requirements listed above, the consequences of applying the CFC regime for a resident controlling party have not been significantly modified by the legislative decree. The income realised by foreign-controlled parties is attributed to controlling subjects in proportion to their profit participation on foreign party, regardless of the actual collection of the revenues. These incomes are taxed separately at the average rate applicable to the controlling party to which the revenues are attributed and the income tax definitively paid by foreign parties shall be deducted from the tax due.

In the light of the above, since the new regulations will be applied starting from the tax period subsequent to the one ongoing on 31st December 2018, it appears to be a need to verify carefully present positions.