April – International Tax Focus

Employment income is taxable in both residence and work State

Implementing provisions of the Italian Investment Management Exemption have been enacted

Assonime comments on the change in the de minimis threshold

The Italian pension regulation entity issues clarifications on teleworking

Conventional wages for FY 2024 have been published

Interest free intra-group loans fall within the scope of the transfer pricing regulation

Obligation to fill in the RW Form for individuals resident a broad under a tax treaty provision

Transfer of ownership of Italian immovable property subject to registration, mortgage and cadastral taxes

European Court of Justice finds the Italian VAT provisions on dormant companies incompatible with EU Law

Withholding taxes applied to dividends paid to foreing pension funds are in breach of EU Law

Dutch laws on the limitation of interest deduction are compliant with EU Law

Employment income is taxable in both residence and work State

With its decision no. 5524 of 1 March 2024, the Italian Supreme Court ruled that income from employment performed in Kazakhstan by an Italian resident is taxable in both States pursuant to the relevant provisions of the Tax Treaty concluded between such Countries.

According to the Italian Tax Court of second instance, as the worker had proved that he/she had stayed more than 183 days in Kazakhstan and, as a consequence, he/she should have been considered tax resident in this last Country and Italy should have not been able to tax his/her income as State of residence.

This conclusion was rejected by the Italian Supreme Court. Indeed, this Court maintained that, since the person had his/her tax residence in Italy, where his/her main residence was located and where his/her family and social ties and centre of vital interests were located, only Italy could qualify as State of residence. The fact that he/she had worked in the other State for most of the tax period was irrelevant.

Accordingly, the second sentence of Article 15(1) of the Italy-Kazakhstan Tax Treaty should kick-in providing that the residence State (in this case, Italy) may tax the employment income, as well as the work State (Kazakhstan) with respect to the days of work that the employee has physically performed in the latter State.

Implementing provisions of the Italian Investment Management Exemption have been enacted

The Ministerial Decree of 22 February 2024 has been published in the Official Gazette no. 53 of 4 March 2024, which contains the implementing provisions of the so-called investment management exemption (Article 162 (7-ter) and (7-quarter) of the TUIR).

The decree outlines the independence requirements of the non-resident fund (with respect to its quotaholders) and the independence requirements of the asset manager (with respect to the fund itself).

In addition, any remuneration of the asset manager, for services rendered related to agreements with entities of the same group, must be supported by appropriate documentation demonstrating compliance with the arm’s length principle.

Assonime comments on the change in the de minimis threshold

Assonime, with its circular letter no. 5 of 5 March 2024 analysed the new “de minimis” Regulation no. 2023/2831, which raised (as of 1 January 2024) the maximum threshold for allowed State aid to EUR 300,000.

The de minimis Regulation No. 2023/2831 and the Regulation on de minimis aid for undertakings providing services of general economic interest (SGEI) No. 2023/2832 replace the previous regulations that expired on 31 December 2023 and will apply until the end of 2030.

The three-year period to be taken into account for the purpose of respecting the maximum amount of de minimis aid has to be assessed on a rolling basis, i.e. for each new grant the total amount of the State aid granted in the previous three years has to be counted backwards from the date of granting the new aid.

The Italian pension regulation entity issues clarifications on teleworking

The Italian pension regulation entity has issued message no. 1072 of 13 March 2024 providing guidelines on the Framework Agreement on habitual cross-border tele-work, regarding, in particular Article 16 § 1 of EC Regulation no. 883/2004.

The Agreement provides that, upon request (with the consent of the employer and employee), a person who habitually teleworks across borders may be subject to the legislation of the State in which the employer has its registered office or domicile (for a maximum of three years which may be extended), provided that teleworking in the State of residence is carried out for less than 50% of the total working time.

The Agreement applies only to the signatory States (for Italy the Agreement is in force as of 1 January 2024) and to employees who:

  • routinely carry out cross-border teleworking;
  • reside in a signatory State (and the registered office or place of business of the enterprise or employer is located in another signatory State);
  • would be subject to the legislation of the State of residence according to the general rules of EU regulations.

Conventional wages for FY 2024 have been published

The Ministerial Decree of 6 March 2024 of the Ministry of Labour and Social Policy, which defines the conventional wages applicable to Italian workers working abroad for the year 2024 (Art. 4 of Legislative Decree no. 317/87), was published in the Italian Official Journal dated 19 March 2024 no. 66.

Conventional wages are relevant for the purposes of:

  • determining the employment income in accordance with the provisions of Article 51(8-bis) of the TUIR, in lieu of wages actually paid;
  • the calculation of contributions for compulsory insurance for Italian workers who work in non-EU countries with which there are no social security agreements in force, or in States with social security agreements for insurance not covered by the existing agreements.

Interest free intra-group loans fall within the scope of the transfer pricing regulation

According to the decision of the Italian Supreme Court no. 7361 of 19 March 2024, the Italian transfer pricing rules enshrined in Article 110(7) of the TUIR are also applicable to intra-group interest free loans.

However, the taxpayer is allowed to prove the “commercial reasons” within the group, linked to the role that the parent company takes on in supporting other group companies, which legitimise the use of non-interest-bearing financing.

Recalling their own previous orientation (Supreme Court Decision no. 13850/2021), the Court points out that non-interest-bearing financing, or financing at a non-market rate, cannot be criticised per se, since it is possible for the taxpayer to prove the economic reasons that led the lender to finance the borrower with that specific pricing.

Obligation to fill in the RW Form for individuals resident a broad under a tax treaty provision

According to decision no. 242/3/24 of the 19 March 2024, by the Tax Court of second instance of Sardinia, an Italian citizen that is not registered with AIRE, but is resident for tax purposes in Switzerland on the basis of Article 4 of the Tax Treaty between Italy and Switzerland cannot be sanctioned for failing to fill in the RW Form of the Italian tax return.

The RW form in the tax return must be filled out, for tax monitoring purposes, by individuals residing in Italy who hold foreign investments and foreign assets of a financial nature by way of ownership or other real right regardless of the manner of their acquisition and, in any case, for the IVIE and IVAFE purposes.

However, the Court held that tax residence under the Tax Treaty is relevant for the purposes of tax monitoring obligations, and not the Italian domestic law.

Transfer of ownership of Italian immovable property subject to registration, mortgage and cadastral taxes

In its ruling no. 81 of 28 March 2023, the Italian Tax Authorities examined a case on the application of a regime under French law known as the “Universal Transfer of Assets”, which involved the dissolution of a French company owning real estate located in Italy, with automatic and full transfer all the assets to its controlling company, which is based in the Principality of Monaco.

According to the Italian Tax Authorities, the transfer is subject to all the taxes that generally apply to a transfer of real estate being:

  • the proportional Italian registration tax of 9%, (Arti-cle 1 of the Tariff, Part I, annexed to Presidential De-cree no. 131/1986) calculated on the taxable base provided for in Article 51(2) of Presidential Decree no. 131/1986;
  • mortgage and cadastral taxes in the amount of 50 euro each (Art. 10(3) of Legislative Decree 23/2011).

The transfer of property cannot be equated with a merger (under Italian and French law) and cannot therefore be subject to fixed registration tax.

European Court of Justice finds the Italian VAT provisions on dormant companies incompatible with EU Law

Italy has enacted certain law provisions designed to prevent fraud and abuse associated with the so-called dormant companies.

In a nutshell, under Italian law, a company is deemed to be a dormant company if it registers revenues below certain minimum thresholds calculated by applying pre-determined ratios to the assets that the company holds.

Where the company qualifies as dormant for three consecutive years or more it loses the right to carry forward any VAT credit to a subsequent period.

In the case at hand, the Italian Tax Authorities denied an agricultural company the right to deduct VAT on purchases in 2009 because, for three consecutive tax periods (2006, 2007 and 2008), the company had carried out relevant transactions below the presumed threshold.

However, the European Court Justice, with its decision on Case C-341/22 of the 7 March 2024, found the Italian rules to be contrary to the VAT Directive. In particular, Article 9(1) and article 167 of the VAT Directive cannot have the effect of denying the status of being VAT person to an entity just because, in a given timeframe, it carries out transactions from which it derived revenues for a value lower than the one presumed by applying certain ratios to its assets.

Withholding taxes applied to dividends paid to foreing pension funds are in breach of EU Law

According to the Opinion of the Advocate General at the European Court of Justice, released on 21 April 2024, with reference to case no. C-39/23, the application of a withholding tax on dividends paid to non-resident pension funds, in the absence of a similar levy on resident pension funds, is an unjustified restriction on the free movement of capital (Art. 63 TFEU).

The case analyses the differential tax treatment between domestic companies’ dividends paid to foreign public pension institutions and those paid to domestic general pension funds which are part of the State and exempt from taxes on such dividends. The foreign public pension institutions are similar in function to domestic general pension funds, however, suffer a withholding tax on dividends received from the domestic company. This restriction was challenged in court under Art. 63 TFEU.

The Advocate General opined that the difference in tax treatment constitutes a restriction on the free movement of capital, as it discourages investments in foreign pension funds.  The Advocate General suggested that the foreign public pension funds and the domestic general pension funds appear to serve similar public interest purposes, thus they are objectively comparable, and therefore equal treatment should apply. 

Dutch laws on the limitation of interest deduction are compliant with EU Law

On the 14 March 2023, the Advocate General of the Court of Justice of the European Union gave a dissenting opinion in Case No. C-585/22. The case concerned the compatibility of the Dutch interest deduction limitation anti-profit shifting rule with EU law on loans for the acquisition of shareholdings from another group.

The AG argues that the restriction on the freedom of establishment is justified by the need to avoid erosion of the tax base, as the transaction was considered to be aimed solely at tax savings. In the AG’s opinion, the restriction under Dutch law, does not go beyond what is necessary to achieve its purpose considering that the law targets wholly artificial arrangements and the consequences for transactions characterized as such were not excessive.

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