With Legislative Decree no. 209 of December 27, 2023, the Italian Government has finally amended the rules on Controlled Foreign Companies with respect to the determination of the effective tax rate, coordinating them with the new Pillar Two and Global Minimum Tax provisions.
The Controlled Foreign Companies (“CFC”) rules set forth in Article 167 of Presidential Decree no. 917/1986 (Income Tax Code) were initially conceived with the rationale of subjecting to taxation by the Italian parent company the income of foreign subsidiaries that, jointly:
(i) were located in a country with an effective tax rate (“ETR”) lower than 50% of the Italian one (i.e., a privileged tax country)
(ii) held at least 1/3 of the income as passive income (interest, royalties, income from financial activities, etc.); and
(iii) did not carry on an effective economic activity.
The CFC regime was recently amended by the Italian legislator to be aligned with EU Directive no. 2022/2353, which implemented, at the European level, the Global Minimum Tax, introduced at OECD level within the framework of the so-called “Pillar 2”.
In this respect, Article 3 of Legislative Decree no. 209/2023 (“International Tax Decree”) introduced, as of 1 January 2024, significant changes to the current rules and regulations, particularly in relation to the definition of privileged tax countries.
Novelty: the rule now considers foreign subsidiaries subject to an ETR of less than 15% to be resident in a privileged tax country, based on the ratio between:
(i) the sum of current, prepaid and deferred taxes recorded in the financial statement of the subsidiary;
(ii) the pre-tax profit resulting from the financial statement.
Therefore, there will be a simplified ETR, the calculation of which will be forfeited.
Additionally: an optional regime is provided for whereby the Italian parent company of a MNE may opt for a 15% substitute tax in order to disapply the CFC regime.
The election for the optional regime made by the Italian parent company is valid for three fiscal years and involves all CFCs with more than one-third passive income. The election will be automatically renewed, unless explicitly revoked.
By express legal provision, the financial statements of the foreign subsidiary must be audited and certified by professionals authorised in the foreign State of location of the non-resident-controlled entities.
DISCLAIMER: This article merely provides general information and does not constitute legal advice of any kind from Macchi di Cellere Gangemi which assumes no liability whatsoever for the content and correctness of the newsletter. The author or your contact in the firm will be happy to answer any questions you may have.