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Source: US Global Legal Monitor

(Oct. 22, 2020) On March 16, 2020, the Italian Supreme Court of Cassation issued Decision No. 10098 on the legal consequences of tax inversion (esterovestizione), which is the relocation abroad of the residence of a person or company in order to enjoy a more advantageous tax regime. Confirming its precedent, the Court held that the tax inversion in this case was illegal because the defendant had not actually and effectively transferred its administrative, management, control, and other related functions overseas.

This decision is significant for a number of reasons.  First, it reaffirms Supreme Court precedents establishing that the relocation of an Italian company overseas does not release it from its tax obligations in Italy in the absence of an effective transfer of control and management of the company abroad. Next, it holds that EU legislation contemplating such transference does not supersede applicable Italian tax legislation. And lastly, it establishes that the nonpayment of taxes, even under a good-faith but erroneous interpretation of applicable tax legislation, does not release a taxpayer from the obligation of payment.

Request for Declaration of Illegality

The request came to the Supreme Court from the Review Tribunal of Naples and concerned a judicial decree issued by that tribunal’s investigating judge ordering the sequestration from a criminal defendant of close to US$5 million. The money constituted the profits from the defendant’s crime, under article 5 of Legislative Decree No. 74 of March 10, 2000 (L.D. No. 74),  of failing to file a tax return in Italy in order to evade taxes. (Decision, Considerations of Fact §§ 1 & 2.)

The defendant had created a company with a registered office of convenience in Malta, but which in reality operated in Naples, where the effective management of company operations was conducted, including the decision to acquire a fleet of vessels at an auction to afterwards be sold to third parties, with the intent of avoiding applicable income and value-added taxes and the filing of annual tax returns. (Decision, Considerations of Law § 2.1.) In the underlying case, the defendant had claimed that, pursuant to EU legislation, he was legally allowed to transfer his investments to a foreign jurisdiction and the fact that the place of effective management of his company was in Italy did not subject his company to the full payment of taxes to the Italian authorities.  This interpretation was key to determining whether the requester had a tax obligation within Italy, whether relocating the company’s headquarters to Malta was done for the sole purpose of evading taxes, and whether the defendant’s failure to pay taxes made him criminally liable for tax evasion from the time that those taxes were due. (Decision, Considerations of Fact §§ 3, 4.)

Reasoning of the Supreme Court

The Court reasoned that the failure to submit required annual tax returns by an Italian company whose residence is located overseas constitutes a crime if the company has a permanent establishment in Italy and carries out its management, strategic, industrial, and financial decisions in Italy, as well as the necessary acts contemplated in its corporate charter or bylaws. (Decision, Considerations of Law § 2.2.)

The Court noted that in the underlying case, the tribunal had found that the company board was composed of individuals residing in different places who convened via videoconference, which impeded the tribunal from establishing the precise place of the meetings and deliberations of the board. Faced with that challenge, the tribunal found that the place of residence and work of the legal advisor (consigliere) who had advised the company on its legal formation was determinative, and that place was Naples. (Decision, Considerations of Law § 2.3.)

The Court took due account of the absolute artificiality of the legal seat in the underlying case; in effect, the Court stated that a company with a fixed place of business in Italy that carries out its administrative management, strategic, industrial, financial decisions, and all other acts necessary to achieve its purpose in Italy, but establishes or transfers its headquarters abroad without declaring the income it generates is artificial (artificiosa) because it creates a “legal form that does not reproduce a corresponding and genuine economic reality.” (Decision, Considerations of Law §§ 2.4, 2.5.)

The Court added that this reasoning was perfectly compatible with the principle that Italian tax laws must be interpreted and applied in accordance with the jurisprudence of the European Court of Justice, so as not to hinder the freedoms enshrined in EU treaties, including in particular the principle of freedom of establishment under articles 49 to 55 of the Treaty on the Functioning of the European Union. The Court further reasoned that tax inversion exists in the case of illicitly obtained profits through the fictitious screen (schermo) of company management activities. (Decision, Considerations of Law §§ 2.5, 2.7.)

Holding of the Supreme Court

The Court thus held that for tax inversion to be legally permissible the subject must actually and effectively transfer its administrative, management, control, and other related functions overseas, which the defendant in this case had not done, making the inversion illegal. (Decision, Considerations of Law § 3.)

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