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Italy passes a new anti avoidance law: the range of dealings monitored by the Italian Revenue Authority is broadened

1997 has been for Italy a year of important changes in the area of taxation, many of which are still in the process of being approved. Among the measures that may be of greater interest to foreign dealers it is worth mentioning the ones pertaining to the "Dual Income Tax", anti avoidance and fiscal monitoring of international money movements.

On September 13, the Council of Ministers approved the decree law concerning the new taxation system for extraordinary corporate transactions (so-called "business re-organizations"). The measure, which is now awaiting publication in the Official Gazette, also contains a new anti avoidance law which replaces the one contained in article 10 of law 408/1990. In fact, the latter had given rise to strong doubts as to its interpretation and, as a consequence, it had been difficult to enforce.

"Potentially elusive" transactions, namely the ones that are likely to be disallowed because they are not backed up by "valid economic reasons" and not aimed to "dodge obligations or bans" or to obtain tax savings which are "otherwise undue", include : transformations, mergers, divisions, contribution by shareholders, transfer of company units, assignment of credit (also relating to tax excesses paid to the Inland Revenue), intracommunity exchange of shares. It will therefore be possible for the Inland Revenue to disallow the tax benefits connected with these transactions and request for the taxpayer to pay the difference between the taxes actually paid and the ones that he/she should have paid if he/she had followed a "fiscally correct" behavior.

The problem is that, as is always the case when dealing with anti-elusion regulations, it is hard to distinguish unmistakably between licit behaviors and illicit ones, which are under penalty. As regards the Italian discipline, there is fear that any tax savings associated with the above-mentioned transactions are liable to be attacked by the Revenue Authority, unless the taxpayer provides valid economic motivations. The latter will have to be assessed in relation to the transaction on the whole, not to the individual acts, facts or transactions that comprise it. Indeed, this is the most innovative aspect of the measure (beyond the fact that it can be applied to a broader range of transactions) : the importance attached to the overall anti avoidance program and, therefore, to the "substance" of the operation implemented brings Italy close to the other fiscally-advanced Countries which now have a long-standing tradition in the area of anti avoidance.

At any rate, the government report on the measure specified that the aim of the law is not that of forcing enterprises faced with two or more alternatives to adopt the most burdensome one in fiscal terms, provided that the various possible solutions are considered to be on a par by the Revenue Authority, in other words that the taxpayer does not resort to "shortcuts" which may perhaps be hardly functional with respect to the corporate structure established.

Lastly, the approved text contains another very important innovation : it modifies the tax treatment of operating losses incurred both for joint-stock companies and for partnerships. There are two main provisions in this regard :

1. Tax losses incurred by newly-established companies in the first three operating years can be carried forward without time limits. This facility, together with the one envisaged in the area of Dual Income Tax, aims to encourage the establishment of new enterprises, protecting them both in the case of losses incurred (highly likely in the first years of activity) and in the case of earned income (which is taxed with the reduced rate of 27%).

2. The possibility to carry forward tax losses is strongly limited if majority shareholdings in the company registering losses are acquired by third parties even on a temporary basis. The measure basically aims to eliminate the trade of companies with past tax losses, allowing, however, the carrying forward of losses if the shareholdings are transferred within a group.