Under the CFC regime, Article 167(5) of the TUIR provides that “transparent” taxation does not apply if the taxpayer can prove the existence of an effective economic organization abroad (personnel, equipment, assets, and premises). In other words, the resident entity must demonstrate the economic substance of the non-resident entity; otherwise, the relevant income is automatically attributed to the resident.
In practice, this mechanism entails a reversal of the burden of proof, since it is the taxpayer’s responsibility to document the legitimacy of the transaction. If the taxpayer adheres to the cooperative compliance regime, legislation allows for a simplified ruling request, seeking a prior assessment from the Italian Tax Authorities on the foreign company’s actual operational status.
After eight years, the European Commission has completed its examination of the case reported by AIDC. At the same time, the MEF reiterated that controls cannot be based on mere automatisms, emphasizing the duty to thoroughly scrutinize the evidence submitted by the taxpayer.
In short, to initiate a well-founded challenge, the tax authorities must assess the genuine presence of an economic activity and cannot simply proceed with a blanket denial. This approach aligns with an established principle whereby the analysis must always consider substantive aspects, limiting the use of generic presumptions.
From an operational standpoint, this means that, on the one hand, the tax authorities are obliged to examine the actual operations of foreign companies without relying solely on formal presumptions; on the other, taxpayers holding stakes in foreign companies must prepare comprehensive documentation to substantiate the real economic activity (personnel, facilities, equipment).
The recent closure of the European inquiry and the MEF’s position confirm the importance of a thorough factual evaluation under the CFC regime. A “reversal of the burden of proof” does not apply: while it is indeed up to the taxpayer to produce evidence of the foreign company’s actual operations, the tax authorities must then review this evidence in a concrete manner.
Our Firm, supported by a team specialized in international taxation, remains available for clarifications, preparation of the necessary documentation, and assistance with ruling procedures, thereby fostering a constructive dialogue with the tax authorities.
