This provision – which covers both hypotheses of “fictitious interposition” and those of “real interposition”[1], through which the taxation affects a person other than the real recipient of the income – has a clear anti-avoidance nature and does not necessarily presuppose fraudulent conduct on the part of the taxpayer, since it is sufficient to make an improper, unjustified or deviant use of a legitimate legal instrument, for tax purposes[2].
In the Tax Rulings No. 274 of 18 May 2022, the Italian Revenue Agency analyses the case of a Cayman Islands resident Limited Partnership, which uses the capital raised among the managers of a Group to subscribe the shares of certain Alternative Investment Funds (AIFs) managed by the same Group.
In this Tax Ruling, it should be noted that the assessment aimed at identifying the Cayman Islands resident LP as a third party, or, vice versa, a separate economic entity with respect to the minority partner resident in Italy, should be conducted in relation to all the shareholders of the company. Such assessment, moreover, cannot disregard the analysis of factual elements that consider the specific activity carried out by the LP, the relationships between it and the shareholders, as well as the relationships between the company and third parties.
In the present case: (i) the Group provides that its managers invest in AIFs managed by companies belonging to the same Group, indirectly, through the LP resident in the Cayman Islands; (ii) the LP is administered by the General Partner that decides, for example, when and in what amount the Limited Partners must pay the amounts established in the Commitment and which part of the income from investments in the funds should not be distributed to the partners but is used by the LP to pay corporate expenses.
The predetermination by the Group of the management plan of the investment in the various funds leads the Agency to the conclusion that the resident partner is totally extraneous to the management activity of the company and, therefore, the absence of interposition by the partnership, which therefore represents a separate economic entity with respect to the resident partner.
In Tax Ruling No. 282 of 20 May 2022, the Italian Revenue Agency analyses the case of a company resident in the United Kingdom, entirely participated by an individual tax resident in Italy, coming, however, to the opposite conclusion to that of the previous ruling.
The foreign company, which has no employees, holds the rights of economic exploitation of the image and sponsorship rights of the shareholder and a 50% shareholding in a Uk company.
It should be noted that, although the company is formally under its own management, the management can easily be attributed to the shareholder as it is entirely participated by him and managed by a person belonging to his family.
In the analysed case (i) the Company did not make significant investments; (ii) the profits consisted of fees paid to the Company as the exclusive owner of the shareholder’s exploitation and image rights and interest on loans, which, however, were not actually paid by the debtor companies; (iv) the bylaws do not explicitly state the Company’s business activity and the UK Companies Registry gives the Company the SIC (Standard Industrial Classification) code, which describes the main activity as ‘Other sports activities’.
Since the company’s investment activity was not clearly defined, together with the absence of an organisational-management structure, it was considered that the company could not be considered a separate economic entity from the shareholder. In fact, the incorporation of the company does not appear to be supported by an autonomous and significant function of its own, capable, as such, of generating income attributable to it.
Therefore, the company is to be considered an interposed entity vis-à-vis the shareholder and the income is only formally imputed to the foreign company but is substantially earned through the exploitation of the shareholder’s image.
Consequently, all income received by the Company must contribute, because of the interposition detected, to the formation of the overall income of the Italian resident shareholder.
In this regard, it should be noted that the foreign tax credit rules should in principle only apply in relation to taxes paid abroad directly by the taxpayer. In the present case, the taxpayer is taxed on the company’s income under the interposition rules and, consequently, payments made by the interposed company may also be relevant for the purposes of the “foreign tax credit”. However, it should be noted that this double taxation remedy will be available under Italian law for taxes paid in the United Kingdom only in respect of UK source income and not also in respect of any Italian source income.
Considering the provisions of paragraph 2 of Article 17 of the Convention against double taxation between Italy and the United Kingdom, in fact, the income deriving from the exploitation of image rights strictly related to sports performances rendered in Italy will be considered as Italian source income.
[1] cf. Italian Supreme Court 15830/2016; 26414/2018; 818/2017; 27625/2018.
[2] cf. inter alia, Italian Supreme Court 12788/2011.
