Maximizing and Substantiating Foreign Tax Credits and Foreign Income Exemptions

U.S. or Italian clients with investments or business operations in a foreign country are subject to tax in the foreign country, which taxes the income on the basis of source, and in their home country, which taxes them as residents on their world-wide income. In order to avoid double taxation and minimize their worldwide income tax liability, clients must be able to structure their foreign investments properly and use the benefits of foreign tax credit provisions of the Italian and U.S. tax code. In this respect, we help clients navigate the intricacies of foreign tax credit rules and make sure that they get the most out of foreign tax credit benefits.

Our services in this area include:

• evaluating clients’ entitlement to foreign tax credit;
• assisting clients in computing the amount of foreign tax credit;
• advising clients in case of base and timing differences affecting their entitlement to and the amount of the credit;
• devising appropriate strategies to maximize the credit and avoid or minimize excess credit or limitation positions;
• invoking Competent Authority assistance to support the creditability of a foreign tax and our clients’ entitlement to the credit.

Italy operates a quasi-territorial system that (partially) exempts dividends and gains from sale of stock of foreign subsidiaries. Exemption is denied for gains or earnings coming from black-listed low tax jurisdictions. Also, income of controlled foreign companies organized in low-tax jurisdictions is taxed currently in Italy unless certain tests aimed at proving the genuine nature of foreign entities and operations and  minimum level of foreign tax are met. We advise clients on the way to benefit from the exemption and deal with various anti-abuse rules applicable to earnings derived from entities organized in low-tax jurisdictions.

The United States operate a worldwide tax system under which resident companies are taxed on their income from whatever sources derived  with a foreign tax credit for any foreign income taxes paid on foreing income reported and taxed in the U.S. Foreign earnings of U.S. controlled foreign companies are not subject to tax unless and until they are repatriated to the United States. Deferral of U.S. tax is denied under a battery of anti deferral rules including controlled foreign corporations (CFC) and subpart F income rules and passive foreign investment company (PFIC) rules.