US-Italy International Tax and Legal Services 

If you are a resident person or company with activities, investments or operations abroad or a nonresident person or company with income, investments or operations in the U.S. or Italy, you are confronted with a vast array of legal and international tax issues. The tax treatment of your income, investment or business activities is determined by the application of the internal laws of the country of which you are resident and the foreign host country co-ordinated and limited under any applicable double income tax treaty.

This is the situation of Italian or U.S. domestic companies with investments or operations abroad and foreign companies with investments or operations in the U.S. or Italy, and resident individuals working abroad on a temporary assignment or a more permanent basis or non resident individuals relocating in Italy or the U.S.

Within the EU the legal and tax treatment of a transaction is also affected by EC law, interpreted and enforced by the European Court of Justice, which override the internal laws of EC Member States. 

In the absence of adequate advice and planning you may easily end up incurring broader and unexpected tax liabilities or suffering double taxation. When a transaction involves three or more jurisdictions the issues multiply exponentially.

In this challenging area we provide the full range of international tax and legal  services for our corporate and individual clients as needed to properly plan cross border activities. In particular we cover the areas described below.

Structuring and Planning International Transactions, Operations and Investments

If you are planning a cross-border transaction, operation or investment you must deal with a multitude of tax issues and a broad array of tax rules, with different and interdependent, short-term and long-term tax consequences. We help clients plan their cross border investments and activities in the most efficient way from a legal and tax standpoint.

Italy operates a corporate tax system which includes participation exemption for dividends and gains from sale of stock; domestic and worldwide consolidation of affiliated corporations; election for fiscal transparency for corporate entities; limitations on deduction of interest in leveraged transactions; anti-abuse rules for investments and operations conducted in low-tax jurisdictions and for Italian-owned foreign holding companies; foreign tax credit for foreign taxes paid on foreign income taxable currently in Italy; specific provisions on classification and taxation of foreign and domestic trusts and pervasive reporting requirements for foreign investments and transactions.

Italy taxes nonresident persons on their Italian-source income under two different tax regimes depending on whether the income is portfolio or passive income or active business income attributable to trace or business activities performed through a permanent establishment in Italy.   

The U.S. operates a system that limits the ability of U.S. persons to defer U.S. taxation of income earned in foreign countries, and grant a tax credit in the U.S. for foreign taxes paid to foreign countries on foreign source income. The U.S. taxes foreign persons (foreign corporations and nonresident alien individuals) on income deriving from U.S. investments and activities. Foreign persons are subject to a gross basis withholding tax on their U.S. source passive income, and to net income tax at ordinary rates in their income effectively connected with a U.S. trade or business. State and local taxes may also apply depending on where a taxpayer does business and its income producing factors are located in the U.S.   

In such a complicated legal framework your choices, if not properly advised, may have negative effects on the tax results of your ventures. Among the factors to consider when planning your cross border investments are the form of entity you choose for your business and the way in which you want to operate your business in practice; the allocation of functions, risks and assets among the various components of your international business operation; the combination of debt and equity (and variations thereof) you use to fund your international operation, the way in which you structure the intra-group transactions, and the transfer pricing policy you set in place for the inter-company flows of values, services and goods within your global enterprise. They all have both immediate and long-term tax consequences, some direct and obvious and some indirect and hidden. The international context magnifies the importance of careful tax planning because you must comply with complex corporate rules at both domestic and foreign level.

Advising clients on properly planning and structuring their international transactions, business operations and investments is an essential component of our international tax practice. We counsel clients on tax-efficient structuring of cross-border inbound and outbound investments, including the optimum use of tax treaties and holding company structures, intra-group financing and financial instruments tax arbitrage, permanent establishment and foreign tax credit issues, tax deferral and entity classifications.

Our services in this area include:

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:

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Maximizing Deferral of Tax on Foreign-Source Income

Income that U.S. or Italian persons earn through foreign companies is not subject to tax until it is repatriated in form of dividends or capital gains from the sale of stock of the foreign entity. For income subject to low or no tax in the foreign country, deferral of home country taxes is equivalent to a reduction or elimination of tax based on time value of money. To contrast tax minimization practices, Italy and U.S. operate various sets of anti deferral rules, on the face of which any foreign investment or operation must be careful studied and planned. We assist clients in structuring their operations in such a way to maximize the benefits of deferral of tax on foreign income when available and avoid the application of anti-deferral rules.

Our services in this area include:

Advising on Withholding Tax Issues for Portfolio Income  

If you are a non resident or foreign person investing in Italy or the U.S. your are likely subject to the rules on withholding tax on Italian or U.S. source passive income you earn from Italian or U.S. investments such as dividends, interest, rents, royalties, gains and the like. Both Italy and the U.S. grant exemptions from withholding for certain type of income earned by foreign investors in Italy and the U.S. Tax exemptions may be limited or excluded in case of investments conducted through entities organized in low-tax countries.

In this labyrinthine area of international tax law, we help clients understand the rules, structure their investments in such a way as to eliminate or minimize withholding taxes and satisfy the procedural, administrative and documentation requirements related thereto. We also assist withholding agents such as companies, banks and financial institutions to comply with their withholding obligations and avoid exposure to personal withholding liability.

Our services in this area include:

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Advising on Permanent Establishment Issues

Foreign investors engaged in activities in Italy that cross a certain threshold may become subject to tax in Italy on income related to their Italian activities. The threshold for triggering Italian tax is referred to as "permanent establishment". It usually requires a direct physical presence (such as an office or other fixed place of business) or regular activities performed by third parties acting on taxpayer's behalf (such as employees or agents). The Italian tax code provides its own definition of permanent establishment and Italian courts are notoriously aggressive in enforcing the permanent establishment provision. As a result, taxpayers are often inadvertently caught in such provisions and suffer adverse tax consequences. We advise our clients on the best practices to avoid inadvertent exposure to Italian permanent establishment tax and help them go through the required due diligence to maintain protection from such exposure.

The U.S. equivalent of the Italian permanent establishment provision is the U.S. trade or business rule, according to which foreign persons are subject to tax in the U.S. on their income effectively connected with their U.S. trade or business. The case-law interpretation of the U.S. trade or business requirement is potentially broad and the statutory and regulatory provisions on effectively connected income are rather complex. We advise clients on issues arising under U.S. trade or business and effectively connected rules.        

If you are a multinational enterprise with cross-border transactions with related entities you probably know that transfer pricing enforcement is a high-profile and big-money priority for tax authorities around the world. Related entities engaged in cross-border transactions must deal with each other at arm's length (as if they were independent). In the United States, IRS is expanding its transfer pricing enforcement activities. According to BNA Tax Management’s analysis of court records, the number of transfer pricing cases filed in U.S. federal courts for the first half of 2004 doubled from those filed during the same period in 2003, and the amounts in controversy increased more than eightfold. Total transfer pricing allocations currently at issue in U.S. federal courts have risen sharply to $ 9.2 billion, up from 2003 total of approximately $1 billion. New regulations in various areas of transfer pricing rules have been promulgated in final, temporary or proposed form. Transfer pricing enforcement is also on the rise worldwide, with an increased number of countries introducing transfer pricing rules and documentation requirements, and transfer pricing specific penalties. Over 30 countries have enacted their own documentation rules, including (among others) Argentina, Australia, Brazil, Canada, Colombia, Chile, China, France, Germany, Hungary, India, Korea, Malaysia, Mexico, The Netherlands, New Zealand, the United Kingdom, and Venezuela. These countries also impose moderate to heavy penalties on transfer pricing adjustments. The result of this global enforcement environment is that taxpayers with international business operations are no longer able to ignore transfer pricing. It is generally not a case of whether their transfer pricing policy will be examined, but when it will be examined.

In this crucial area, which lies at the heart of international taxation, we can assist clients to minimize their expenses and burdens connected with transfer pricing disputes in every stage of the transfer prices planning, documentation and defense process. Our services in this area include:

Interpretation and Application of Tax Treaties

Countries enter into bilateral income tax treaty to govern the allocation of respective taxing rights and avoid double taxation of their residents with respect to income arising in their own territories.

A bilateral income tax treaty typically limits the source state’s power to tax income earned by a resident of the other contracting state from sources within its territory, provides for relief from double taxation and provides for a procedure before the competent authority of the contracting state as a way to settle international tax disputes arising under the treaty.

Tax treaty benefits essentially reduce withholding taxes at source on investment income and limit taxation of business profits at source unless attributable to a permanent establishment in the source country. The large Italian and U.S. tax treaty network makes it likely that you are entitled to benefits under one or more of the 70-plus Italian and U.S. tax treaties. Understanding and working with tax treaties require specific practice, because notwithstanding efforts to conform to a model (either the OECD or the U.S. model), Italian and U.S. treaties differ from each other in important and often subtle respects. Seemingly simple questions common to all treaties, such as who is entitled to treaty benefits, can give rise to contentious and potentially costly disputes.

Certain issues, such as what constitutes a permanent establishment and how profits attributable to a permanent establishment are computed (which seemed reasonably settled at a certain point in time) are still subject to debate and at the root of complex tax disputes. You are probably aware that since 1998 the OECD has been engaged in a project to re-examine the attribution of profits to a PE under article 7 of the OECD Model, and in August 2004 it issued a discussion draft on this issue, setting forth the methodology to attribute profits to a permanent establishment and addressing a series of related issues, which are receiving high attention among the OECD member states.

Our international tax practice covers both substantive legal issues and administrative and procedural aspects of securing treaty benefits by filing appropriate forms and working with Italian, U.S. and foreign tax authorities. Our services in this area include:

Negotiating Advance Pricing Arrangements

In the United States, the Advance Pricing Agreement (APA) program was established in 1991 and is generally recognized as a mature and stable program that has provided taxpayers with an extremely valuable, non adversarial alternative to resolve transfer pricing disputes. Following the United States, other countries adopted and now have well established APA programs, including Australia, Belgium, Canada, Colombia, France, Germany, Japan, Korea, Mexico, the Netherlands, New Zealand, the United Kingdom and several others. In 1996, the OECD issued Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and included a chapter on APAs. More recently, the Pacific Association of Tax Administrators (PATA) (whose members include Australia, Canada, Japan and the United States) issued guidance on bilateral APAs. Italy has finally joined this group of countries by adopting in 2004 its version of APA program named “international tax ruling”, which extends to transfer prices, tax treatment of cross border interest, dividends and royalties, attribution of profits to a PE and other transfers of values to or from foreign persons and issued specific guidance on the procedure leading to the agreement with the tax administration.

If you are evaluating how or whether to seek an APA in Italy or abroad, we can help you:

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Handling Competent Authority Cases

If you are faced with the prospect of international double taxation as a result of the fact that a country is imposing a tax in a manner that is inconsistent with an income tax treaty, you can resort to the competent authority process to avoid or at least minimize such international double taxation and obtain other forms of assistance in the international context. The competent authority process is designed to assure the proper application of a tax treaty to the benefit of taxpayer and is crucial for the proper working of the tax treaties system. Unfortunately, many taxpayers are not familiar with the competent authority mechanism and fail to obtain all the benefits it can provide. We can assist you to avail of the competent authority process to its full extent. Our services in this area include:

Cross-Border Financing and Financial Products

Multinational enterprises engaged in cross-border financing transactions now face various types of earnings stripping and anti thin-capitalization or avoidance rules adopted in most countries around the world, and must properly deal with them in order to avoid undesired tax consequences.

Italy has enacted its own version of anti thin-capitalization rules in 2004, which were repealed and replaced with a new limitation on deduction of interest in 2008.

Financial products, designed correctly, provide competitive returns to purchasers and, on the issuer side, they aid in risk management and collection of funds for corporate growth and development. In the international setting, their value is enhanced through the use of hybrid entities and hybrid transactions (which means, entities and transactions characterized differently for domestic and foreign tax law purposes), with increased possibilities of double dips and tax efficient structures. A completely new set of rules on tax characterization and treatment of financial products was also enacted in Italy in 2004. With the growth in this area has also come more intense scrutiny at the legislative and administrative level, with the enactment and enforcement of anti-abuse and tax shelter rules, thus making it even more important that a financial product or transaction is carefully designed from the outset.

We advise clients in evaluating financial products offered by others, designing financial products and correctly structure their cross-border financing deals to maximize tax benefits and avoid risks of non compliance, unfavorable tax audit and assessments. Our services in this area include:

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In coordination with our associated professionals and accountants, we provide all services ancillary or incidental to international tax and legal advice on cross-border transactions and maintain a niche practice in the area of ship finance law. In particular, we assist clients in the following matters: