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Italy’s Supreme Court on June 11 issued judgment 13579-07 on the application of Italy’s estate tax on a nonresident individual that inherited assets connected with Italy. A Swiss individual inherited the stock of a Swiss company that owned 100 per cent of the stock on an Italian subsidiary. In its decision, the Court addressed the characterization of the Italian subsidiary as permanent establishment of its foreign parent, for the purposes of determining whether the Swiss parent’s stock was subject to estate tax in Italy as asset located in Italy. Although the case concerns the application of Italy’s estate tax, the Court’s ruling has significant implication also in the context of income taxes, since it is largely based on the concept of permanent establishment that applies in the area of direct taxes.


Nonresident persons are subject to Italian estate tax with respect to their assets located in Italy. Assets located in Italy include stock or other capital interests in Italian resident companies and partnerships organized in Italy and having their registered seat, place of management or principal place of business in Italy (the same criteria established at article 73 of Italian tax Code for determining residency for income tax purposes).

Under the facts of the case, an individual resident in Switzerland inherited various assets, including (a) tangible assets located in Italy; (b) stock of a Panamanian company, and (c) stock of a Swiss company that owned 100 per cent of the stock of an Italian operating company.

The Italian tax administration stated that the Swiss company’s Italian subsidiary constituted a permanent establishment in Italy of its Swiss parent, and that the Swiss parent’s principal place business was located in Italy, where it operated through its wholly owned Italian subsidiary/PE. As a consequence, according to the tax authorities the Swiss company had to be considered a domestic (resident) entity (under the principal place of business test) and its stock was an Italian asset subject to estate tax in Italy. The taxpayer subsequently challenged the assessment of the tax in court.

The tax court partially upheld the challenge, although it is not clear from the description of the facts of the case which aspects it supported. However, the tax court ultimately confirmed the application of the estate tax on the stock of the Swiss company. The taxpayer appealed that finding to the appellate court, which rejected the appeal. The taxpayer then appealed to the Supreme Court.


According to the Court, the relevant issue is whether the Swiss company’s Italian subsidiary can be characterized as its PE in Italy.

In that question is answered in the affirmative, then because the Swiss company’s sole activity is holding the stock of the Italian subsidiary, it would result that the Swiss company’s sole business is located in Italy, where it operates through its wholly owned Italian subsidiary/PE. Consequently, the Swiss company would be an Italian-resident company under the principal place of business test, and its stock would be an asset located in Italy subject to Italy’s estate tax.

In answered in the negative, the Swiss company would be a foreign (nonresident) company based on its registered seat, place of management and place of business (Switzerland, where it is managed and holds the stock of its Italian subsidiary), and the Italian estate tax on the stock of the Swiss company would not be due.

The Court addressed this issue by referring to the provision of article 5, paragraph 6 of Italy-Switzerland income tax treaty, which says that the sole fact that a company in one contracting state is controlled by company in another contracting state is not sufficient, in itself, to characterize the former as a permanent establishment of the latter.

The Court observed that this conclusion is in line with a previous decision, Ministry of Finance (Tax Office) vs. Philip Morris (GmbH), Corte Suprema di Cassazione n. 7682/02 of May 25, 2002,in which it found the existence of a PE on the basis of a the parent-subsidiary relationship accompanied by other elements, such as the subsidiary’s active participation in contractual negotiations on behalf of the parent and supervision of the parent’s business in Italy.

Because, in the case under analysis, the tax administration referred to no other facts to justify treating the Italian subsidiary as PE of its Swiss parent and enable it to assert its taxing power on the stock of the Swiss parent, the Court held that the estate tax was not due.

However, the Court also noted that for companies organized in tax haven jurisdictions that do not have tax treaties with Italy that include a provision similar to article 5, paragraph 6 of Italy-Switzerland treaty, the conclusion may be different. In that case, the Court seems to imply, the parent-subsidiary relationship may constitute, in itself, sufficient evidence for the subsidiary-PE re-characterization.


The decision is important, since it shows that the tax administration and the courts may be willing to use or consider an argument based on the re-characterization of an Italian subsidiary as the permanent establishment of its parent, and the consequent re-characterization of the foreign parent as an Italian company based on the principle place of business test (in case of pure holding companies) to assert Italian tax jurisdiction in cross-border situations that may be perceived as abusive. That could have far-reaching implications in the area of income taxes.

Also, the Supreme Court seems to suggest that a stricter standard applies to offshore companies organized in low tax jurisdictions with no tax treaties with Italy, in which case the mere control relationship may be used to re-characterize the subsidiary as a PE on the basis of its real economic nature, disregarding the legal structure. In that particular situation, according to the Court, the mere control relationship may be sufficient evidence, as the standard of proof upon the tax administration is less stringent.

Consequently, taxpayers should continue paying attention to this area of law, as the courts are shifting towards the use of substance-over-form type of analysis or arguments to justify a wider application of Italy’s taxing power.