"NEWS of the June 16, 2016-foreign income before costs without permanent establishment"

Posted by on Jun 16, 2016

For the purposes of determining the tax credit deductible from the tax payable abroad italiana pursuant to article 165 of the tax code, it is necessary to calculate the relationship between the foreign source income and total income net of tax losses decreased flow rates. That raises the question of how should be quantified the numerator of this report – that is, the income produced abroad – especially if this should be represented directly from the proceeds made abroad, and subject to taxation shared with the Italian, or as the difference between such proceeds and the costs that they can (or could) be reported.

This issue has long been discussed in doctrine, as far as publication of circular No. 9/2015 and there wasn't an official position of financial administration. In doctrine, prevailed an approach so to speak "lordista" of that value was determined, also in order to make a match with the income subject to taxation in the foreign State and thereby facilitate effective removal of double taxation. The Oecd Commentary on the Model Convention against double taxation – par. 62 and 53 – isn't much help because it gives the choice to their respective national legislators.

In Italy, the legislator, when publication of the scheme by Decree. 344/2003, had tried to take a stand advocating for the solution "lordista"; However, the final version of the decree did not contain this clarification, according to the doctrine in order to avoid that this legislative provision could be viewed as having innovative character.

The issue has now found a clarification in its circular No. 9 of 2015, in which the tax authorities accomplishes this distinction:

  • for foreign income through a permanent establishment, and self-employment income products overseas, the calculation must be made net of all costs incurred;
  • for foreign income other than those produced by a permanent establishment or from self-employment products abroad, they take the gross proceeds.

The circular puts then on guard against possible exploitation elusive to this approach that could be attacked in the light of the discipline of the abuse of rights, having probably about pathological cases in which there was a glaring disproportion between foreign costs and proceeds thereof, so as to artificially alter the relationship between values that is functional to the determination of credit deductible.

The reasons for the preference for the approach "lordista" which, as mentioned, is to be considered confirmatory and therefore also applies to previous tax periods are different; among them, that of ensuring that the correspondence between the value of the income subject to tax abroad and the value for which is recognized at the Italian taxpayer recovery of tax paid abroad. In addition to this, also notes the difficulty of determining costs that are attributable to the proceeds made by in a sufficiently specific activities abroad: think of the case of interests from loans, royalties for the use of intellectual property, etc.

This approach should also apply in cases of income in the performance of the company in foreign countries where there is a permanent establishment of the Italian taxpayer.

Finally, it would be logical to apply this approach to professional income made abroad in the absence of a fixed base, but still subject to taxation therein; Circular No. 9 of 2015, instead, in para. 3.2 employment incomes, always leads back to "nettista", with a position that, for this particular circumstance, does not seem entirely shareable.

Fabio Lad