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Italy: Changes made to "black" and "white" lists

Ministerial Decree No. 180, published by the government on 4 August 2010 (and effective as from that date) makes changes to the countries included on Italy's "black" and "white" lists. Specifically, Cyprus, Korea and Malta have been removed from the black lists, while Cyprus and Latvia have been added to the white list of countries. Italy is in the process of reforming the structure of its black and white lists by developing a new white list that will replace most of the existing lists (i.e. once the lists are restructured, certain "old" black list restrictions will not apply in relation to countries included on the "new" white list). Currently, however, there are four lists: · · · · The white list includes jurisdictions with which Italy is able to exchange information and that have a level of tax not significantly different than the Italian income tax, allowing a possibility to benefit from certain Italian tax advantages (see below) and freedom from certain stringent rules; A controlled foreign company (CFC) black list covers countries in relation to which Italy's CFC regime applies; A tax haven black list identifies jurisdictions/territories for which deductible cost and expense limitations apply to Italian companies doing business with entities in the jurisdiction/territory; and A black list that applies to individuals, which places the burden on the taxpayer to prove his/her residence is outside Italy.

The CFC and tax haven black lists also include countries that are subject to a special incentive regime and tax advantages. In particular, companies based in Korea and Malta were subject to the Italian CFC rules to the extent they were benefiting from tax breaks under Korea's Tax Incentives Limitation Law and Malta's Financial Services Centre Act, Malta Merchant Shipping Act and Malta Freeport Act, respectively. Impact of changes to the lists As a result of the inclusion of Cyprus and Latvia on the white list, companies in those countries can benefit from certain provisions in the Italian tax code that are limited to persons resident in a country that has agreed to an information exchange with Italy. For example, certain capital gains, such as those on listed shares and bonds, realized by Cyprus/Latvian qualified investors (e.g. financial institutions) can qualify for an exemption from Italian taxation (on the 12.5% substitute tax). Cyprus and Malta both have been removed from the black list applying to individuals. If a jurisdiction/territory is included on this list, the burden of proving that residence is outside Italy shifts from the tax authorities to the individual. As a result of the change, the presumption of Italian residence will no longer apply to former Italian residents that have transferred their residence to Cyprus and Malta, i.e. such individuals will not be required to prove their effective residence outside Italy; instead, the burden shifts back to the Italian tax authorities. Inclusion of a country on the CFC black list means that income earned by Italian subsidiaries in that country is fully taxable as income of the Italian parent company (i.e. the subsidiary is treated as transparent), regardless of whether the subsidiary distributes the income. Cyprus, Korea and Malta have been taken off the CFC blacklist, so that Italian-owned companies in these jurisdictions will no longer be subject to Italy's CFC rules. However, the CFC regime will still apply if a Cypriot, Korean or Maltese subsidiary of an Italian parent is subject to an effective income tax rate lower than 50% of the Italian tax rate had the subsidiary been an Italian resident and the majority of its revenue is passive income or generated through intercompany services. In such cases, the Italian controlling entity can request a favorable ruling from the Italian tax authorities by demonstrating that the foreign subsidiary is not an artificial structure aimed at taking advantage of undue tax benefits. In view of the foregoing, the removal of Cyprus, Korea and Malta from the CFC black lists means that those regimes will not apply to companies based in Cyprus, Korea and Malta merely as a consequence of their domicile. Cyprus, Korea and Malta also have been removed from the tax haven black list. Under Italian tax law, costs arising from transactions between an Italian entity with a company resident in a country on the tax haven list are not deductible unless certain conditions are satisfied (such as demonstrating that the company carries out actual business activities). Removal

World Tax Advisor 17 September 2010 1 of 2 Copyright ©2010, Deloitte Global Services Limited. All rights reserved.

from the black list means that there are no limits on the deduction of costs incurred by an Italian entity in connection with a Cypriot, Korean or Maltese company. -- Stefano Schiavello (New York) Client Service Executive Deloitte Tax LLP [email protected] Olderigo Fantacci (New York) Client Service Executive Deloitte Tax LLP [email protected]

About Deloitte Deloitte refers to one or more of Deloitte Global Services Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Global Services Limited and its member firms. "Deloitte" is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee. Each member firm provides services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries in which it operates. DTTL does not itself provide services to clients. DTTL and each DTTL member firm are separate and distinct legal entities, which cannot obligate each other. DTTL and each DTTL member firm are liable only for their own acts or omissions and not those of each other. Each DTTL member firm is structured differently in accordance with national laws, regulations, customary practice, and other factors, and may secure the provision of professional services in its territory through subsidiaries, affiliates, and/or other entities. Disclaimer This publication contains general information only, and none of Deloitte Global Services Limited, its member firms, or its and their affiliates are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. None of Deloitte Global Services Limited, its member firms, or its and their respective affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication. World Tax Advisor 17 September 2010 2 of 2 Copyright ©2010, Deloitte Global Services Limited. All rights reserved.


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