CFC regulations and the Double Taxation Convention

With the recent judgment no. 25281 of december 16, 2015 , the Italian Supreme Court has addressed the debated issue of the compatibility of the regulations dictated by Article 167 of the TUIR on CFCs with the conventional provisions on business income.

The relationship between conventional and domestic anti-avoidance rules offers food for many interesting observations also in light of the lack of CFC provisions in the Romanian legislation and the potential application of the legislation also to EU countries such as Romania.

As is well known, the CFC rules provide that if the subsidiary does not meet certain conditions (exemptions), the subsidiary’s income, restated with the application of Italian domestic regulations, is attributed by “transparency” to the Italian parent company.

On the other hand, the OECD model convention rules in Article 7 attribute, with the exception of the presence of an O.S., the exclusivity of taxation to the enterprise’s state of residence (not contemplating any exception for the case of controlled enterprises).

Positions:

Some authors believe that the transparency taxation of TUIR Article 167 constituting a derogatory provision to the more favorable covenant provision should not be applied. This view is supported by the ruling rendered by the Bergamo Tax Commission on Nov. 12, 2009, No. 170.

Against this thesis, there is the orientation of other authors, according to whom the CFC regulations would not be contrary to the conventional provisions since the latter are not only aimed at regulating double taxation but also at preventing international avoidance. Consequently, one cannot through the interpretation of the covenant provisions compress the taxing action of the state.

Finally, other authors believe that CFC and covenant rules pertain to different facts: the former subject resident entities to taxation for the subsidiary’s foreign income the latter regulate the allocation of taxing power for business income.

This judgment, espousing the latter strand of thought, made some particularly significant conclusions that cannot be fully supported. In particular, according to the Court , “the self restraint to which the nation state consents by signing the convention cannot evidently go so far as to permit an abuse of the convention itself, which would thus realize a phenomenon of double non-taxation as deplorable as that of double taxation.”

There is a final point to note that the ruling sins in not considering that double nontaxation would not have occurred equally since the mechanism implemented by the CFC legislation is aimed at protecting the state from possible dilatory maneuvers of dividend distribution implemented by the parent company by virtue of control. In any case, taxation would also occur without CFC but with dilated timing.