ITALY: REVISED STANDARD; FOREIGN ENTITY NOT REQUIRED TO FILE RETURN

The Italian Supreme Court overturned decisions of lower courts to conclude that two renowned Italian fashion designers were not guilty of tax evasion. The designers, however, could still be subject to civil penalties of about €343.3 million.

BACKGROUND

The designers had set up Luxembourg companies, to which they had transferred ownership of their trademarks. Royalties were paid not to the designers, but to the Luxembourg entities. Italian prosecutors alleged the designers had failed to declare income and value added tax (VAT) in Italy, and maintained that a Luxembourg company was managed in Italy and was a de facto tax resident of Italy.

The Supreme Court’s decision, finding the designers were not guilty of tax evasion, was issued in October 2014 but not published until October 2015.

IMPLICATIONS OF DECISION

The high court’s decision is a landmark one because it sets out principles for application of criminal penalties in tax avoidance cases, and signal a change from the previous position followed by the Supreme Court.

The judgment clarifies that a foreign entity is not deemed to be a resident of Italy and therefore not required to file an Italian tax return if, outside Italy, it has substance and a structure—even if minimal—that allows the entity to pursue the business purpose set forth in its articles of incorporation. By contrast, a business is deemed to be a resident of Italy if it is established abroad with the sole purpose of exploiting a more favorable tax regime.

Read a November 2015 report [PDF 257 KB] prepared by the KPMG member firm in Italy: Supreme Court finds Dolce & Gabbana not guilty of tax evasion