“Urgent measures for competition, infrastructure development and competitiveness”.
That is the aim of a new amendment to Italy’s tax law which will facilitate the tax-free migration of its companies to tax ‘friendlier’ European Offshore Financial Centres (OFCs).
Subject to the usual implementation rules that will clarify its application, the law will allow an Italian company relocating its tax residency to elect for a deferral of taxation on its unrealised capital gains until the gain is in fact realised.
It is entirely possible therefore that a company could arrange its affairs in such a way that no capital gain ever arises.
Freedom of Establishment
The new rule is a legislative response by Italy to a formal request from the European Commission (EC) to align its ‘exit’ tax with the principle of ‘freedom of establishment’ as discussed by the European Court of Justice (ECJ) in its National Grid Industries judgement (C-371/10).
In that case the ECJ ruled that Article 49 of the Treaty on the Functioning of the European Union prohibits an European Union (EU) member state from prescribing an immediate levy of tax (a so-called ‘exit’ tax) at the time of the relocation.
Non-European OFCs not Covered.
To qualify for the tax-free treatment the company must move to a EU member state or a non-EU member of the European Economic Area (EEA)with whom Italy maintains treaty relations governing the exchange of tax information and mutual assistance in the collection of taxes.
By implication a move outside of Europe by an Italian company even where the relevant agreements are in place triggers a ‘taxable event’ and the immediate imposition the ‘exit’ tax thereby acting as a de facto ‘penalty’ for extra-European company migration.
Why this Matters
As part of a regional economic and monetary union it entirely appropriate that Italy’s laws are brought into line with the common goals and objectives of the EU of which a fundamental one is enhanced competitiveness – at the regional, state and enterprise level.
The application of the ‘Freedom of Establishment’ as clarified in National Grid places European OFCs like the Netherlands, Liechtenstein, Ireland, Cyrus and Luxembourg at a competitive advantage vis-à-vis their non-European counterparts who offer comparable tax benefits especially in the treatment of dividends, interest and royalties; and even where the requisite bilateral arrangements supporting information exchange and facilitating the mutual assistance in tax collection are in place.
A Timely Reminder
As Europe generates more rules principally through the OECD and ostensibly aimed at supporting increased transparency and more effective tax cooperation, this EC-ordered tax amendment stands as a timely reminder that at the heart of this agenda is also the support and reinforcement of Europe’s competitiveness during this sustained period of economic recession.
(For more analysis see Tax Analysts Doc. 2012-8137 Amended Italian Exit Tax Provides New Opportunities for Multinationals)