There are numerous specific anti-avoidance provisions (SAARs) and the general anti-abuse rule (GAAR), and the Italian tax authorities may recharacterize or disregard a transaction or series of transactions under the GAAR only if the tax benefits cannot be challenged under any of the SAARs which exist, for example, in relation to the carry-forward of losses and deductions for interest expenses.

GAAR

There are broadly four steps or conditions which must be met in order for the GAAR to apply.  

First, does the transaction give rise to an undue tax saving, meaning a tax advantage contrary to the purpose of the relevant provision or the principles of the tax system? In assessing this, the Italian tax authorities would generally consider whether there is a more straightforward alternative transaction that would have achieved the same juridical and economic results, but would not have given rise to the same tax advantage.

Second, is the main purpose of the transaction to obtain an undue tax saving?

Third, does the transaction lack economic substance, i.e. is it not justified by economic reasons? Transactions are regarded as lacking economic substance if they do not result in any significant economic effect other than the tax benefit. As indicators of lack of “economic substance”, the GAAR refers to cases where there is an inconsistency between the qualification of the transactions and their legal basis as a whole and where the choice to use certain legal instruments is not consistent with the ordinary market practice. Circular transactions carried out solely for tax reasons would be regarded as lacking economic substance.

Finally, is the transaction justified by non-negligible, non-tax reasons? A transaction should not be regarded as abusive if it is justified by non-negligible business purposes (other than of tax considerations), including those aimed at improving the organisational and managerial structure of the business.

Enforcement trends

Recent challenges based on a purpose test included the following cases:

• Choice between a step-up of tax basis in shares (through payment of a substitutive tax), followed by a sale to another company owned by the same shareholder (so-called “cash out”), and a dividend payment. The Italian tax authorities tend to consider the step-up and sale option abusive since the seller does not fully divest of the shares. The Italian Supreme Court, however, decided that such transactions cannot be considered abusive if they are justified by sound economic reasons, such as a reorganisation or the entry of third-party investors, for example, in the context of a leveraged buyout transaction (see Supreme Court Decisions no. 868 of 16 January 2019, no. 25131 of 16 September 2021 and no. 6623 of 1 March 2022).
• Intermediate EU holding company ultimately owned by a non-EU fund claiming exemption from Italian withholding tax under the Parent-Subsidiary Directive. The Italian tax authorities would tend to challenge this type of structure. Recent case law on the free movement of capital as regards equal treatment of EU and non-EU investment funds could, however, be used to argue that this should not normally be regarded as an abusive scheme (see Court of first instance of Rome Decisions no. 1354 and 1355 of 18 October 2022).
• Intra-group “re-leverage” transactions pursuant to which third-party debt borrowed by an EU parent company to acquire a group was reallocated to Italy (in proportion to the value of Italian targets). The Italian Supreme Court regarded such transactions as abusive since they are essentially carried out to obtain an undue tax saving through, inter alia, the shifting of “artificial” debt into Italy, and the erosion of the relevant tax base (Supreme Court Decision no. 34595 of 30 December 2019). Several more recent rulings by the Italian tax authorities have taken the same position.
• The Italian Supreme Court ruled that beneficial ownership status is not included in the Parent-Subsidiary Directive and that the only basis for denying the withholding tax exemption provided for by the latter in the EU context is the existence of an abuse of rights, aimed at illegitimately allowing a non-EU company to obtain such an exemption regime to which only EU companies are entitled (Supreme Court Decision no. 16173 of 8 June 2023).