On 8 August 2007, the Italian tax authorities issued Ruling No. 212 that deals with the deductibility, for corporate income tax purposes, of the costs incurred by the Purchaser for the acquisition of a financial lease contract (the "Costs").

(a) Facts. During the fiscal year 2006, an Italian resident company (the "Purchaser") purchased a financial lease contract originally stipulated by the Seller in 2003. The Purchaser paid a price of EUR 541,000 exclusive of VAT. The price (i.e. the Costs) was calculated as the difference between (i) the market value of the leased immovable property and (ii) the lease instalments to be paid plus the purchased option price.

(b) Issue. Whether, and to what extent, the Costs are deductible for corporate income tax purposes.

(c) Tax authorities' opinion. Firstly, the tax authorities recalled that, regardless of the method of accounting for leasing transactions, Art. 102(7) of Presidential Decree 917/1986 – Italian Income Tax Consolidated Code (ITC) – provides that leasing fees are deductible by the lessee only if the contract lasts for more than half the statutory depreciation period (or the whole statutory depreciation period, in the case of leasing of motor vehicles), with a minimum of 8 years and a maximum of 15 years in the case immovable property leases. Hence, Art. 102 deals only with the deductibility of leasing fees and not with the extra costs born by the Purchaser for the acquisition of the lease contract.

The tax authorities stated that the Costs may be split in two components:

-		price paid for the right to use the leased property that qualifies as capitalized cost within an intangible asset, amortized over the residual life of the leased contract; and
-		advance price paid for the option to purchase the leased property at the end of the lease contract ("APP"). The APP will become relevant only at that time. It will represent either (i) a higher value of the asset, therefore, deductible through amortization of the purchased asset or (ii) a cost fully deductible at the end of the lease contract, depending upon whether or not the right to purchase is exercised.

Furthermore, the tax authorities pointed out that the allocation of the Costs cannot be done arbitrarily. In particular, the Costs qualify as APP to the extent they represent extraordinary income subject to taxation for the Seller. Pursuant to Art. 88(5) of the ITC, the extraordinary income taxable in the hands of the Seller is calculated as the difference between (i) the market value of the leased property and (ii) the leasing instalments to be paid plus the purchased option price. On the other hand, only the (residual) Costs, if any, qualify as advanced payment for the right to use the leased property (first bullet point above).

The tax authorities reached the conclusion that the Costs qualify exclusively as APP and, therefore, will become relevant at the year-end of the lease contract either (i) as higher costs for the purchase of the immovable property or (ii) as a deductible cost.

Application of CFC regime to group with sub-holding company resident in black list country

On 23 August 2007, the Italian tax authorities issued Ruling No. 235 aimed at clarifying the applicability of the CFC regime to a group with a sub-holding company resident in a country which has a privileged tax regime and is therefore included in the "black list" (Ministerial Decree 21 November 2001, No. 429).

(a) Facts. An Italian company (the "Company") through a sub-holding owns a shareholding in a company resident in a black list country ("CFC Company"). However, the participation in the CFC Company fully consists of preferred shares (azioni privilegiate). The sub-holding is also resident in a black list country.

(b) Issue. (i) Whether the CFC regime applies as the Company indirectly controls the CFC Company through preferred shares, instead of through ordinary shares.

(ii) Whether the principles provided for by Art. 87(5) of the ITC apply, by analogy, to the CFC regime, considering that:

-		the only asset of the sub-holding is the participation in the CFC ompany. Hence, the sub-holding distributes dividends exclusively out of dividends received from the CFC company; and
-		the income of the CFC company has been already taxed in the hands of the Company pursuant to the CFC regime.

The taxpayer highlighted that in case of a negative answer from the tax authorities, the CFC regime applies to both the sub-holding and the CFC Company and, therefore, triggers double taxation.

(c) Tax authorities' opinion. With respect to the first issue, the tax authorities referred to Art. 168 of Presidential Decree 22 December 1986, No. 917 (Italian Income Tax Code – ITC) which states that the CFC legislation is "also applicable where an Italian resident entity directly or indirectly holds 20% or more of the capital of an entity resident in a state or territory having a privileged tax regime". The tax authorities highlighted that reference is made to Art. 168 instead of to Art. 167 of the ITC because the latter, which refers to voting rights, deals only with the concept of control as provided for by Art. 2359 of the Italian Civil Code, which is not relevant in the case at issue. It follows that the CFC regime applies in all situations in which there is the right to receive a certain amount of income (i.e. higher than 20% of the total income), regardless of the existence of voting rights attached to the participation. Hence, the Company should apply the above principle for the purpose of the CFC regime. It means that, in the case at issue, the CFC regime applies.

With regard to the second issue, the tax authorities ruled that the CFC regime applies to both the sub-holding and the CFC Company.

Arts. 167 and 168 of the ITC provide that the application of the CFC regime can be avoided if the resident person proves, through an advance ruling, that:

-		the foreign entity predominantly carries on an industrial or commercial activity in the state or territory in which it is located (Art. 167(5)a)); and
-		the participation in the foreign entity does not achieve the localization of income in tax haven countries or territories (Art. 167(5)b)).

Art. 87(1) of the ITC provides that capital gains are not exempt if realized upon the disposal of shares owned in a company resident in a black list country, unless the taxpayer (i) gives the same proof required by Art. 167(5)b) of the ITC (see above) and (ii) proves that the CFC company carries on real business activities. However, in case of holding (and sub-holding) companies, such requirements are met if they are met by the subsidiary whose shares represent the majority of the assets of the holding company (Art. 87(5) of the ITC).

Taking the above considerations into account, the tax authorities pointed out that the provision in Art. 87(5) of the ITC regarding the holding (and sub-holding) companies cannot be equally applied with regard to the CFC regime, due to the lack of a specific provision contained therein (i.e. in Art. 167 and 168). Therefore, even if the CFC Company receives a positive advance ruling, the sub-holding will be subject to the CFC regime.

Finally, the tax authorities clarified that double taxation is not triggered, as dividends distributed by the foreign entity are taxable for the amount exceeding the income that has already been taxed in the hands of the Italian recipient under the CFC regime.