Reproduced with permission from BNAI European TaxService Monthly Digest, 17 ETS 16, 10/30/15. Copyright �2015 by The Bureau of National Affairs, Inc.(800-372-1033) http://www.bna.com

VOLUME 17, NUMBER 10 >>> OCTOBER 2015

Italian Tax Reform:New Legislation onAbuse of Law andStatute ofLimitationsVittorio Salvadori di WiesenhoffK&L Gates

A new Decree, which includes changes to the treatment of taxavoidance and abuse of law, and which should limit the moreenthusiastic challenges by the revenue authorities, has beenapproved by the Italian Government. The following articleexamines the changes.

The Italian government has recently approved anew decree which reshapes the definition ofabuse of law and tax avoidance and changes

the rules on the statute of limitations in the event oftax crimes. The decree also introduces a cooperativecompliance program to improve relationships be-tween taxpayers and Italian tax authorities.

The new decree, which represents the first step ofimplementation of a wider tax reform, in compliancewith the empowering legislation enacted by the Par-liament in 2014, was published in the Official GazetteAugust 18, 2015, n. 180 as Legislative Decree August 5,2015 n. 128 (the ‘‘Decree 128’’) and is effective as ofSeptember 2, 2015 (the ‘‘Effective Date’’).

This document provides an overview of the mea-sures included in the Decree 128 concerning the abuseof law and the statute of limitations.

I. Abuse of Law and Tax Avoidance

A. Introduction

Art. 1 of the Decree 128 introduces a new general anti-avoidance rule (‘‘GAAR’’), within the Taxpayer Bill of

Rights (Law 212/2000 – ‘‘TBR’’), with a view to providemore certainty to the taxpayers.

The GAAR replaces and supplements the current(semi-general) anti-avoidance provision set out byArt. 37-bis of the Decree 600/73, whose scope of appli-cation was limited to Italian income taxes and to aclosed list of transactions, and the abuse of law doc-trine developed by the Supreme Court, which hasbeen extensively applied by the Italian tax authoritiesand tax courts beyond the narrow borders ruled byArt. 37-bis.

The GAAR is effective as from the first day of themonth following that of the Effective Date (i.e., asfrom October 1, 2015). However, the new rules willalso apply retrospectively to transactions which havenot yet been challenged by the tax authorities througha formal deed of assessment.

B. The New Definition of Abuse of Law

Art. 10-bis of the TBR provides for a brand new defi-nition of abuse of law and tax avoidance.

An abuse of law exists when one or more transac-tions ‘‘lack any economic substance and, despite beingformally in compliance with tax laws, are essentiallyaimed at obtaining undue tax advantages’’. These abu-

Vittorio Salvadoridi Wiesenhoff ishead of the taxdepartment at K&LGates, Milan

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sive schemes are not opposable to the tax authorities,which shall disregard the tax advantages so achievedand compute the taxes on the basis of the rules andprinciples that have been circumvented, taking intoaccount any tax payments made by the taxpayer inconnection with the abusive transactions.

Art. 10-bis also states the following:(a) transactions are deemed to be lacking any eco-

nomic substance when they consist of facts, actsand contracts, even interconnected, that are notable to generate economic effects other than thetax advantages. The inconsistency between the in-dividual transactions and the underlying juridicalrationale of their aggregation or between the legalinstruments that have been adopted and standardmarket practices can be regarded as being evi-dence of a lack of economic substance;

(b) the undue tax advantages consist in benefits, evenif not achieved in the short term, that are in con-flict with the purpose of the tax provisions or withthe principles of the tax legal framework;

(c) there is no abuse when a transaction is justified bysound and non-marginal non-tax reasons, includ-ing managerial and organizational ones, beingaimed at improving the structure or the function-ality of the business.

The provision clarifies that taxpayers are allowed tochoose between different op-tional tax regimes provided bythe law or between alternativetransactions leading to a differ-ent tax burden. In other words,it is recognized that under Ita-ly’s detailed rules, taxpayersfrequently have a choice as tothe way in which transactionscan be carried out, and that dif-fering tax results arise depend-ing on the choice that is made.The GAAR does not challengesuch choices. Clearly, it mayhowever still come into opera-tion if the course of actiontaken by the taxpayer cannot beregarded as reasonable and es-sentially aims to achieve a fa-vorable tax result that thelawmaker did not anticipate when it introduced thetax rules in question.

C. Taxes to Which the GAAR Applies

The GAAR applies to all taxes, with the exclusion ofcustom duties.

D. Ruling Applications

Taxpayers can file a ruling application to ascertainwhether envisaged or already completed transactionsimply an abuse of law. The application shall be filedprior to the deadline for the filing of the tax return orfor the completion of the tax formalities relating to theunderlying transactions.

E. The GAAR and the Rest of the Tax Rules

The Revenue Agency is allowed to make abuse of lawchallenges only when the relevant tax advantagescannot be struck out with the argument that specifictax provisions have been violated. This means that itwill usually be necessary to determine whether the ar-rangements under scrutiny could achieve their tax

avoiding purposes under the rest of the tax code,before challenging them on abuse of law grounds ap-plying the GAAR.

F. Management of the GAAR by the Tax Authorities

Art. 10-bis of the TBR includes a set of comprehensiveprocedures for tax assessments involving an abuse oflaw under the GAAR. Failing to comply with theserules would render the assessment null and void.

Before issuing an assessment based on the GAAR,the Revenue Agency shall address to the taxpayer aformal request for clarification of the transaction(s),detailing the reasons why an alleged abuse of law isbeing considered. This formal request shall be servedwithin the expiration of the ordinary statute of limita-tions and the taxpayer shall reply within the following60-day period. It is also stated that the time span be-tween the receipt of the taxpayer’s reply or the dead-line for sending such reply and the ordinary statute oflimitations shall be not less than 60 days. If the timespan is shorter, the Revenue Agency is granted an ex-tension of the period within which they can serve thetax assessment.

Abuse of law challenges under the GAAR shall beraised with a specific tax assessment, which cannot in-clude other charges and shall be properly motivated.In this respect, the Revenue Agency is required to

specify the rules and principles that have been alleg-edly circumvented and detail the undue tax advan-tages, making also reference to the clarificationsprovided by the taxpayer.

G. Burden of Proof

The authorities shall provide evidence of the allegedabuse of law, as defined above, while the taxpayer mayinvoke and demonstrate the existence of non-tax rea-sons supporting the transaction that is being chal-lenged.

H. Administrative Tax Penalties

Art. 10-bis(13) of the TBR states that transactions thatamount to an abuse of law under the GAAR shall besanctioned with the imposition of the ordinary ad-ministrative tax penalties (i.e., the penalties that maybe imposed for the filing of incorrect tax returnsand/or for failure in making the required tax pay-ments).

Despite the clear statement in the GAAR, it is stilldebatable whether the imposition of penalties in re-spect of abusive transactions is reasonable and consis-tent with the provisions governing tax sanctions.

‘‘[T]he new provisions...may alsoapply retrospectively to previoustransactions that have not beenformally assessed yet by theRevenue Agency under the oldrules’’

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J. Tax Crimes

It is now specifically ruled that abusive transactionsthat are challenged under the GAAR do not amount totax crimes. This is a noteworthy development whichshould significantly reduce the flow of criminal law in-vestigations and procedures in respect of allegedlyabusive schemes. On the basis of the general criminallaw principle whereby newly enacted legislation ap-plies on a retroactive basis if more favorable to the de-fendant (the so-called favor rei), the provision shouldallow protection from criminal law proceedings in re-spect of abusive schemes that have been put in placeprior to the entry into force of the GAAR. It is, on theopposite, debatable whether the provision would alsopositively affect pending criminal cases.

II. Tax Crimes and Statute of Limitations

A. The Current Rules

Under current rules, the statute of limitations isdoubled when the Revenue Agency is required tomake a filing with the public prosecutor for allegedtax crimes. According to the approach adopted by thetax authorities, as endorsed by the ConstitutionalCourt, the extension also applies when the filing ismade after the expiration of the ordinary statute oflimitations.

B. The New Rules

Art. 2 of the Decree 128 changes the rules, stating thatthe period of time in which a deed of assessment canbe served is not doubled if the filing with the publicprosecutor is made after the expiration of the ordi-nary statute of limitations.

On the basis of the amended rules, therefore, thestatute of limitations will generally expire on Decem-ber 31 of the fourth year following the year of filingthe relevant tax return, unless, prior to the elapse ofthis ordinary deadline, the Italian tax authoritiesmake the filing with the public prosecutor (in whichevent the term is doubled). The extension will in anyevent no longer apply for challenges that aregrounded on the basis of abuse of law.

C. The Grandfathering Provision

Art. 2 includes a grandfathering provision for:

(i) tax and penalty assessment notices served beforeSeptember 2, 2015 which rely on the doubling ofstatute of limitations under the previous (looser)rules;

(ii) tax audit reports of which the taxpayer becomesformally aware before September 2, 2015, pro-vided that the subsequent tax or penalty assess-ment notices are served before December 31,2015.

III. Conclusions

Decree 128 introduces detailed rules on abuse of law,providing taxpayers with a comprehensive and long-awaited framework on the matter. These new provi-sions, combined with those which limit the Italian taxauthorities’ right to extend the statute of limitations inthe event of an alleged tax crime, should improve tax-payers’ rights and reduce the uncertainties generatedin recent years by the aggressive approach adopted bythe Revenue Agency and by public prosecutors whenchallenging tax advantages on the basis of the abuseof law doctrine.

The new rules will not only affect Italian residentpersons; they are relevant for non-Italian taxpayers aswell. Indeed, foreign investors will want to considerthe impact of Decree 128 when structuring the acqui-sition of Italian properties or the execution of transac-tions on assets that generate Italian-source income(e.g., equity and derivative trades during dividendseason). Where these transactions are structured in atax-efficient manner or allow for the application ofcertain tax advantages, they may be challenged by theItalian tax authorities relying on the GAAR.

Reference would therefore be made to the new defi-nition of abuse of law in Art. 10-bis of the TBR and theRevenue Agency would have to follow the proceduresset out for GAAR assessments. In addition, these chal-lenges should no longer entail the commencement ofa criminal law proceeding.

But the new provisions may not only be relevant forthe future. Indeed, they may also apply retrospectivelyto previous transactions that have not been formallyassessed yet by the Revenue Agency under the oldrules. Moreover, they may positively affect ongoingcriminal law proceedings that are based on abuse oflaw challenges since abusive conducts can no longerresult in a tax crime.Vittorio Salvadori di Wiesenhoff is head of the tax department atK&L Gates, Milan. He can be contacted atvittorio.salvadori@klgates.com.

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