The new Italian CFC regime



Legislative Decree No. 142 of 29 November 2018, published in the Italian Official Gazette on 28 December 2018, implemented Council Directive (EU) 2016/1164 of 12 July 2016, setting forth new rules against tax avoidance, known as the Anti Tax Avoidance Directive (ATAD).

Article 4 of the Decree restates current Article 167 of the Italian Consolidated Income Tax Act in order to incorporate Articles 7 and 8 of the ATAD on the regime applicable to the controlled foreign companies, the so-called CFC regime.

Previous Italian CFC regime

Article 167 of the Italian Consolidated Income Tax Act required Italian residents to be taxed on income earned by the non-resident controlled entity applying the so-called ‘look through’ tax regime, even in the absence of effective distribution of profits, if the controlled entity was subject to a preferential tax regime.

Specifically, if an Italian resident had control, directly or indirectly, including through trust companies or third parties, of an enterprise, a company or other entity, residing or located in states or territories with a preferential tax regime, the Italian taxpayer was taxed on the income earned by the controlled foreign entity, with effect from the end of the financial year or management period of the controlled foreign entity, in proportion to their stake.

Such a regime was not applied if the taxpayer was able to show that the company or other non-resident entity carried out an effective industrial or commercial activity in its home state. For banking, financial and insurance activities, the latter condition was deemed to be satisfied when most of the funds, investments or revenues originated in the same country. Also, if the holding of one or more participation did not have the effect of attributing income in states or territories with a preferential tax regime.

Nevertheless, the previous CFC regime was also applied to income from foreign holdings if the controlled entities were located in states belonging to the European Union (EU) or to those belonging to the European Economic Area, with which Italy has signed an agreement that ensures an effective exchange of information, if the following conditions were jointly applied – first, they were subject to effective taxation lower than 50 percent to Italian taxes and, second, if they had income, more than 50 percent of which was derived from management, holding or investment in securities, equity investments, loans or other financial assets, from the sale or the granting of intangible rights relating to industrial, literary or artistic property, as well as from the supply of services, including financial services, to entities that directly or indirectly control the non-resident company or if the entity is controlled by the same company that controls the non-resident entity.

New Italian CFC regime

The new wording of Article 167 of the Italian Consolidated Income Tax Act provides that a resident taxpayer holding a controlling share or a profit of more than 50 percent, be taxed on income earned from the non-resident applying the so-called look-through tax regime, provided that the following conditions are met: first, the effective level of taxation of the foreign subject is less than 50 percent of the Italian applicable one and, second, more than a third of the non-resident profit consists of passive income, including dividends, interest and royalties, income deriving from financial and insurance activities or sale of goods or intra-group services with low added value.

Therefore, the new CFC regime extends the notion of control to instances where the Italian entity directly or indirectly holds the right to profit of the foreign entity in excess of 50 percent. With reference to financial and insurance activities, the new CFC regime appears to be applied simply on the basis of the supply of these activities. And the new CFC regime applies to intra-group sale of goods or services with ‘low added value’.

However, the new CFC regime does not specify the meaning of ‘low added value activities’. According to certain scholars, such circumstance will have to be evaluated on the basis of a functional analysis, taking into account the tasks performed and the risks assumed.

It is also unclear whether the new regulations apply only to infra-group resale activities, for example purchase and resale from or to associated entities, as would appear to be the case according to Article 7, paragraph 2, letter A of the ATAD which refers to “goods purchased from and sold to associated companies”.

Non-application of the new CFC regulation

The new CFC regime shall not apply if the non-resident entity carries out an effective economic activity, through the use of equipment, assets, premises and staff.

The taxpayer is granted the opportunity to file a ruling in order to prove the existence of these requirements.

The ATAD gave Member States the opportunity not to apply the CFC regime if no more than one third of the passive income of the foreign entity is derived from transactions with associated companies. The Italian legislator did not take this option.

Application of the new CFC regime to non-resident UCIs

The new regulations introduced by Legislative Decree No. 142 expressly provide for a specific provision aimed at non-resident collective investment schemes.

Paragraph 10 of Article 167 of the Italian Consolidated Income Tax Act provides for a mechanism to prevent the resident controlling entity from being subject to double taxation during disinvestment, allowing the latter to add taxes paid by that subject at the time of taxation to the cost recognised for tax purposes of the units or shares of the foreign UCI.


The ATAD proposes two approaches in order to tax only part of the income of the foreign controlled entity: first, the ‘entity approach’, which provides for the inclusion of non-distributed specific types of income and, second, the ‘transactional approach’, providing for the inclusion of non-distributed income arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.

The regime introduced by Legislative Decree No. 142 provides for the taxation of the entire income of the CFC, maintaining the approach traditionally adopted by Italian rules.

Nonetheless, the implementing measures appear to be in line with the provisions of the ATAD, as Recital 12 of the ATAD allows for the possibility of taxing the entire income of the CFC.

The new CFC regime does not resolve some issues that had already emerged under the old regulation. With reference to the CFC holding: CFC is a holding and, in turn, holds the control of another CFC entity holding.

It is not clear whether the CFC regime should be applied to all entities, with the consequence of applying multiple taxation subjects to the look-through tax regime.

In addition, the Italian Association of Chartered Accountants and Accounting Experts (AIDC) has also filed a complaint to the European Commission highlighting how the current regulation should be considered contrary to the provisions of the ATAD.

Article 167 of the Italian Consolidated Income Tax Act requires one third of revenue to be derived from passive income for a foreign entity to fall within the CFC regulation.

Instead, the English version of the ATAD requires an entity to be treated as CFC if one third or less of the income accruing to the entity is derived from passive income.

The reference to revenue rather than income, which is calculated as the difference between costs and revenues, might have the effect of increasing the number of entities subject to the Italian CFC regime. Therefore, according to the AIDC, the new CFC regime provided by Article 167 of the Consolidated Income Tax Act has not been implemented in compliance with the European rationale.


Domenico Gioia is an associate at LMS Studio Legale. He can be contacted on +39 02 881861 or by email:

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Domenico Gioia

LMS Studio Legale

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