Mapping of foreign subsidiaries and regulations on Controlled Foreign Companies

The emergency at Covid-19 is forcing Italian companies to deal with the delicate management of short-term problems, first of all obtaining the necessary liquidity.

This context would lead to an avoidable neglect of medium/long-term commitments, such as the calculation of taxes, which, if not properly assessed, will result in additional burdens for Italian companies.

From this point of view, an element to be considered by Italian companies with foreign subsidiaries is the eventual submission to the discipline of the Controlled Foreign Company (Cfc).The Cfc regulation is established by art. 167 of the TUIR and is established to counter tax avoidance by setting up companies in countries with privileged tax status. The mapping of potential foreign subsidiaries, which are subject to the above-mentioned regulations, would provide a picture of foreign income that would be taxed by the Italian parent company for transparency or to the extent of profit participation.

The elements to be considered in this assessment, also in the light of the updates to the Cfc regulations of Legislative Decree 142/2018, are: companies to be considered; requirements for the application of the regulations; tools to avoid the application of the regulations and communication phase.

The central point in the assessment of foreign subsidiaries is to establish whether they fall within the notion of control under the Article 2359 of the Italian Civil Code, which is of a legal nature, and whether the Italian parent company contributes more than 50% of the profits. In addition, pursuant to Article 167, permanent establishments not resident in Italy or those of residents who have chosen the branch exemption are included among the subsidiaries.

Subsidiaries must meet the following requirements to be covered:

  • they must be subject to effective taxation 50% lower than that which would be applied in Italy (only IRES is taken into account for the calculation);
  • at least 1/3 of their income should derive from the so-called “passive income” (interest, dividends, royalties and intercompany services).

In order to avoid the application of the Cfc framework to those companies falling within the above parameters, it is possible:

  • to submit an appropriate request to the tax authorities in advance;
  • to demonstrate the presence, in the event of subsequent control, of an effective economic activity capable of producing the income in question using multiple productive factors.

In the communication phase, if the Italian parent company establishes, by reason of the assessment of its subsidiaries, the presence of the requirements for the disapplication of the Cfc, it must indicate in section I of the FC framework of the 2020 income model the non-taxation for transparency of the income received by foreign subsidiaries.

It will also be necessary to indicate:

  • with code 1 the case of non-submission of the application and the existence of the conditions for the disapplication of the discipline;
  • with code 2 the case of presentation and absence of a positive response and the existence of the conditions for disapproving the regulations.

In the event of failure to communicate information, the parent company is subject to penalties for an amount equal to 10% of the income of the foreign subsidiaries and attributable in the fiscal period for an amount between 1,000 and 50,000 euros.