Law Decree No. 78, published in the Official Gazette on 1 July 2009 (the Decree) amended the Controlled Foreign Companies regime (CFC Rules), providing for:  

  • the review of the so called “safe harbour” rules, which allow the taxpayers to avoid the application of the CFC Rules upon filing of a preliminary tax ruling, and
  • an extensive application of the relevant provisions to controlled foreign companies, even if not resident in a “black-listed” country, if certain conditions are met.  

The CFC Rules  

According to Article 167 paragraph 11 , of the Presidential Decree no. 917 dated 22 December 1986 (the Italian Tax Code, or ITC) income produced by a CFC located in a black-listed jurisdiction2 is attributed, on an yearly basis, to the Italian controlling entity - regardless any actual distribution of profits - proportionally to the participation held in the controlled company (flow-through approach). Dividends distributed by the CFC are not subject to taxation in the hands of the Italian recipient, up to the amount that has already been subject to taxation.  

The Italian company may claim for the non-application of the CFC rules by submitting a preliminary ruling to the Italian tax authorities, in order to demonstrate:  

  • either that the CFC carried out an actual business activity abroad as its main activity in the state of territory where it is established (Article 167, paragraph 5 (a)), or
  • that the relevant participation in a black-listed company does not cause a leakage of income to the (black-listed) state or territory of residence of the CFC (Article 167, paragraph 5 (b)).  

Article 1 of the Decree amended the provision, by:  

  • amending the safe harbour rules, particularly concerning the actual business activity test, and
  • widening the scope of application of the transparency regime in order to include also CFCs which are not resident in black-listed jurisdictions; and  

in order to prevent any form of tax arbitrage possibly carried out by setting up a CFC solely for the purposes of minimising the domestic tax burden of the resident company.  


  1. “If an entity resident in Italy directly or indirectly controls, also through trust companies or third parties, an enterprise, company or other entity which is resident or located in a country or territory [having a preferential tax regime], the income derived by the participated foreign entity is imputed to the resident entity in proportion to its respective participation, starting from the close of the foreign entity’s fiscal year or management period. Such provisions also apply to interests held in non-resident entities with regard to income derived from their permanent establishments which are subject to the aforesaid preferential tax regimes.”
  2. These countries were listed in a Ministerial Decree which is still in force to date, notwithstanding the previous amendment to article 167 of the ITC, which currently refers to companies “which are not resident of” white-listed countries, ie, countries and territories included in a white list that is still to be issued by the Ministry of Finance. Up to the year following the publication of said Decree in the Official Gazette, in fact, the “old” provisions are still in force, included the previous version of article 167 which refers to companies resident in black-listed jurisdictions  

Changes to the safe harbour rules  

Amended article 167, paragraph 5(a) provides that, for the purposes of applying the safe harbour rule, the trade or business activity must be carried on as the main activity in the market (rather than the State or territory) where the company is established.

Hence, in line with the criteria provided with the most recent clarification released by the Tax Authorities3, the provision now requires that the activity carried out by the company has, as its main target, the local market (ie, the market of the country where the company is located). Therefore, it will not be enough in order to claiming the exclusion from the CFC regime - that the CFC has a corporate organisation abroad or local offices through which its business activity is carried out, if the same business activity is mainly represented by transactions entered into with parties located outside the relevant market.  

For banking, financial and insurance activities, the law makes reference to financial figures, ie, for the actual business activity test to be complied with, the majority of “sources, investments and proceeds” of said entities shall be originated in the state or jurisdiction of establishment. The Decree further amended article 167 by introducing paragraph 5-bis, which restricts the availability of exclusion from the CFC regime, where more than 50 per cent of the profits realised by the controlled company are made of passive income, ie, are derived in connection with one of the following sources:  

  • the management and holding of or investment in securities, shareholding participations, credit instruments, or other financial activities;
  • the transfer or licensing of intellectual property rights of industrial, literary or artistic nature; or
  • the rendering of services (including financial services) to related entities.
  • If these conditions are met, the taxpayer may ask for the non-application of the CFC rules by demonstrating that the safe harbour rule set forth by Article 167, paragraph 5 (b) - is complied with, i.e. that the relevant participation in a black-listed company does not cause a leakage of income to the (black-listed) state or territory of residence of the CFC4.  


  1. See Ministerial Resolutions no. 427/E dated 10 November 2008 and no. 165 dated 22 June 2009.
  2. This may always be used in alternative to the first safe harbour rule, in order to be excluded from the scope of application of the CFC rules.  

Non black-listed CFC  

Up to now, the CFC rules have been applied only to companies located in black-listed countries. The main purpose of them was to stop the use of shareholdings in controlled foreign companies resident in jurisdictions which had a privileged tax regime, in terms both of level of taxation and of special privileges or exemption regimes possibly granted by the third state; they also lacked arrangements for adequate exchange of information with the Italian tax authorities.  

The “black list” was issued with the Ministerial Decree dated 21 November 2001, as amended and supplemented from time to time, and incorporates the countries which have been deemed to have a preferential tax regime when compared to the Italian one.  

In order to broaden the application of said regime and further prevent tax evasion, the Decree added paragraph 8-bis to Article 167 of the ITC, including in the scope of application of the CFC Rules also foreign companies which are not located in black-listed countries, if both of the following conditions are met:

  • the CFC is subject to an effective tax burden which is lower than half of the one which would have been payable, had the company been resident in Italy, and
  • the company derives more than 50 per cent of its proceeds from passive income sources, ie,
  • the management and holding of or investment in securities, bonds, shareholding participations, credit instruments, or other financial activities; the transfer or licensing of intellectual property rights of industrial, literary or artistic nature; or
  • the rendering of services (also of a financial nature) to related entities.  

The exclusion from the CFC regime can still be claimed by mean of a preliminary tax ruling request, aiming at demonstrate that the controlled foreign company was not established as part of an artificial structure for the sole purpose of obtaining tax advantages (Article 167, paragraph 8-ter).  

This is the most relevant change to the CFC Rules, as it will affect not only Italian-based companies, but also foreign-based groups having an Italian subsidiary at an intermediate level of the control chain, all excluded - up to date - from the scope of application of the CFC regime.  

Furthermore, the new rule applies also to companies located within the European Union. In principle, this does not represent a breach of the freedom of establishment set forth by the EC treaty; however, it could result in a more burdensome procedure for the taxpayer, if compared to the ones in force in most of the EU countries with similar CFC regimes already in force.  

The “new” safe harbour rule provided by Article 167, paragraph 8-ter of the ITC, in fact, seems substantially in line with the criteria set forth by the ECJ in the Cadbury-Schweppes case (C-196/04), according to which CFC rules could also apply to companies resident in an EU member state, without jeopardising the freedom of establishment, if the corporate structure results in a “wholly artificial arrangement intended to escape the national tax normally payable”, ie, that the CFC does not carry out any “genuine economic activities”. However, it could be argued that for EU resident companies which are located in countries different from the black-listed ones, the obligation to submit a preliminary ruling as the exclusive way to avoid application of the CFC Rules would represent an excessive procedural burden, and this is not compatible with the EC law.  

The Decree does not provide how the “effective tax burden” must be calculated; reference will likely be made to the financial statements figures of the non resident companies, adjusted according to the provisions of the ITC as if the CFC was an Italian resident entity.  

Effective date  

The Decree entered into force on the day of its publication on the Official Gazette (ie, 1 July 2009), but did not provide for any particular provision regarding the effectiveness of the new CFC provisions. Therefore, the new provisions shall be effective as from the first fiscal year starting after the date in which the Decree has come into force, according to the general principle established by Article 3 of the Law 212 dated 27 July 2000 (the so called Taxpayer’s Statute).