Transfer of Residence and Exit Taxation in EU Law: the Italian Approach

• Author: Thomas Tassani
• Pages: 1-31

Page 1

1. Introduction

The present configuration of the Italian income tax system is characterized by two important features, with reference to the EU freedom of establishment.¹

On the one hand, the transfer of residence abroad by a company or enterprise is expressly considered as a gain, in terms of the exit tax pursuant to Art.166, Tuir.

On the other hand, the transfer of residence abroad is specifically regulated by anti-avoidance and anti-evasion provisions. In particular, there is a presumption of residence in Italy on the part of companies formally resident abroad, but maintaining a "substantial" presence in the Italian territory. This presumption was recently introduced, together with the power of tax authorities to consider such transfers of residence invalid.

In this connection, the overall picture would appear to give rise to serious problems in connection with the principle of non-discrimination and the freedom of establishment. In fact, the transfer of residence abroad on the part of entrepreneurs, collectives or individuals gives rise to a tax liability. Moreover, a transfer of this kind, especially in the case of companies, may mean that the taxpayer is required to prove that the transfer is genuine or that residence abroad is not an avoidance strategy. However, an analysis of the compatibility of the national tax system with EU freedoms must take other fundamental elements into account. Page 2

Firstly, the ECJ has declared the incompatibility of the exit tax with the freedom of establishment, basing its ruling on conditions which seem non existent in the Italian system. The cases examined by the ECJ concerned the transfer of residence by individuals. National provisions for entrepreneurs were not deemed to be applicable. In these entrepreneurial cases, the Italian tax system does not currently apply an exit tax, which is limited to individuals engaging in business activity².

Secondly, in order to determine the impact of national rules on freedom of establishment, it is essential to take criteria used to value assets in the country where the residence is transferred into account. Based on the variable combination of criteria of "exit" taxation and appraisal rules of "entry" assets, completely different fiscal consequences can ensue. One such consequence is double taxation.

Finally, it is necessary to emphasize that companies and, generally speaking, entities other than individuals are set up under a national legal system and they exist solely on the basis of national legislation³. This Page 3 means that the choice of the connection criteria, and the means of assessment of the real nature of the criteria are decided by national law- makers.

The present study aims at exploring the factors involved in the way national fiscal systems are structured. The Italian system appears to adopt a different paradigm compared to the general European provisions on the limitations on the freedom of establishment.

2. The transfer of individual residence

2.1. The absence of an exit tax for subjects who are not entrepreneurs

The Italian fiscal system does not impose a specific exit tax in the case of the transfer of residence by individuals not engaging in business activities. The characteristic features of the cases examined by the ECJ in the de Lasteyrie du Saillant⁴ and N⁵ decisions do not appear to exist in Italian law⁶.

Clearly, in the above-mentioned decisions, the Court asserted that national provisions that deem a transfer of residence to be equivalent to the realisation of unrealised gains from the sale of shares are incompatible with EC law. The restrictive effect on the freedom of establishment could be attributed to the discrimination resulting from the difference of regime between subjects transferring their fiscal residence (with consequent tax liability only in relation to accrued and not effectively realised capital gains) Page 4 and other subjects (for whom on the other hand single taxation in the case of "monetisation" of unrealised gains was provided)⁷.

In Italy the Unified Body of Laws dealing with income tax, specifically concerning the taxation of capital gains, provides that capital gains are taken into consideration in term lett. c, c-bis, Tuir) only as the result of a sale of assets. The only important fact is receipt of this income⁸.

The transfer of residence abroad does not appear to result in the taxation of unrealised gains in Italy, nor of tho coinciding with fiscal residence in Italy. Such gains will not be subject to taxation in Italy even in the future.

In cases where a subject from abroad has transferred his/her residence to Italy and sells assets that were held in the period of non-Italian residence (or in m law), it should be noted that this capital gain is then taxed in its entirety in Italy⁹.

As a result, it is generally correct to argue that a subject who relocates his/her residence abroad can achieve the effect of avoiding Italian taxation Page 5 on capital gains accrued but not still realised¹⁰; however, it is necessary to specify that, as the criterion of worldwide profit for a sbject who is no longer resident does not apply, these capital gains could be subject to Italian taxation based on the "source of income" criterion.

Art. 23 par.1 lett. f), Tuir, provides for taxation of non-residents for "capital gains deriving from the sale of shares in resident companies "¹¹.

Moreover, this article shows consideration for the various assets and/or economic activities of the transferred subject, in order to determine whether, with reference to the different categories of income, the tax liability continues to apply in Italy.¹²

2.2. The exit tax provided for individual entrepreneurs

There is a need also to examine the case of natural persons who conduct business activities. Individual entrepreneurs are subject to the exit tax provided by Art.166 Tuir: the transfer of residence gives rise to the taxation of assets that are not owned by a permanent establishment in Italian territory. Postponing a fuller discussion on the way the norm operates, it is necessary here only to emphasize that Art.166, paragraph 1, Tuir, provides for separate taxation for unrealised gains by individuals acting as entrepreneurs and by partnerships (Art. 17, par.1 lett. g, l).

2.3. The question of exit taxation for self-employed workers

A more complex issue is that of natural persons who are self-employed. As a result of amendments to Art. the 54, Tuir, by Dl n. 223 dated 4/7/2006¹³ and by the Finance Act 2007¹⁴, the increase (but not the decrease)¹⁵ in the Page 6 value of assets instrumental to the professional activity¹⁶ is deemed to contribute to income. According to the law, the cases in which there is a realization of unrealized gains are those that, in the entrepreneurial income regime, are capable of generating revenue or an increase/decrease in the value of company assets: sales, compensation, personal or household consumption, and the allocation of assets for purposes other than business use.¹⁷

Partially anticipating matters to be discussed later, the case of the transfer of residence abroad can also be considered as the "allocation of assets for purposes other than business purposes" (as mentioned above) and, in certain circumstances, could result in avoidance of taxation in Italy on instrumental assets.

Furthermore, self-employed persons are subject to an exit tax, which depends on the application of a general rule and not on a specific provision. This brief analysis shows the specific provisions relating to Italian exit tax; it provides an overview of the principles regulating the taxation of enterprise income, rather than dealing with specific cases, to be analysed in more detail below.

A significant differentiation between individual entrepreneurs and self- employed persons is to be seen in cases where, despite the transfer of residence abroad, the Italian tax regime remains applicable due to the source of income criterion. Pursuant to Art.23 Tuir, taxation in Italy of profits "deriving from activities exercised in the Italian territory" applies to self-employed persons, whereas in the case of entrepreneurs, it applies only in cases in which they have a permanent establishment in Italian territory. Page 7

As a result, the Italian fiscal regime does not apply to instrumental assets in cases in which a person who has moved abroad ceases to engage in a regulated professional activity in Italy or, even though it takes...