Foreign partnership of domestic partner
Private Partnership which are treated as a transparent flow-through entity for tax purposes, and are not legal entity, have been long considered an indicator of Aggressive Tax Planning for OCSCE stand point of view, as result from Eu Taxation paper n.61/20015. So, these partnerships can be defined as truly “hybrid entities”. We analyses the recent introduction of the reverse-hybrid rules that the article 9 of the legislative decree 142/2018, to determine if this new disposition will be able to limit the undue tax benefit of the foreign partnership.
As regards domestic partner in foreign partnerships, under Italian tax law, foreign partnerships are treated as non-transparent entities and are generally subject to corporate income tax. Indeed, Article 73, paragraph 1, letter d) of Italian Tax Code (“ITC”), provides that: “all types of companies and entities, including trusts, with or without legal personality, not resident in the State territory are subject to corporate income tax”.
As consequence, income derived by a domestic partner through a foreign partnership is going to take place in the hands of Italian partner, and later it is subject to taxation in Italy, only when effectively distributed to the resident partner accordingly to the cash basis
On this matter, it is important to underline that the subject that distributes the dividend has not levied taxes because these revenues have been taxed only at shareholder level.
For this reason, article 73, paragraph 1, letter d, establish that the foreign transparent entities has to be considered as opaque, consequently, the foreign taxes paid by the associates have to be considered as taxes paid by the company and decreased by the gross amount for Italian tax purposes.
From a treaty tax perspective, the treaty characterization of income will be influenced by the tax treatment of the partnership in the State of organization.
In fact, if the State where the partnership is organized treats the partnership as transparent for tax purposes, the article 10 of the double tax treaty (“DTT”) regarding dividends would not be applicable to income concerned. Consequently, the business profits or the other income article should be applied.
Therefore, the article 7 of the double tax treaty may find application, focusing on sentence (2) of paragraph 1, joint venture can be considered as a permanent establishment.
This element avoids the risk that this partnership transparent for fiscal purposes in which the dividend could never transfer to the partner, deferring sine die taxation on this income, because the taxation income generated should be subject at permanent establishment level under Article 7, paragraph 1, sentence 2 of DTT.
In this case, the reverse-hybrid rules that the article 9 of the legislative decree 142/2018 have implemented does not find application.
On the other hand, when the article 10 of the double tax treaty (“DTT”) regarding dividends would be applicable to income concerned, the risk that these transparent partnerships will be qualified as hybrid entries is huge. In this case, the new provision introduced by Legislative Decree 142/2018 find application.
Actually, the new provision aims at countering the achievement of unintended outcomes in respect of mismatch situations which could result in undue tax benefits under the laws of the two jurisdictions (i.e. double non-taxation)
Stating the above, due to the recent introduction of the reverse-hybrid rules that the article 9 of the legislative decree 142/2018 have introduced, we are not able to determine if this new disposition will be able to limit the undue tax benefit of the foreign partnership. In order to obtain more clarity on this matter, we are awaiting for guidelines from Doctrine and Case Law.
