Italy: Tax Avoidance: Criminal Liability For A Foreign Company’s Management

Last Updated: 21 March 2012
Article by Bernadette Accili and Domenico Gioia

On 22 November 2011 the Criminal Chamber of the Italian Supreme Court (Corte di Cassazione) heard case No. 7739; on 28 February 2012 it issued the judgment deciding, inter alia, on the criminal tax consequences for the managers of a company formally resident abroad but de facto managed in Italy.

According to the Italian Supreme Court, where a foreign company of an Italian group having intercompany transactions with other Italian members of the group for the sole purpose to erode their Italian tax base, and having its place of management in Italy is considered as resident in Italy for tax purposes and is therefore subject to Italian tax provisions including the filing of an Italian income tax return.

On the basis of the above, where the foreign company did not file its tax returns in Italy, it is liable for the tax crime of omitted tax return, according to the provisions set forth by Article 5 of Legislative Decree No. 74 of 10 March 2000.

The individuals potentially liable for tax crimes of omitted tax return are the legal representative of the foreign company and/or any other person with delegated fiscal powers.


The Italian Supreme Court reversed the prior judgment against two very popular Italian fashion designers (hereinafter the "Designers"), and against the managers of a company based in Luxembourg (hereinafter the "LuxCo") of the Designers' group.

The facts can be summarized as follows:

  • LuxCo was incorporated in Luxembourg, by a company of the Italian group participated by the Designers
  • after the company was incorporated, LuxCo acquired the trademarks totally owned by the Designers
  • LuxCo had obtained a favorable tax ruling by the Luxembourg Tax Authorities whereby its overall rate would have been 4%
  • after a few months, LuxCo entered into a trademark license agreement with yet another company of the Designers' group therefore royalties for the exploitation of the designers' trademark were paid by the Italian company to LuxCo.

According to the Italian Public Prosecutor:

  • the trademarks were sold at a price lower than the market value for the sole purpose of evading taxes in Italy
  • LuxCo headquarters in Luxemburg were fictitious since there were no employees, but only secretaries
  • the Boards of Directors took place in Luxembourg only formally
  • thus LuxCo was to be considered a sham company (società esterovestita)
  • the whole reorganization (sale of trademarks and following license agreement) within the group was carried out with the sole purpose of evading taxes in Italy (abuso del diritto)
  • as a consequence the Designers as well as the managers of LuxCo were accomplices in aggravated fraud against the Inland Revenue having conspired to subtract taxable income in Italy.

On the basis of these charges, the Designers, as well as other members of the board of LuxCo, were indicted. The case eventually reached the Supreme Court where the Criminal Chamber first looked at the tax regime of sham companies and therefore examined the criminal tax consequences of the behavior charged.

The Sham Companies' Regime

The Court first examined the provisions concerning tax residence of companies.

According to Art. 73 of Presidential Decree No. 917 of 22 December 1986, companies are considered resident in Italy when:

  • the headquarter and/or the administrative offices are located in the Italian territory; and/or
  • core business activity is carried out predominantly in Italy.

Entities having one of these two requirements are considered resident in Italy and therefore taxable on their worldwide income.

Paragraph 5-bis of the same Article 73 provides that holding companies of Italian groups resident abroad are considered as resident in Italy if in turn controlled by individuals resident in Italy, or managed by a board composed by a majority of members resident in Italy.

The provision sets forth a presumption which can be rebutted by the taxpayer showing that the foreign holding does have a business purpose.

This provision is considered as a special anti-avoidance rule for Italian groups totally resident in Italy with a foreign holding. The Italian Supreme Court ha s recently also introduced a more general anti-avoidance rule (abuso del diritto) applicable to any transaction carried out without any business purpose but with the sole aim of avoiding taxation and/or of getting a tax break.

On this basis the Supreme Court ruled that LuxCo was to be considered as resident in Italy.

Criminal Sanctions and Anti-Avoidance Rules

The Supreme Court then moved to assess the criminal consequences of the people indicted. The issue that the Italian Supreme Court has faced in several occasions already dealt with the applicability of criminal sanctions to a so-called elusive behavior, i.e. a behavior which could fall within the definition of the general anti-abuse provision.

According to its well established case-law, tax evasion does not involve a criminal intent and therefore criminal liabilities should be excluded.

In a few cases, though, the Italian Supreme Court found that tax evasion was relevant for criminal purposes.

Omitted Tax Return Crime

In the case at stake, the Court found that LuxCo was a sham company (esterovestita) because it was indeed managed by the same Designers, but that the behavior of the Designers as well as the managers of LuxCo did not fall within the provision of aggravated fraud as the Public Prosecutor had requested.

Rather, the Court ruled that the Designers as well as the managers of the foreign sham company could be held responsible for having omitted to file the relevant income tax returns in Italy, since the place of management of LuxCo was in Italy.

The Court also added that in such a case, the persons liable are the legal representative of the company and/or any other person with delegated fiscal powers.


In light of this recent ruling of the Supreme Court, fiduciary companies, financial intermediaries, advisors and counsels of foreign companies of Italian groups when acting as members of the board of the said foreign companies should carefully assess whether such companies fall within the definition of sham companies i.e. società esterovestite, in order to identify the potential Italian tax liabilities of the company and avoid potential criminal tax consequences which may derive personally to them from the failure to fulfill such obligations.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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