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.

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.

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 activity ^[2].

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 legislation ^[3]. This means that the choice of the connectioncriteria, 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 Saillant ^[4] and N ^[5] decisions do not appear to exist in Italian law ^[6].

Clearly, in the above-mentioned decisions, the Court asserted that national provisions that deem a transfer of residence to be equivalent to the realiz ation of un realiz ed 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 realiz ed capital gains) and other subjects (for whom on the other hand single taxation in the case of “monetisation” of un realiz ed 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 terms of income as sundry profits (art. 67 par.1 lett. c, c-bis, Tuir) only as the result of a sale of assets. The only important fact is receipt of this income ^[8].

The transfer of residence abroad does not appear to result in the taxation of un realiz ed gains in Italy, nor of those accrued in the period of possession 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 ofnon-Italian residence (or in more general terms, during the period of application of the Italian law), it should be noted that this capital gain is then taxed in its entirety in Italy ^[9].

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 on capital gains accrued but not still realized ^[10]; however, it is necessary to specify that, as the criterion of worldwide profit for a subject 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 un realiz ed 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 4/7/2006 ^[13] and by the Finance Act 2007 ^[14], the increase (but not the decrease) ^[15] in the value of assets instrumental to the professional activity ^[16] 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.

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 place, if he/she avoids making use (totally or partially) of instrumental assets utilized before the transfer of these assets abroad.

2.4. The transfer of residence to tax havens

The evaluation of the impact of the Italian fiscal regime on freedom of establishment of individuals must take into consideration Art. 2 par. 2bis, Tuir, as this rule provides for a juris tantum presumption of residence in Italy for nationals who remove their names from municipal registers and move to countries other than those on the white list to be issued by a Decree of the Ministry of Finance. ^[18]

As a result of this white list, the above-mentioned presumption should apply to the transfer of residence of individuals to countries considered tax havens that do not provide an adequate exchange of information. ^[19]

In cases in which this rule is applicable to EU Member States ^[20], there may be a problem of compatibility with the fundamental freedoms of the Treaty. There might be some restriction ^[21] given that these provisions may have a dissuasive effect on persons resident in Italy planning to move to another Member State, thus exercising the general freedom of movement and residence (Art.18 ECT) ^[22] or, in the case of undertakings ^[23], the freedom of establishment (Art.43 ECT). ^[24]

However, this rule appears to be compatible with the fundamental freedoms of the Treaty.

This opinion is not based on the procedural nature of this provision that binds the taxpayer to provide evidence of the actual place of residence. The procedure is not a sufficient element to consider this provision legitimate pursuant to EU law, as it leads to a different treatment among taxpayers. The ECJ has on several occasions affirmed, also in relation to VAT, that violations of rights safeguarded by EU law have to be evaluated in practical terms, considering the effects produced by national provisions on taxpayers. ^[25]

Thus, the procedural nature of this rule is not relevant, but its aim and the way it works are. On the one hand, the aim is important as the intent of dealing with abusive phenomena is considered by the ECJ a general interest imperative capable of justifying the violation of fundamental freedoms ^[26], particularly in the case of fraudulent residence statements ^[27]. On the other hand, the way this provision is implemented is relevant because the above-mentioned objective has to be achieved in compliance with the principle of proportionality ^[28]. The presumption is relative, not absolute; there is no limit to contrasting evidence that may be provided by taxpayers; there are no problems of retroactivity preventing the exercise of the right to prove a genuine transfer of residence in practical terms. In other words, the provision is designed in such a way as to ascertain whether the transfer of residence abroad is genuine or not, in the light of objective situations such as the transfer of residence to tax havens, giving rise to the need to adopt measures to protect the national financial interest.

3. The transfer of residence of companies and entities operating under private law

3.1. The transfer of the registered office as an amendment of the company’s statute: fiscal consequences of continuity of the entity

The fiscal effects of the transfer of residence of companies and, in general, of entities must necessarily start from an analysis of the transfer. This is due to the position of companies, either partnerships or commercial companies, in the Italian tax system. According to Art. 6 par. 3 and Art. 81 Tuir, commercial companies are considered to generate exclusively business income ^[29]. As already mentioned ^[30], commercial contracts represent the area of application of the tax regime for undertakings so that all the factors relating to the effectiveness and validity of this contract affect the tax regime. It is therefore important to highlight the fact that the taxation of undertakings is closely linked to continuity of the entity involved: as long as an undertaking exists, it will be taxed on the basis of the tax regime for undertakings ^[31]. On the contrary, if the transfer of the registered office abroad were to be considered as a winding up or liquidation of the company, this would mean the non application of the tax regime for undertakings. Nonetheless, the prevailing interpretation in commercial law is that the transfer of the registered office abroad is a modification of the company incorporation ^[32], and the same may be said of demergers and transformations. ^[33]

As a result, the company does not disappear or initiate a winding-up procedure simply by moving its registered office abroad. The same conclusion may be reached also considering other criteria which, pursuant to Art. 73 par.3, Tuir, establish the residence of the undertaking in Italy and, therefore, the “transfer” abroad of the registered office and the main activity. The continuity of the entity, not affected by the transfer of residence abroad, should not therefore give rise to tax liability on unrealiz ed gains at the time of transfer and recognition of fiscal values; however, this conclusion appears to be incorrect for two reasons. Firstly, even though it is true that a transfer of residence abroad does not result in the winding up of the entity involved, it cannot give rise to an exemption of company assets from the tax regime for undertakings only because the Italian fiscal regime no longer applies. Secondly, because the continuity of fiscal values is not conditioned by provisions of the tax system where the undertaking was previously resident, but rather by provisions of the tax system in the country to which the undertaking has been transferred.

3.2. The transfer of residence abroad as the realization of gains: the exit tax provided by Art. 166 Tuir

The transfer of residence abroad does not automatically result in the liquidation or winding-up of a company, but may nevertheless exclude company assets from the tax regime for undertakings. With regard to the transfer of a company abroad ^[34], the personal connection with Italian territory is missing and as a result business activity may no longer be relevant in fiscal terms ^[35]. In other words, although the legal person still exists, the transfer to another country may preclude the application of Italian tax provisions.

This will certainly be the case in all those instances where the connection criterion of residence is not replaced by the criterion of the source, leading to permanent establishment. Accordingly, the presence of a permanent establishment may be a sufficient requirement to apply the entrepreneurial tax regime ^[36] to the business carried out in Italy through the permanent establishment, and to impose taxes on the assets of the permanent establishment. The most significant aspect is that, in the Italian company tax system, where enterprise assets are utiliz ed for a purpose other than for the company’s main business purpose, then they are treated as capable of generating profits or unrealized losses/profits ^[37] that are no longer within the scope of the company’s main business purpose. This provision, considered to be a standard rule ^[38], applies to all business income generated either by individual entrepreneurs or companies ^[39]. In the light of the above analysis, it is possible to state that the exit tax in Art. 166 Tuir ^[40] expresses a principle relating to business income. Under this provision, the transfer abroad of residence by individual entrepreneurs or companies engaged in business activities results in a realization, at book value, of company assets, unless these assets remain within a permanent establishment in the Italian territory . Moreover, this provision clearly links the taxation of un realiz ed enterprise gains to the continuity of application of the fiscal regime for businesses. As a result it provides that the un realized gains of the permanent establishment abroad are considered to be realized, since, after the transfer of residence abroad, there is no way to provide for any kind of continuity. The element that determines taxation is the removal of the business from application of the fiscal regime for business due to the loss of fiscal residence, whereas in order to avoid such a consequence it is sufficient to set up a permanent establishment in Italy to which the assets of the enterprise can be assigned. In the latter case it will only be possible to avoid taxation of assets that are assigned to the permanent establishment and only as long as these assets remain with the permanent establishment. Art. 166 Tuir gives rise to a tax liability on these assets if they are transferred from the permanent establishment in Italy. Additionally, Art. 166 Tuir currently in force (as modified by D.lgs 199/2007 ^[41]), includes specific rules for the calculation of losses prior to the transfer of fiscal residence ^[42], and in addition it provides that the transfer of residence of a company does not automatically result in tax liability for shareholders. ^[43]

3.3. Analysis of the Italian exit tax in the light of ECJ’s jurisprudence: no restriction on the freedom of establishment

The evaluation of the compatibility of the exit tax (Art.166 Tuir) with EU law must take into consideration the role played by Art.166 Tuir in the company tax regime. From the discussion so far, it is evident that this provision is not a derogation from the principles of the system, but an application of general tax provisions in cases in which a company’s assets are used for purposes other than ^[44] the main business purpose of the company. This includes all cases in which the business tax regime no longer applies. As a result, the taxation of un realized business earnings becomes relevant at a systematic level for the following two reasons. Firstly, because tax liability traditionally relates to income earned by the owner of an asset, with the sale of the asset and its conversion into another form of wealth ^[45]. Secondly, because consumption and use by the individual or the individual’s family of enterprise assets for purposes other than the company’s main business purpose give rise to realization, even though no payment is made ^[46]. According to the two cited ECJ cases regarding the exit tax, in order to ascertain whether Member State regulations are compatible with EU law or not, the fundamental point is the dissuasive effect of exit taxes on the freedom of establishment, due to the different treatment between nationals remaining in the country and those leaving it. In the examined decisions, the restriction of fundamental freedom was closely connected to the derogatory treatment that applied to nationals moving abroad. Specifically, discrimination arose from tax liability on un realized gains, whereas normally ^[47] taxation should coincide with the moment of realization. It is therefore possible to affirm that such discrimination does not exist in the Italian system on the basis of Art. 166 Tuir. This provision was introduced not solely in relation to the transfer of residence abroad, as it embodies a general principle applicable to all persons in every case where there is objectively no application of the business tax regime ^[48], even though there is no transfer of residence. Accordingly, wherever an entrepreneur terminates the entrepreneurial activity without realizing all the assets, or a company is transformed into a non-commercial entity, the entrepreneur or company are taxed on unrealized gains, since their assets are to be assigned to a purpose other than the original purpose; the same conditions apply to assets of entities moving abroad if they do not assign these assets to a permanent establishment in Italy.

It is the opinion of the author that the declarations of the European Commission, which consider principles laid down in ECJ judgments applicable to companies ^[49], have to be considered in a critical light as this interpretation gives rise to difficulties relating to the rationale and the operation of the Italian exit tax. It is therefore not possible to attribute to this provision any direct or indirect discrimination on grounds of nationality, nor any specific discriminatory treatment for those who decide to transfer their residence abroad. Consequently, no restriction on the freedom of establishment ^[50] seems to be present.

However, it would not be correct to affirm the existence of a restriction on fundamental freedoms only on the basis of a general dissuasive effect due to taxation in the State of origin. In other words, it would mean that a violation of EU freedom takes place because the person moving abroad would gain a greater advantage by deferring or avoiding taxation rather than incurring a tax liability at the time of the transfer. This construction of the concept of restriction would substantially devalue and excessively simplify it, as the dissuasive effect of the restriction may appear to be always present in every form of tax liability, as the concept of tax liability is normally not attractive to taxpayers. It is obvious that this approach would be mistaken, as the ECJ is clear in linking the concept of restriction to the concept of discrimination: as explained by Advocate General Maduro in the Marks & Spencer case, it is “a matter of pursuing discrimination against Community nationals wishing to assert their rights derived from the freedom of movement” ^[51].

3.4.   Art. 166 Tuir and the justification of the “coherence of the tax system”

The conclusion reached by the author so far is that Art. 166 Tuir is compatible with EU law as there is no discriminatory/restrictive effect on the freedom of establishment. However, it may be said that, even though Art. 166 Tuir was regarded as incompatible with the freedom of establishment on the basis of a broad definition of restriction, the above-mentioned incompatibility could be justified, relying on ECJ case law, on the grounds of “coherence of the tax system” ^[52].

As already argued by distinguished authors, the justification of “coherence of tax system” is noteworthy as taxation based on Art. 166 Tuir originates from “a structural systematic requirement ^[53]“, not from anti-avoidance or anti-evasion purposes. Moreover, the imposition of a tax liability when the company tax regime ceases to be applied is a response to the need for a provision allowing the taxation of assets on the grounds of deductions relating to these assets from which taxpayers have previously benefited. ^[54]

Finally, the solution protects national jurisdictions on the basis of the principle of territoriality as recently explained by ECJ judgments ^[55]; according to the principle of territoriality, taxation can be considered to be balanced and proportional. This fiscal effect represents the consequence of a general imposition that does not exist in the cases decided by the ECJ judgments concerning exit taxation. ^[56]

3.5. Directive 1990/434 and taxation of transfer of residence

The conclusion that the exit tax in Art.166 Tuir is not incompatible with the freedom of establishment since it is not restrictive, and justified in term of the coherence of the fiscal system, can be further supported by an analysis of the fiscal model in Directive 1990/434 dated 23/07/90 ^[57], later amended by Directive 2005/19 dated 17/2/2005 ^[58].

It is well known that Directive 1990/434 provides for a system of taxation applicable to cross-border restructuring operations (mergers, divisions, transfers of assets, exchange of shares concerning companies of different Member States) aiming at neutrality ^[59] in terms of tax liability. Mergers ^[60] appear to be particularly interesting as they offer various analogies to the transfer of companies abroad. According to national provisions and to this Directive, in the case of a merger or transfer abroad, the entity does not disappear as the merger or the transfer is not regarded in fiscal terms as a case of realization. However, a cross-border merger or transfer may result in the loss of the “personal” connection of the company to the country and consequently in the exclusion of his assets from the Italian business tax regime. In these cases, illustrious authors ^[61] have described cross-border mergers as the realization of enterprise assets for different purposes, in terms of Italian tax law. In cases in which the assets of a merged Italian company are not assigned to a permanent establishment in Italy (owned by the non-resident company resulting from the merger), there will be a tax liability on un realiz ed gains arising from enterprise assets that have been transferred out of the entrepreneurial regime. Clearly, this case is analogous to the one in Art.166 Tuir, the only difference being that the loss of the Italian tax residence depends in the first case on the cross-border merger, whereas in the second case it depends on the company’s decision to move abroad ^[62]. Furthermore, the fiscal consequences laid down by Directive 90/434 are compatible with the rationale on which Art.166 is based. A cross-border merger gives rise to the loss of fiscal residence in the State of origin of the merged company; in addition, if the company’s assets are not assigned to a permanent establishment in that country, then they are regarded as being used up for different purposes and, according to Directive 90/434, subject to taxation on the basis of their un realiz ed gains. However, this is not in contrast with the principle of neutrality ^[63]. In conclusion, taxation of a company’s assets that are transferred out of the fiscal regime due to the loss of fiscal residence (without the monetisation of un realized gains) is considered by Directive 90/434 to be compatible with a general EU taxation model. ^[64]

3.6. Directive 2005/19 and the transfer of the registered office of European Companies and European Cooperative Societies

Directive 2005/19 amended Directive 90/434, adding section IV-ter which includes “Rules applicable to the transfer of the registered office of an SE or an SCE”. These provisions aim to guarantee the fiscal neutrality of the transfer of the registered office of European companies and European cooperative societies, not giving rise to any tax liability in the EU State of origin provided that a permanent establishment is set up there and the assets of the transferred company are assigned to this permanent establishment (Art. 10-ter Directive 90/434).

This rule is similar to that of Art. 166 Tuir. Additionally, D.lgs. 199 dated 6/11/2007 modified Art. 166 Tuir by applying provisions therein not only to the transfer of the registered office of an SE and SCE, but to all cases of the transfer of the fiscal residence of companies and enterprises. Thus, Art.166 Tuir is compatible with Directive 2005/19. This compatibility appears to be important as it offers evidence that the tax liability model based on taxation of the transferred assets of the company not assigned to a permanent establishment in the State of origin is compatible with the fundamental freedom of establishment. It would be difficult to conclude otherwise, considering the choice of this model of tax liability in Directive 2005/19 that, aiming at fiscal neutrality, regulates the transfer of registered offices for SEs and SCEs ^[65]. Furthermore, the requirement of a uniform interpretation of EU law precludes any other conclusion and, according to ECJ case law ^[66], provides further evidence that there is no problem of infringement of the freedom of establishment for those national provisions that comply with a tax liability model sanctioned by EU Law.

3.7. Outbound taxation and recognition of fiscal values in the inbound state

The analysis will now focus on the relationship between the taxation of outbound assets and the recognition of inbound fiscal values in case of transfer of residence abroad. It is possible to imagine that a company leaves a State in which tax is calculated on current values in order to move to another State which values its assets at historic cost. In this case there would be negative consequences for taxpayers as they could deduct lower amortisation rates and, in case of the realiz ation of assets, would be taxed on gains accrued in the State of origin and thus already taxed there.

On the other hand, it is possible to imagine a company that gives up its fiscal residence in one State without being subject to an exit tax and whose assets, in the inbound State, are estimated at current value. In this case there would be no taxation since the un realiz ed gains accrued in the State of origin would be taxed neither at the time of transfer, nor at a later date ^[67]. Both these consequences appear to be detrimental in terms of the EU rationale of market freedoms ^[68]. Nonetheless, although the combination of the fiscal policies of the two States may give rise to negative and dissuasive effects for taxpayers who decides to transfer their residence, it does not seem to lead to the conclusion that the different national provisions are incompatible with the fundamental freedom of establishment. It is a coordination problem between the national tax systems concerning direct tax liability rather than a matter of compliance of these individual systems with the freedoms in the Treaty.

Once national provisions are found to be compatible with EU law, (as, according to this author’s analysis, in the case of Art. 166 Tuir) solutions to problems relating to a company’s transfer of residence arising from a combined application of different States’ provisions have to be found by means of harmoniz ation of the dissimilar tax systems ^[69]. This harmonization should be achieved by means of a legislative process rather than by relying on the interpretation of the ECJ. The Commission ^[70] is aware of this problem and in order to solve it has developed prospective solutions that have not yet been implemented ^[71]. In term of harmoniz ation it is a serious issue considering that Directive 19/2005 has provided regulations for the transfer of residence of the SE and SCE, but has omitted to provide rules aimed at avoiding the risk of double taxation relating to the transfer of residence.

3.8. Permanent establishment abroad and the notional tax credit provided by D. lgs . 199/2007

The aim of avoiding double taxation, at least in certain cases, has led the Italian legislator, with the enactment of D. lgs .199/2007, to apply the notional tax credit to the transfer of residence within the EU.

In cases in which (after a merger, demerger or transfer of assets) the transferring company has a permanent establishment located in another Member State, Art. 10, par. 2 of Directive 90/434 provides that the State of origin of the transferring company has the right to tax unrealized gains relating to the permanent establishment, on condition that a deduction is granted equal to the tax that the State where the permanent establishment is located would have required if it had not had to apply the Directive.

The Directive prevents the State of permanent establishment from taxing unrealized gains at the time of the extraordinary operation and, by granting a notional tax credit, it is possible to avoid a harmful effect on the taxpayer as well as double taxation of unrealized gains relating to transferred assets. ^[72]

The current Art. 179 par.3 Tuir, as amended by D. lgs. 199/2007, provides the notional tax credit applied to the transfer of an Italian company with a permanent establishment abroad, but within the EU. The “virtual” taxation of the permanent establishment abroad is calculated with reference to the open market value that the other Member State would have ascertained in the case of realization at open market value of the above-mentioned permanent establishment. The EU ^[73] rationale of this provision is manifest, in that it aims at avoiding the double taxation which would result from either the Italian exit tax on unrealized gains relating to the permanent establishment, or the value attributed in the other Member State to the assets of the permanent establishment, that would necessarily be the historic value ^[74].

At the current stage of development of EU and national legislation, the risk of double taxation survives in all those cases where this provision does not apply, as double taxation is likely to arise from a combination of different national regimes.

3.9. Evaluation criteria of assets allocated in Italy by transfer of residence from abroad

In order to conclude this analysis, it is important to ascertain which regime is applicable in case a company or enterprise moves its residence to Italy; the main issue is the recognition of the fiscal value of the assets, that are subject to the business tax regime ^[75].

The Tuir makes no specific provision and therefore it is essential to rely on the general principles regulating business tax. In the literature it has been argued that inbound assets are taxed at normal value as described in Art. 9 par. 3 and 4 Tuir ^[76]. So far, there could be taxation on unrealized gains accrued during the time of residence in Italy as the connection between “accrued income” and tax sovereignty would be sufficient to justify taxation in Italy ^[77].

Art. 166 Tuir and in general taxation relating to the use of company assets for purposes other than company activity appear to be based on this principle. As recently noted in an authoritative study ^[78], “there is no reason why the State making a claim to tax the entrepreneur’s un realized gains accrued during the period of residence in the Italian territory, even though realiz ed only after the transfer, should be able to consider taxable un realiz ed gains accrued elsewhere, but realized later”. However, it is important to highlight the fact that the interpretation by Italian tax authorities, as stated in resolutions 67/E dated 30/03/2007 and 345/E dated 5/8/2008, is partially discordant with the solution proposed by the present author. According to the Italian tax authorities, both criteria, historic cost and current value, may theoretically be used to determine the fiscal value of assets transferred to Italy pursuant to a transfer of residence. The current value criterion appears to be the most suitable in cases where the foreign state applies an exit tax, whereas the historic cost criterion is to be preferred where the transfer takes place without any taxation of un realiz ed gains. In the recent resolution 345/2008, Italian tax authorities have based their interpretation on the principle of continuity, considering the current value criterion as appropriate only in the case of legal and fiscal discontinuity. This approach, according to the present author, is open to criticism as it confuses two different matters: legal continuity of the subject and realization in fiscal terms.

The legal continuity of a company moving its registered office ^[79] does not require, under private law, dissolution and re-establishment of the company; there is no need for liquidation to take place. From a fiscal point of view, the mere transfer of the registered office does not result in a realiz ation of the company’s assets. Moreover, the connection between the time of residence abroad and time of residence in Italy has to be taken into consideration for several different purposes ^[80].

Legal continuity does not prevent the effects of realization on company assets from taking place where the tax system of the state of origin of the company moving to Italy has a provision similar to Art. 166 Tuir. In these circumstances, the transfer of residence will take place with legal continuity effects, but will give rise to a tax liability.

Additionally, it does not seem appropriate to carry out a tax evaluation of inbound assets on the basis of the taxation of assets in the State of origin, as in this case the national tax criteria would depend on the fiscal preferences of another State. The solution proposed by Italian tax authorities appears to be inspired by a need for pragmatism and fairness in terms of overall taxpayer evaluation. Italian tax authorities aim at avoiding double taxation when opting for the evaluation of assets at current value in the case of exit taxation levied by the State of origin, whereas the choice of the historic value criterion in the absence of exit taxation in the State of origin is aimed at preventing inadvertent non-taxation . However, there is no legal framework supporting this interpretation as the TUIR allows taxation only of un realiz ed gains accrued as from the moment when assets start to incur tax liability in Italy. Moreover, the choice of different evaluation criterion on the basis of the tax regime in the State of origin of the subject moving to Italy may result in a different treatment of this subject and give rise to a strong risk of discrimination and violation of the fundamental freedom of establishment. Finally, the choice by the State of origin to exempt outbound un realized gains from taxation is a merely internal decision that may result in tax privileges.

3.10. Residence presumptions in Italy of companies and entities and the “tax avoiding” transfer of residence abroad by companies

In recent years, in Italy several provisions aimed at thwarting simulated and/or tax avoiding residence abroad have been adopted. To start with, it is essential to consider the residence presumptions in Italy of IRES subjects provided in Art. 73 Tuir.

The D.l . 223/2006 (implemented by L. 248/2006) added to Art. 53 Tuir two paragraphs (5-bis and 5-ter) regarding companies and entities controlling (according to Art. 2359, par.1, c.c.) companies and commercial entities resident in Italy. The place of effective management of these controlling subjects is deemed to be Italy, unless otherwise demonstrated, on either of the two following conditions: controlling companies and entities must be controlled, either directly or indirectly, by subjects resident in the Italian territory or the majority of their board members must be resident in Italy ^[81].

Recently, D.l 25/6/2008 n.112 (entering into force on 5 August 2008) added to Art.73 Tuir a further paragraph (5-quater) according to which residence of companies and entities is deemed to be in Italy if “the majority of their capital is invested in real estate closed-end fund shares” (according to Art. 37, D.lgs. 58/98) and “if they are controlled directly or indirectly, through a trust company or an intermediary, by subjects resident in Italy”.

It is not the aim of the present author to conduct a detailed analysis of these provisions, however they appear to share common inspiration as both confer more extensive investigative powers to tax authorities, placing the burden of proof on the taxpayer in all circumstances where there is evidence of a permanent connection with the Italian territory of subjects that are foreigners only in formal terms. Accordingly, these provisions endeavour to achieve manifest evidence of connection criteria (registered office, place of effective management, main object of activity) provided in Art. 73, par. 3, Tuir and so far, considering also what has already been said ^[82], they do not appear to be incompatible with the EU freedom of establishment. ^[83]

On the contrary, Art.1 D.lgs n.199 dated 6/11/2007 – that amended the “general ^[84]” anti-avoidance provision in Art. 37 bis, e), DPR 600/73 – may raise a problem of compliance with EU law.

Since 1/1/2008, when this provision became effective, tax authorities have been entitled to consider tax avoiding, for the purposes of this same provision, the transfer of a company’s fiscal residence abroad.

An illustrious author ^[85] has declared that the scope of this provision should be limited, as it should not apply in the case of a newly founded company abroad and the simulation of residence abroad (already regulated by Art. 73 Tuir) and, taking into consideration Art.166 Tuir, attempts to avoid unrealized gains taxation.

In particular, this would apply in all cases in which a company transfers its registered office abroad, without at the same time moving its productive activity ^[86] or other “substantial” connections with Italian territory (e.g. real estate, shares, residence of controlling shareholders, etc.). These substantial elements would, within the meaning of the new Art. 37 bis, Dpr 600/73, have the function of implementing a real transfer of residence, resulting in tax benefits, deemed to be invalid by tax authorities.

Even though it will be necessary to wait for rulings on these cases in order to evaluate the real impact of the new provision, it is appropriate to highlight the prospective contrast of this provision with the freedom of establishment. The ECJ has stated in various decisions that the freedom of establishment includes the right by which companies can choose the Member State which applies the most favourable legal provisions, also in fiscal terms, for the location of their registered office ^[87]. Member States are entitled to adopt any appropriate measure to avoid abuses, but have to limit the application of these provisions to cases of fraud and simulation relating to the company structure deriving from artificial arrangements ^[88].

Nevertheless, in cases when a company really transfers its residence to another Member State, locating its place of effective management abroad, there is neither fraud nor simulation as both the structure of the company and the residence abroad are real ^[89]. Thus, the possible finding that such a transfer of residence is void as determined by tax authorities does not seem to be compatible, in these cases, with EU Law. ^[90]

4. Conclusions

The full implementation of the freedom of establishment and the removal of fiscal barriers precluding the transfer of residence are objectives that are difficult to achieve as they depend on many different but closely related factors.

It is not only a matter of exit taxes provided by national systems on income accrued but not realiz ed and relating to the choice of moving residence abroad. In order to safeguard the fiscal neutrality of business/economic operations, the taxation/non taxation of outbound assets must be related to the recognition and evaluation of inbound assets adopted by the State to which the transfer is made. Both these aspects must be taken into consideration as a matter of symmetry when evaluating the impact of the provisions of a Member State on the freedom of establishment.

From the point of view of the needs either of the system as a whole or of the national laws, it is necessary to guarantee a balanced partition of individual States’ powers to levy taxes not only in order to safeguard national financial interests, but also to avoid double taxation (or inadvertent non-taxation) and therefore to avoid risks in terms of freedom of establishment.

In the perspective of an “ideal” tax system, there are various solutions that take into consideration the variety of factors involved; some suggestions were made in the Communication of the European Commission dated 2006. Nonetheless, EU law is not at this time able to provide a harmonised system of rules regulating the fiscal treatment of the transfer of residence within the EU, as the instruments offered by EU law – Freedom of establishment and movement, Directive 90/434, and the specific provisions for the transfer of SE and SCE registered offices – allow only partial approaches.

It is not only a matter of the lack of direct tax harmonisation or the fragmentation of secondary legislation, but rather of ascertaining precisely how EU law affects and limits national legislators, considering that the lack of harmonization and consequently of a common approach will leave most of the related problems unsettled. In this sense, the analysis of Italian fiscal law appears to be paradigmatic.

To start with, this analysis has shown that Art. 43 of the EC Treaty is not, by itself, a sufficient instrument to guarantee the fullrealiz ation of freedom of establishment.

This statement will no longer appear to be paradoxical if it is considered that the evaluation of the compatibility/incompatibility of national fiscal systems, within the meaning of Art. 43, is not able to take into consideration effects of connections between outbound and inbound Member State legal systems. So far, the Italian legal system appears to be compatible with Art. 43 EC Treaty, even with regard to procedural rules providing presumptions regarding residence in Italy. However, there might be a significant EU compatibility problem concerning the recent rule that considers the transfer of residence by a company to be potentially tax avoiding, even though it mainly depends on future case law interpretations. According to the principles laid down by the ECJ, in de Lasteyrie du Saillant and N, it is possible to note that the Italian system does not provide an exit tax for individuals (nor in the case of shareholdings owned by individuals moving their residence) and that outbound taxation provided in Art.166 Tuir for companies and entrepreneurs (including implicit taxation of self-employed persons) does not appear to be restrictive/discriminatory and, in any case, is justified by the requirements of “coherence of the tax system”. Nevertheless, as already explained, the effects of double taxation, as well as inadvertent non-taxation, may arise from the variable connections with other national laws, either when Italy is the inbound or outbound state; these effects are extremely detrimental to the effectiveness of the freedom of establishment. These consequences cannot be precluded only by Art.43 of the EC Treaty and secondary EU rules would be needed. In the perspective of harmonisation, the fact that the EU legislator has provided effective solutions neither when the transfer of residence involves an SE or SCE (Directive 2005/19) nor in other cases, appears to be a serious issue.

In the absence of a systematic approach at Community level, the development of the Italian system in terms of provisions and interpretation has shown the need for such an approach, if not the autonomous search for national solutions.

Accordingly, the D.lgs. 199/2007 extends the notional tax credit to the transfer of residence of companies within the EU, an instrument capable of avoiding double taxation on permanent establishments abroad.

Also the administrative interpretation concerning the evaluation of enterprise assets “moved” to the Italian system by means of a transfer of residence is based on the idea of a global approach, that makes it possible to take into consideration, either in the state of origin or in the state of arrival, the entire fiscal treatment of the subject. According to the present author, thisinterpretation is to be criticiz ed as lacking appropriate legal support. However, it correctly demonstrates the need, due to the aims of competitiveness and coherence of national systems, for the implementation of values on which a common market and, especially, a common system is based.

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[[72]See SILVESTRI, cit., 488-9; LUPI, Primi appunti in tema di fusioni, scissioni e conferimenti “transnazionali”, in Boll.trib., 1992, 1302.[[72]]