When Italian tax authorities classify a foreign company as an interposed entity under Article 37, paragraph 3, of Presidential Decree No. 600/1973, the entity’s income is taxed directly to the resident shareholder on a transparency basis. According to recent tax court rulings, such as a decision issued by the Tax Court of First Instance of Turin (C.G.T. I Torino n. 1234/1/25), this transparency mechanism can create a severe tax trap: subsequent dividend distributions may be excluded from domestic taxation to prevent double taxation, yet that exact exclusion strips the taxpayer of any foreign tax credit under Article 165 of the Consolidated Income Tax Act (TUIR), leaving foreign withholding taxes uncompensated.
The Mechanics of Foreign Entity Interposition Under Italian Tax Law
Under Article 37, paragraph 3, of Presidential Decree No. 600/1973, the Italian Revenue Agency (Agenzia delle Entrate) holds the power to impute income to its actual possessor when it determines—based on serious, precise, and concordant presumptions—that the formal titleholder is not the true beneficiary. When applied to a foreign corporate structure, this rule treats the company as a transparent pass-through entity. The resident shareholder who exercises total control must declare and pay ordinary Italian taxes on the company’s income in the year it is generated, regardless of whether any cash dividends are actually distributed.
However, it creates severe friction later when the foreign entity finally distributes accumulated profits. Because the shareholder already paid Italian income tax on those earnings during the production year, taxing the subsequent cash distribution would violate Italy’s domestic prohibition against double taxation. To prevent this, the distributed amount is excluded from the taxpayer’s overall income for that year.
Why Article 165 TUIR Denies the Foreign Tax Credit
The exclusion of the dividend from overall taxable income triggers an unexpected statutory hurdle under Article 165, paragraph 1, of the TUIR. Italian law permits a foreign tax credit only when three cumulative conditions are met: the taxpayer earns foreign-source income, that foreign income explicitly contributes to the formation of the taxpayer’s overall Italian taxable base, and a definitive foreign tax is paid on it.
Because the transparency mechanism already taxed the income in prior years, the subsequent dividend distribution does not enter the overall taxable base. Consequently, the second statutory requirement fails. Foreign tax authorities—such as tax administrations in Germany or other jurisdictions—frequently levy withholding taxes on the outbound dividend payment itself. Because the corresponding income does not enter the Italian tax base for that distribution year, the Italian system refuses to grant a foreign tax credit. The taxpayer absorbs a real, documented economic double taxation on the dividend without domestic relief.
Precedent: The Turin Tax Court Decision on Athlete Image Rights
The practical impact of this legal interpretation is illustrated by a case adjudicated by the Tax Court of First Instance of Turin (C.G.T. I Torino n. 1234/1/25). The dispute involved a German citizen who worked as a professional football player in Italy between September 2015 and February 2021. To manage image rights, the athlete had established a wholly owned German company. Following a ruling request submitted in March 2017, the Agenzia delle Entrate determined in October 2017 that the German firm was an interposed entity under Article 37, paragraph 3, of Presidential Decree No. 600/1973. Under the Italy-Germany double tax treaty, the image rights revenue generated from sporting performances in Italy was classified as Italian-source income.
Complying with the ruling, the taxpayer reported the German company’s earnings on a transparent basis starting from the 2015 tax period, paying ordinary Italian taxes without claiming foreign tax credits for taxes paid by the company in Germany. On November 25, 2020, the German company distributed a € 3.000.000,00 dividend to the taxpayer. Because this distribution fell below the income already taxed through transparency in prior years, it was exempt from further Italian taxation. However, German authorities levied a total of € 791.250,00 in taxes on the distribution. Although the German administration refunded € 341.250,00 under Article 10, paragraph 2, of the Italy-Germany tax treaty—which caps the source-state withholding rate at 15%—the remaining € 450.000,00 was definitively taxed under German law without any matching Italian tax credit.
Seeking relief, the taxpayer filed a second ruling request in April 2020, confirming that the Agenzia delle Entrate maintained its stance: the dividend could not be taxed again in Italy, but that same exemption barred any foreign tax credit under Article 165 TUIR because the income lacked “concourse” in the overall taxable base. Mutual Agreement Procedures (MAP) initiated under OECD Model Convention Article 25 and Italy-Germany Treaty Article 26 either proved inadmissible due to strict statutory deadlines or failed to resolve the overlap. When the taxpayer challenged the silent rejection of a refund claim for € 387.524,88—representing 86,12% of the German tax burden—the C.G.T. I Torino dismissed the appeal, relying on the revenue agency’s administrative practice outlined in ruling response No. 956-760/2020.
Available Legal Remedies and Strategic Options
Taxpayers operating foreign corporate structures must weigh compliance and mitigation strategies carefully before disputes crystallize:
- Preventive Rulings (Interpello): Filing an Article 11 ruling request under Law No. 212 of July 27, 2000, provides clarity on how the Agenzia delle Entrate views a foreign entity’s status. However, taxpayers must recognize that a positive finding of interposition locks in transparent taxation and forecloses future Article 165 tax credits on dividend distributions.
- Mutual Agreement Procedures (MAP): Bilateral tax treaties offer MAP channels to resolve double taxation between states. As demonstrated in the Turin litigation, missing strict statutory deadlines renders these procedures inadmissible, leaving taxpayers with only domestic judicial avenues.
- Judicial Appeals: If administrative refund requests are denied, taxpayers can bring challenges before regional tax courts (Corti di giustizia tributaria). Current case law shows that courts tend to defer to administrative guidelines regarding Article 165 TUIR exclusions, making judicial reversal difficult absent established Supreme Court precedents.
Frequently Asked Questions
- Does the foreign tax credit always apply to foreign income taxed via transparency? No. If the income is taxed under transparency and a subsequent distribution is excluded from overall income to prevent double taxation, the primary requirement of Article 165, paragraph 1, of the TUIR is unfulfilled.
- Does this restriction only affect professional athletes managing image rights? No. While the Turin case involved a football player, the interposition mechanism under Article 37, paragraph 3, of Presidential Decree No. 600/1973 applies to any foreign structure categorized as an interposed entity.
- What happens if a Mutual Agreement Procedure (MAP) is filed late? The procedure is declared inadmissible, permanently closing off bilateral resolution between the two states and forcing the taxpayer to rely entirely on domestic remedies.
- What is the legal distinction between interposition and foreign vectoring (esterovestizione)? Interposition under Article 37, paragraph 3, addresses the subjective attribution of specific income streams, whereas esterovestizione under Article 73 of the TUIR concerns the core fiscal residency of the corporate entity itself.
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