The Italian Tax Authorities issued Protocol No. 143239 (the Protocol) on 16 September 2016, providing further clarifications on CFC legislation, as recently amended by Legislative Decree No. 147 of 14 September 2015 and Law No. 208 of 28 December 2015 (the Stability Law for 2016).

The scope of the CFC rules also encompasses companies located in a jurisdiction which is not considered to have a privileged tax regime, provided that the following conditions are met: the actual income tax paid in the foreign jurisdiction is lower than 50% of the Italian corporate income tax that would be applicable to the company if it were resident in Italy, and more than 50% of the proceeds of the controlled foreign company consist of passive income for CFC purposes.

The Protocol also provides simplified rules for calculating the effective foreign tax of a controlled company and the related virtual domestic tax, for the purposes of the first condition. In particular, when determining the effective foreign taxation, only income taxes due in the country where the controlled company is located must be taken into account, without including possible tax credits related to income derived in a third country. Where a tax treaty is applicable, the taxes covered by the treaty and any identical or substantially similar taxes that are subsequently imposed must be included in the calculation.

Correspondingly, when determining the Italian tax that would be applicable to the company if it were resident in Italy, only the corporate income tax and possible surcharges must be taken into account, without including possible tax credits related to income derived in a third country. Such calculation must be based on the data available in the financial statements of the controlled company.