Fictitious location abroad and burden of proof on it

In Judgment No. 56 of Jan. 25, 2023, the Tax Court of Second Instance of Liguria settled a dispute on the subject of fictitious location abroad for tax purposes (so called “esterovestizione”), annulling the deed of assessment as a result of the Tax Authority’s failure to discharge the evidentiary burden of proof on it following the amendment of Article 7 of Legislative Decree No. 546/1992 made by the recent Law No. 130/2022. On this occasion, the regional judges also expressed interesting considerations on the role of residence certifications issued by foreign tax authorities.

The case originated from a tax audit concerning the relations between Genoa Airport and all individuals and legal entities that had paid airport fees to the airport's managing company for various kinds of services (handling, passenger boarding, take-off, landing, passenger parking and aircraft shelter services). As part of this audit, issues had been found regarding the verified company, a company headquartered in Denmark that had rented a hangar for the sheltering of its fleet of aircraft. The verifiers determined that the company's entire fleet had been permanently employed in the service of a well-known Genoese businessman and the managers of the multinational company he managed.

The company's core business, formally identified as activities such as purchasing, importing and registering aircraft for the purpose of chartering to third parties, had been rectified by the auditors, believing instead that the core business was the activity of an aero-commercial shipping operator. As a result, the business object was placed in Italy. Similarly, the place of effective management (“POEM”) was also placed in Italy, at the aforementioned hangar, where, according to the auditors, "all activities related to business management, such as the conclusion of maintenance contracts, management and recruitment of human resources", were carried out. The aforementioned businessman was also identified as the "dominus" of operational management. The disputes concluded by noting, against the company, the obtaining of an undue tax advantage deriving from its formal foreign location (in Denmark), functional to evade the Italian tax regime provided for shell companies.

Faced with the notification of the notices of assessment, the company challenged them, replying that the adjustment of the company's core business was erroneous and that the formal Danish location coincided with its actual POEM. For this purpose, it noted that the decision-making activity was carried out in Denmark and the "activities of bookkeeping, preparation of corporate financial statements, preparation of tax returns and other administrative activities related to the previous ones" were located there. It also contested that, with the relevant assessment, the Office had violated Articles 49 and 54 TFEU on freedom of establishment, which allows legal persons incorporated in the Union territory to locate their economic activities in any country in the Union.

However, the appeal was dismissed by the Genoa Provincial Tax Commission and the company appealed against this ruling.

Instead, the CGT II grade in Genoa upheld the company's arguments. In particular, the Court's decision focuses on the failure of the Internal Revenue Service to meet the evidentiary burden required for contestation of fictitious location abroad.

In the first instance, the Court adheres to the orientation of Italian Supreme Court (ex multis, Cass. civ., Sec. V, nos. 33234 and 33235 of 2018 and, more recently, id. no. 4463/2022) according to which, in the European context, the challenge of esterovestizione - in addition to being based on the criteria of linkage with the territory set forth in Art. 73, c. 3, TUIR - must necessarily postulate the abuse of freedom of establishment. In this respect, the principles already conveyed by the well-known CJEU ruling issued in definition of Case C-196/04 (so-called Cadburry Schweppes) are taken up, for which for the purposes of abuse of freedom of establishment, only the circumstance that the establishment of the company in another country constitutes a merely artificial operation, consisting in the creation of a legal form that does not reproduce a corresponding and genuine economic reality is relevant. On the contrary, locating in an EU country in order to take advantage of more favourable tax legislation does not in itself constitute an abuse of that freedom, so that the tax advantage does not constitute a diriment element for the abuse or, for that matter, for the contestation of esterovestizione.

Adhering to these principles, the Internal Revenue Service failed to meet the strict evidentiary burden required for the esterovestizione case, which postulated proof that the Danish office constituted a merely artificial construction and that the POEM was located in Italy. This evidentiary burden finds a renewed definition as a result of the new paragraph 5-bis of Article 7 of Legislative Decree 546/1992, which as imposes not only a remodelled investigative obligation on the Internal Revenue Service, but also imports a different structuring of the court's decision-making activity. From this point of view, in addition to the evidentiary deficiencies noted with regard to the acts of the Office (guilty of not expressing any evaluation and estimation of the elements collected by the verifiers), the Court of Second Instance also censured the work of the judges of first instance, who had completely ignored the findings produced by the company in support of its actual incorporation in Denmark.

In conclusion, it should be noted that the judgment bears useful considerations on the circumstance that the Office had not taken into consideration the certificate issued by the Danish Tax Administration attesting to the company's tax residence in Denmark. In the judges' opinion, the production of these certificates (commonly called "tax forms") by the taxpayer obliges the Internal Revenue Service to contact the corresponding tax agency to verify actual foreign residence.