Index:
1) The operation of "Scudo Fiscale"
2) The practical effects of "Scudo Fiscale"
Dr Claudio Del Giudice
Rivington House
82 Great Eastern Street,
London EC2A 3JF
(United Kingdom)
Tel 0044 207 613 2788
Fax 0044 207 613 2799
Because of political and economic difficulties, Italy has been a net exporter of capitals for over 50 years. Although the protection afforded by a complex and penalising exchange controls legislation was eventually removed in April 1990 by Decree No. 167/1990 later confirmed by Law 227/1990 implementing EEC Directive 88/361, various exchange controls "formalities" were retained and are still in force, in Italy.
These formalities relate mainly to the supervision of the flows of funds / capitals inside and outside Italy and the duty of Italian residents to notify the Italian authorities of any transfer of their capitals / funds abroad ( "Monitoraggio"). Under current Italian legislation, transfers of capitals / funds in / out of Italy in excess of total value of It Lira 20 million are normally to be effected by bank transfer. Alternatively, if funds / assets / securities are carried by individuals through Italian customs, there is a duty to inform the Italian authorities ("Comunicazione valutaria"), at the time or within a specified deadline.
In addition, under the same legislation, Italian residents are required to declare the value of assets / investments held outside Italy in their Italian Income Tax Return. As for most OECD countries, Italian income tax ("IRPEF") is levied on all residents in Italy on a world - wide basis. Where any funds are transferred out of Italy by a resident taxpayer, he /she must declare any income earned abroad to the Italian tax authorities and pay Italian income tax(subject of course to any treaty for the avoidance of double taxation which may be in force). Thus, if any funds are taken out of Italy in breach of this legislation, the resulting violation frequently turns out to be tax evasion as well, given that the funds / assets and any income generated abroad are not declared nor taxed in Italy. It is currently estimated that over 500,000 billion Italian Lira have been smuggled out of Italy over the years and are currently held abroad by Italian residents in breach of current Italian legislation. In the final days before the introduction of the Euro and while further steps are being taken against tax havens and to improve the exchange of information between tax authorities, the Italian Government has introduced legislation which will enable residents in Italy to safely repatriate their capitals back into Italy, without any risk of prosecution or penalties, upon payment of a small amount. These provisions dealing with the "Surfacing of assets held abroad" ("Emersione di attivita` detenute all` estero") or more informally "Tax shield" ("Scudo Fiscale") were introduced in Italy on the 25th September 2001 by Decree Law No. 350, later confirmed by Law 23rd November 2001 n. 409.
1) - The operation of the " Scudo Fiscale". Basically " Scudo Fiscale" is available to any individual, partnership form or association (but not to any commercial limited company) resident in Italy who has exported fund / assets abroad and /or has not paid Italian tax on the income produced by such funds / assets. This legislation is not restricted to liquid funds as it also applies to any other assets such as shares, bonds, securities, jewellery and even real property, held outside Italy.
Under this legislation the Italian resident has two options, he can either repatriate ("Rimpatrio") the funds or assets in question. Effectively this involves transferring the funds /assets back into Italy. Alternatively he may regularise the funds / assets ("Regolarizzazione") in question, i.e. declare their value to the authorities and continue to keep them outside Italy.
These provisions are flexible in so far as they also allow a combination of "repatriation" and "regularisation" for the same individual resident in Italy, if required. Where the funds / assets continue to be kept outside Italy after regularisation, there will be no other penalty or fine, however in future, the Italian resident owner will have to declare any income received in his Italian tax return and pay Italian income tax ("IRPEF") subject to any treaty for the avoidance of double taxation which may be applicable in the circumstances.
While it is possible to "repatriate" funds / assets held up to the 1st August 2001, under a recent resolution of the Italian authorities it will be only possible to "regularise" funds / assets held abroad up to the 27th September 2001. In the case of "repatriation" of assets, it is possible to repatriate, assets of a different nature from the assets originally held on the 1st August 2001.The " Scudo Fiscale" procedure is initiated by the Italian resident lodging a confidential return (Dichiarazione Riservata) with a bank or any other authorised financial institution (which includes Italian branches of foreign banks), thus providing some details of the funds / assets in question and a statement of his intention of "repatriating" or "regularising" the assets in question. This confidential return is protected by law and can not be used or disclosed to the Italian tax authorities. There are no particular rules as to the valuation of the funds /assets in question, however the value declared will be used as "acquisition value / cost" for the purposes of future taxation. Where foreign assets are "regularised" (i.e. will continue to be held abroad) the resident taxpayer must also lodge a certificate issued by the foreign financial institution holding the assets, confirming both their existence / value and the details of the foreign institution.
Upon lodging the confidential return ("Dichiarazione Riservata") or shortly afterwards (in any case by the 28th February 2002) the Italian resident must either pay a 2.5% of the value of the funds / assets in question to the authorised bank, or alternatively expressly elect to acquire Italian treasury bonds ("Buoni del Tesoro") yielding an especially reduced rate of interest for a nominal value equivalent to 12% of the funds / assets declared, and pay to the authorised intermediary the funds required to acquire them. In a way, this 2.5% payment is a consideration paid to the Italian authorities for the benefits arising from" Scudo Fiscale". The term of these Italian treasury bonds is 10 years from the 1st November 2001, the especially reduced interest rate is 1.9 %. These treasury bonds are freely marketable, and benefit from the usual tax exemptions in Italy.At the same time, if the funds / assets are repatriated, the Italian resident must ensure that they are paid or lodged in special accounts, opened for this particular purpose with the authorised intermediary. These accounts are subject to special confidentiality rules, and are held to the Italian resident`s order. Upon completion of these formalities the authorised financial intermediary will collect the 2.5% payment and deliver to the Italian resident one sealed, receipted copy of the confidential return, while keeping for its private records the original return.
The funds / assets are then paid out / released to the Italian resident in case of repatriation, the owner is then totally free to use the assets in question as he prefers in the knowledge that no fines nor any penalties can be levied for the past, by the Italian authorities. Overall, the term for the operation of "Scudo Fiscale" has started on the 1st November 2001 and will terminate on the 28th February 2001.
2) - The practical effects of "Scudo Fiscale" As was to be expected of this legislation, where funds / assets are correctly "repatriated" or "regularised" and payment of the 2.5% required sum fully and timely effected, no assessment, fine or penalty may be levied, either with reference to the breach of exchange controls legislation when the funds / assets were originally taken out of Italy, or in relation to the concurrent / subsequent Italian tax / social security contribution evasion.
Given that under this legislation the confidential return (" Dichiarazione Riservata") is not reported nor passed to the Italian tax authorities, there is no practical immediate effect to the "repatriation" or "regularisation"of the funds /assets and subsequent payment of the sum due. However, should any enquiry or investigation be launched by the Italian tax authorities or any assessment / penalty be issued at a later date, then the Italian resident taxpayer may disclose the " Scudo Fiscale" confidential return to the authorities and invite them to check that the funds / assets in question have been correctly reported. This will stop any further action / attempt to levy penalties in its tracks. In practice, by complying with this legislation the Italian resident taxpayer may set up for himself a"tax shield" ("Scudo Fiscale") which he may wish to use, at a later date.
Although very comprehensive, the "tax shield" is expressly subject to some limitations. It will not apply to criminal activities such as money laundering as currently defined and punished by Decree No. 143/1991 and Law No. 197/1991, organised crime and of course, terrorism. With the carrots there is also a stick. This legislation increases the penalties currently provided for breaches of exchange controls / tax legislation ("Monitoraggio"). Fines may now be levied on any the funds / assets transferred out of Italy in breach of the current rules, ranging between 5% and 25% of the total value. Also, the Italian revenue has clearly indicated the intention to launch a major campaign against illegal transfers of capitals outside Italy, upon lapse of the "Scudo Fiscale" deadline, on 28th February 2002. In addition, on the 1st January 2002 the new rules on "Cfc" (Controlled foreign companies) will come into force in Italy. This legislation (Decree 429/2000) basically provides that any Italian resident taxpayer owning shares or otherwise controlling a foreign company located in a "tax haven" (as defined by a "black list" issued by the Italian revenue) will be taxed in Italy on the income realised by such foreign company, whether or not he actually receives such income. This is an extension of the existing armament to counter tax evasion, as already, under current Italian law any Italian citizen emigrated to a tax haven is deemed to remain resident in Italy for tax purposes.
These severe sanctions do cause some concern, especially for foreign employees seconded in Italy by foreign employers. Upon completing their six months stay in Italy these employees will normally acquire Italian residence, and with it all the duties and obligations provided by the current tax / exchange controls regulations. They may not be aware of this, and ignore the benefits of "Scudo Fiscale" at their own risk. Professional advise before acquiring Italian residence, is advisable. This legislation imposes heavy duties on the "authorised intermediaries" who receive the confidential returns and the 2.5% payments. Firstly, the authorised intermediary must certify compliance with the "Scudo Fiscale" legislation. Secondly, strict deadlines are set to pay any 2.5% sums received from Italian resident taxpayers on "repatriation" or "regularisation", over to the Bank of Italy. Thirdly, duties to notify the Bank of Italy as to subscription of Italian treasury bonds are also introduced.
It remains to be seen whether this legislation will work. Several factors are in action at the moment and it is difficult to predict how they will operate. Much reduced interest rates on a world wide basis and reduced Italian inflation have substantially weakened the incentive for Italian resident taxpayers to invest abroad, no matter what the risk or the possible consequences. Also, attempts to reduce the overall level of taxation in Italy are now beginning to show some positive results. It is now only a few weeks since Inheritance and Gifts tax was totally abolished in Italy, and already substantial reductions of Italian income tax rates are being proposed by the current Italian Government. Plans to reduce the red tape are also being considered, as an attempt is made to reduce all Italian taxation to five main taxes only.
As this is an extremely delicate matter, much will depend on how this legislation is perceived and how far Italian residents can be reassured that compliance with " Scudo Fiscale" will not result in unpleasant, unexpected secondary effects. If this legislation fails in producing the expected results, it will not be for lack of trying.
Dr Claudio Del Giudice - Copyrights reserved, December 2001