Restructuring, relocation and continuation
of companies and groups of companies
Restructuring, relocation and continuation of companies and groups of companies
Our law firm has extensive experience in the restructuring, relocation and continuation of companies and groups of companies. Both the Helvetic Confederation and Malta offer interesting opportunities in terms of taxation, including the possibility of obtaining capital grants, to be examined obviously on a case-by-case basis. The use of Maltese holdings, as well as SAs under Swiss law, together with operating companies can make the difference in obtaining legitimate tax savings to be used for future investments.
Opening a representative office abroad
What are the first steps to take as soon as you decide to explore new markets across the border?
For the entrepreneur interested in expanding his/her business activities abroad, it is very important to choose the most appropriate legal and tax form.
There are three operating approaches that can be used:
The opening of a “bureau de liaison”, also called “representative office”.
The establishment of a branch or permanent establishment of the parent company.
The establishment of an independent branch, in the form of partnerships or companies with share capital, in compliance with the law in force of the host country.
Opening a representative office represents the simplest solution and is normally used when the entrepreneur wants to start exploring a new foreign market without having civil or tax obligations in the host country. On the other hand, given that a representative office performs only “an auxiliary and preparatory function to the activity of the parent company”, it cannot carry out business activities and issue invoices: in essence it will not be able to generate income.
The costs that a representative office bears for the lease of an office, a room or a warehouse destined, for example, as a showroom for the promotion of products, as well as the staff hired locally, will be entirely deductible from the income of the parent company and from the salary of the representative of the bureau de liaison operating on the foreign territory chosen.
Furthermore, a representative office has no legal status or management and financial autonomy, because it represents a simple “cost centre” that does not generate revenues. The question changes if a permanent establishment or an independent company controlled by the parent company is opened. In this case, the entrepreneur makes a different and more demanding choice, both from a civil and tax point of view. Indeed, a branch or independent company will be taxed in the host country for income generated on the spot.
Since a branch has no independent legal status, it is taxed on the income produced abroad and the turnover will flow into the parent company’s balance sheet. Therefore, it represents a sort of operational “longa manus” of the parent company abroad, since it will be able to use a tax credit in Italy for the taxes paid abroad.
The definition of permanent establishment can be found in the Commentary to the OECD Model, in Article 5, which defines exactly the conditions leading to this kind of enterprise. A branch, which has its own legal status under the civil law, will also be taxed in the host country on the income produced. The parent company will then be able to decide on the transfer of dividends to Italy, and be able to use international treaties to avoid double taxation; or it may use the Mother-Daughter Directive (Directive No. 434/90), with undeniable tax benefits in terms of taxation (no withholding tax on dividends and dividend taxation of 5% of profits).
It would seem that everything is clear and simple. But, unfortunately, it is not because very often the entrepreneur unknowingly believes that he/she has established a simple representative office. Actually the operation is that of a permanent establishment because, for example, contracts for the sale of products or supply are stipulated. This will inevitably lead to the taxation of that income produced on the spot, with the consequent penalties for not declaring it.
It is therefore necessary to pay great attention to the actual activity carried out by the representative office and by the personnel who work there, in order to avoid any activity that can be qualified as commercial, should it actually take place.
The tax variable in the internationalisation of companies
With increasing frequency we are witnessing the intensification of entrepreneurial activities carried out by small or medium-sized enterprises in the Community or international context. Indeed, expanding abroad becomes increasingly necessary to keep up with the competition, increasingly strong, put in place by foreign economic operators in the production chain.
While the foreign market was dominated by large international groups until a few years ago, today even the small or medium-sized entrepreneur increasingly operates in non-domestic contexts. Consequently, it is necessary to carry out a preventive analysis of the “tax risk” that can arise, if not wisely managed, when opening beyond the border.
Indeed, whether you decide to enter into a partnership that already operates abroad, or whether you want to create a new company directly owned or controlled by a company residing in Italy, attention must be paid to the tax consequences deriving from the presence of corporate income produced abroad: this in order to avoid problems or risks of such income appearing to have been placed for tax evasion or avoidance purposes.
In recent years, the tax legislator has intervened several times in this delicate matter, in order to clarify what the honest behaviour under the tax profile should be for activities carried out abroad. In particular, it is important to remember that not all foreign territories in which you decide to operate with production, commercial or service activities represent an alarm bell for the tax authorities; this happens only with those countries considered as tax havens or, in any case, that subject income produced to less than half of the percentage of taxation applied in our country, with reference to the ordinary rate of IRES (corporation tax) and IRAP (regional tax on production).
A decisive clarification regarding the taxation of activities deriving from income produced in states considered privileged from the fiscal point of view was obtained with the enactment of Italian Legislative Decree no. 147/2015 on the internationalisation of enterprises and the subsequent circular letters of the Inland Revenue Agency no.35 of 4/8/2016 and no. 143239 of 16/9/2016, related to CFC (Controlled Foreign Companies).
These circular letters clarify the situations in which the presence of a foreign company owned or controlled by a person who resides fiscally in Italy may entail the taxation for tax transparency for the beneficiary, regardless of whether or not profits are received in Italy: this in cases where the company is in one of the fiscally privileged countries, until recently also included in a ministerial black list in consideration of the non-taxation of income produced there or of taxation lower than 50% of that applied in our country.
The issue of the aforementioned decree regarding internationalisation and subsequent circular letters by the Tax Authorities, thus make it easier to identify dangerous and inadvisable behaviour in terms of taxation. This is to the advantage of the tranquillity and certainty of being able to expand your business capacity by crossing national boundaries, without the risk of receiving tax inspections for irregularities of a fiscal nature or elusive behaviours, which are aimed at obtaining undue tax advantages by abusing or interpreting the tax laws for your own benefit.
The main rule to follow when carrying out an operation with foreign countries, useful to avoid the occurrence of problems with the tax authorities, is this: ask yourself if the operation is put into being only for reasons of tax convenience. If this were the case, we would be in the presence of an operation that could be potentially challenged by the Tax Authorities because qualifying as being set up to “abuse rights” and, therefore, for tax avoidance or even evasion.
If, on the other hand, the tax variable is only one of the factors that have determined the entrepreneur’s conviction to carry out that particular transaction or negotiation activity, but what is done is supported by valid economic reasons, then it will be difficult for the tax authorities to raise any problems because the tax advantage is not the decisive reason for the choice made and, therefore, we are not be in the presence of a transaction at tax risk.