The Italian Supreme Court of Cassation recently ruled again through decision No. 5583 of March 9 2011 on the abuse of law (fraud legis) in commercial transactions.
The case relates to a sale and lease-back transaction of a warehouse, entered into between a company and its sole director. The Supreme Court held, that although the transaction did not expressly fall among those classified as elusive pursuant to Article 37-bis of Presidential Decree No. 600 of September 29 1973 (as amended), it nevertheless represented fraud legis as it was entered into solely to achieve a tax benefit.
The Supreme Court of Cassation issued a similar ruling in 2009 identifying an abuse of law in a sale and lease-back transaction entered into by two companies belonging to the same group on the assumption that transactions of this kind have no economic justification.
The Court applied the same principle expressed by the European Court of Justice in the well-known Halifax and Part Service cases, according to which transactions entered into exclusively to obtain a tax benefit may represent an abuse of law and as such are disregarded by tax authorities.
The very recent Supreme Court of Cassation decision stresses the need of better identification by the Italian legislature of the circumstances and elements representing an abuse of law so as to avoid transactions being reclassified simply on the basis of court precedents.
Three Bills aimed at codifying and regulating the abuse of law from a tax perspective have been recently submitted to Parliament. The proposals provide, among other things, the following.
i) Limiting the abuse of law principle only to cases where there is a clear intention of the company avoiding on an illegal basis the application of tax laws. Abuse of law should therefore be defined as "any contrived and distorted use of one or more provisions of law to obtain unlawful tax benefits or in general not to be compliant to tax legislation". Companies may therefore freely enter into transactions that are less burdensome from a tax point of view, to the extent that the tax benefits obtained are not achieved through loopholes that deceive the good faith of the legislature;
ii) Extending the abuse of law principle to direct and indirect taxes and any other tax, levy or impost, including local taxes;
iii) Rendering not enforceable, with retroactive effect, towards tax authorities transactions made with the intention of avoiding tax laws; and
iv) Excluding, however, criminal sanctions on tax avoidance transactions having the above characteristics, maintaining only administrative sanctions.
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