The Italian term “esterovestizione” (the fictitious relocation of a corporate residency) refers to the dissociation between formal residence and effective residence, carried out in order to benefit from a more advantageous tax regime than the one of the country of actual belonging through so-called “brass-plate companies” or “letterbox companies.”
This may constitute an abusive practice when the transfer of tax residence abroad is purely artificial and lacks any real presence or connection to the claimed place of foreign residence, e.g., a company formally declares that it is resident abroad but, in fact, has its place of management and control in Italy (see on this point Cass., sent. n. 33234/2018).
It is evident that the topic at hand intersects with — and actually presupposes — the issue of tax residence (to which reference is made), because it is precisely starting from the criteria connecting the legal entity to the territory, as set out in Art. 73 of the TUIR, one can identify cases in which a dissociation between formal seat and substantial seat (or, more precisely, between the taxpayer’s state of residence and the state of source of the income) is a mere artifice.
Relative legal presumptions of residence under Italian law – Art. 73, paragraphs 5-bis and 5-ter of the TUIR
Pursuant to Art. 73, paragraphs 5-bis and 5-ter of the TUIR, fictitious corporate relocation occurs in all cases where, for the sole purpose of obtaining a tax advantage, a company declares that it is (formally) resident abroad, while having (as alternatives):
- an actual connection with Italy according to the criteria in Art. 73 (registered office, place of effective management, or main place of ordinary management); or
- controlling shareholdings in a company resident in Italy and being in turn controlled, even indirectly, by entities resident in the territory of the State (Art. 73, paragraph 5-bis); or
- controlling shareholdings in a company resident in Italy and being managed by a board of directors, or other equivalent management body, composed mainly of directors resident in the territory of the State (Art. 73, paragraph 5-bis).
Paragraphs 5-bis and 5-ter of Art. 73 of the TUIR introduce a relative legal presumption of tax residence in Italy for companies and entities with a fictitious foreign residency, with a consequent reversal of the burden of proof onto them.
As clarified in Circular n. 28/E/2006 to rebut this presumption, the taxpayer “must demonstrate, with adequate and convincing arguments, that the company’s place of effective management is not in Italy, but abroad.”
The aim pursued by this presumption is to bring closer together and reconstruct, at least on a substantial level, the criteria of residence and source, allowing the state of source (or rather, of genuine residence) to exercise its taxing rights over income only artificially located abroad.
Therefore, for these relative legal presumptions not to conflict with the EU principle of freedom of establishment (Art. 49 TFEU), it is necessary to verify, case by case, that the operation’s sole purpose is to obtain an unjustified tax advantage. The Italian Supreme Court has, in fact, reiterated that it is lawful to choose, when faced with two possible ways of conducting business, the one that entails a lower tax burden and a greater economic benefit (cf. Cass. civ., Sez. V, 02/10/2024, no. 25917).
In short, it is not unlawful to incorporate a company in a state chosen solely for the tax benefits it offers. It is “only” necessary that in that state an economic activity is actually carried out that is concretely verifiable, and that it is not merely an empty shell to simulate residence in a place with which there is no connection. Nothing prevents one from enjoying more advantageous conditions, provided that if the decision is made to establish the seat in such a country — a perfectly lawful choice — some concrete and tangible form of activity is actually carried out there.
Methods of Entering a Foreign Market
A legal entity may decide to expand into countries other than its country of origin, thereby widening its pool of clients and suppliers. Whatever the purpose, this can take place through three methods:
- establishment of a controlled economic entity (“subsidiary”) with a legal personality separate and distinct from the “parent company”;
- establishment of a branch/permanent establishment (“branch”), a secondary seat with stable representation but without legal personality;
- establishment of a representative office (“rep office”).
Only in the case of a subsidiary could the entrepreneur potentially incur a situation of fictitious relocation abroad, since it is the only one that has separate legal personality. Conversely, a permanent establishment and a representative office cannot give rise to cases of “esterovestizione”.
It should be stressed that each country autonomously determines the definition and boundaries of a permanent establishment (“branch”). For this reason, it is important for each entrepreneur, before entering a foreign market, to research the rules governing it, to understand in what form to enter — whether through a permanent establishment or a controlled company.
The Nature of “Esterovestizione”: abuse of right or tax elusion?
While in the past the case law had consistently classified “esterovestizione” as an intrinsically abusive phenomenon, recently, the Cassazione has shifted its stance, finding esterovestizione’s practice not an abuse of law, but rather a form of tax avoidance. Previously, the Court considered the undue tax advantage to be the distinguishing feature of fictitious relocation, and, as an expression of abusiveness, it automatically placed it within the category of abuse of law (cf. Cass. decisions no. n. 4463/2022, no. n. 7454/2022 and n. 8297/2022). This approach, however, was not fully aligned with the principle of freedom of establishment established at the EU level by Art. 49 TFEU.
In the Cadbury vs. Schweppes C-196/04 case, the ECJ established three fundamental principles of law regarding the freedom of establishment:
- it is lawful to locate one’s residence in a foreign state for the sole purpose of obtaining a tax advantage. This does not, in itself, constitute an abuse of law;
- a tax advantage is not per se undue, and assumes that character only in the presence of conditions that reveal abusiveness;
- restrictions on freedom of establishment are allowed only if aimed at countering “wholly artificial arrangements,” meaning foreign companies lacking actual economic substance whose sole purpose is to obtain an undue economic advantage from the more generous tax conditions of another European state.
In line with these principles, the Italian Supreme Court has revised its previous stance, removing the undue tax advantage from the list of constitutive elements of “esterovestizione” (cf. Cass. n. 23150/2022, no. 11709/2022 and no. 11710/2022), thereby placing “esterovestizione” in the category of avoidance rather than abuse.
Practically speaking, this means that its detection by the Tax Administration will be based on indicia capable of showing the purely artificial or fictitious nature of the establishment in the foreign state. It will no longer be necessary, for evidentiary purposes, to prove the obtaining of an undue tax advantage, which now degrades to a mere indicium. Put differently: the advantage may be (and usually is) a consequence of “esterovestizione”, but the real flaw lies in the lack of genuineness of the link between the legal entity and the state of residence.
Effects of corporate fictitious relocation abroad
If the company fails to provide the necessary counter-evidence, the direct consequence is that it will be considered fiscally resident in the territory of the Italian State
Reclassifying a foreign company as an Italian resident legal entity entails the application of all substantive and formal obligations that the legal system imposes upon resident legal entities (Circular 28/E/2006).
Companies found to be “esterovestite” will be considered fiscally resident in Italy and therefore taxed on income earned anywhere in the world, according to the principle of worldwide taxation.
They may, accordingly, benefit from the preferential regimes and tax incentives provided by Italian law.
As for penalties, these companies are subject to the same sanctions ordinarily applicable to entities reclassified as residents in Italy (see infra).
Examples of counter-factual allegations which may be opposed by an entity considered as fictitiously established abroad
As noted at the beginning of this analysis, Italian law, to counter the proliferation of less-than-genuine foreign residences of taxpayers who are, in all respects, Italian, has established legal presumptions. It is necessary to clarify which circumstances — not unlike the fumus commissi delicti in criminal law — legitimise the Italian Revenue Agency’s fact-finding activity to ascertain the avoidance nature of the residence, as well as the counter-evidence through which the taxpayer can rebut the forementioned presumptions.
When faced with indicia suggesting a simulated tax residence abroad, the Revenue Agency may initiate an investigation, which must “collect in a detailed and specific manner” the connecting factors that indicate the company’s rootedness in Italian territory, pursuant to Art. 73 TUIR.
Conversely, the taxpayer accused of alleged fictitious relocation abroad may present counter-evidence in the forms and manners indicated by the Agency in note prot. n. 39678/ 19 march 2010.
The evidentiary elements available to the taxpayer are not subject to any formal or substantive limits — there is, to date, no exhaustive list of “exonerating circumstances” — so as not to limit freedom of proof. On the contrary, the taxpayer may produce any element of proof deemed to be useful to demonstrate the actual establishment abroad.
More specifically, recalling Circ. n. 312/E/2007, it is stated that: [t]he demonstration of the ‘counter-evidence’ [is] based not only on documentary data, but also on all concrete elements from which it emerges, in particular, the place where strategic decisions, contract signing, and financial and banking operations are actually carried out.”
Examples include:
- documents proving the periodic holding of board of directors’ meetings at the company’s registered office (minutes formally adopted abroad, airline tickets/hotel receipts proving shareholders’ travel abroad);
- acts showing the actual management of the company by the members of the board of directors (projects, interventions, decisions on the company’s performance);
- documents proving the operational management of the company abroad (internal directives, commercial or financial contracts, correspondence relating to business negotiations).
Sanctionatory consequences of Esterovestizione
Fictitious relocation abroad (“esterovestizione”) constitutes one of the most recurrent mechanisms by which companies seek to evade domestic tax liabilities. Once established, it may give rise, for the taxpayer, to administrative-tax and criminal sanctions provided under the applicable legal framework.
- Administrative Sanctions
- Violations concerning income tax returns and the regional tax on productive activities (Art. 1, Legislative Decree n. 471/1997, Legislative Decree No. 471/1997, currently Art. 27 of the Consolidated Act on administrative and criminal tax sanctions), subject to a penalty amounting to 120% of the tax due;
- Breaches of accounting obligations (Art. 9, para. 1, Legislative Decree No. 471/1997, currently Art. 34 of the Consolidated Act), punishable by an administrative fine ranging from €1,000 to €8,000;
- Violations concerning VAT returns and reimbursements (Art. 5, Legislative Decree No. 471/1997, currently Art. 30 of the Consolidated Act), subject to a penalty of 120% of the tax due;
- Violations of obligations relating to the tax register and fiscal code (Art. 13, para. 1, lett. a), Presidential Decree n. 605/1973, currently Art. 63 of the Consolidated Act), punishable with a fine ranging from €103 to €2,065.
- Criminal Sanctions
Although fictitious relocation abroad does not constitute a discrete criminal offence, it may nevertheless entail criminal liability on the part of the taxpayer. In particular, it may amount to:
- Fraudulent tax return through the use of invoices or other documents relating to non-existent transactions (Art. 2, Legislative Decree No. 74/2000, currently Art. 74 of the Consolidated Act), punishable by imprisonment from 4 to 8 years;
- Fraudulent tax return by other artifices (Art. 3, Legislative Decree No. 74/2000, currently Art. 75 of the Consolidated Act).
Any person who, for the purpose of evading income tax or VAT, carries out objectively or subjectively simulated transactions, or makes use of false documents or other fraudulent means capable of hindering tax audits and inducing the tax administration into error, shall be punishable by imprisonment from 3 to 8 years.
The elusive conduct consisting of fictitious foreign relocation may be subsumed under “other fraudulent means” aimed at misleading the tax authorities, thereby integrating the offence set forth under Art. 3. The term “means” shall be construed as encompassing a set of acts carried out for the purpose of obtaining an undue tax advantage.
Such acts are deemed “fraudulent” insofar as they are capable of deceiving the competent authorities (Italian Supreme Court of Cassation, Criminal Section, No. 50308/2014). This offence is to be classified as a crime of danger, rather than a result-based crime, in line with the genus of fraud-related offences: it is not necessary for the tax administration to be actually misled, but rather that the artifices, documents, etc. are objectively capable of misleading it;
- Unfaithful tax return (Art. 4, Legislative Decree No. 74/2000, currently Art. 76 of the Consolidated Act), in cases where the taxpayer declares understated taxable income or fictitious deductible items, punishable with imprisonment from 2 years to 4 years and 6 months;
- Failure to file a tax return (Art. 5, Legislative Decree No. 74/2000, currently Art. 77 of the Consolidated Act), consisting in the omission of the filing obligation where the evaded tax exceeds €50,000, punishable with imprisonment from 2 to 5 years.
The regime governing tax offences is currently disciplined within the Consolidated Act on administrative and criminal tax sanctions (Legislative Decree n. 173/2024), which shall enter into force on 1 January 2026. Said Consolidated Act has not altered the substantive definitions of tax-criminal offences, but has merely undertaken a reorganization of the provisions already contained in the Legislative Decree No. 74/2000. Consequently, the aforementioned provisions remain substantially applicable.
