Italian rules: controlled foreign companies, residence and withholding tax

Article 167 TUIR after the reforms of 2018 and 2023

A trading company in Lugano owned by an Italian resident, whether an individual or a company, falls within the scope of the Italian rules on controlled foreign companies (CFC) in Article 167 TUIR. The rules apply to individuals and to the entities referred to in Articles 5 and 73 paragraph 1 letters a, b and c TUIR that control a non-resident entity. Control exists within the meaning of Article 2359 of the Civil Code or through a direct or indirect participation of more than 50 per cent in the profits.¹ Until 2018 Italian law distinguished between controlled companies in blacklisted states, among which Switzerland long figured, and those in other states. The latter were caught only if they were taxed at a low effective rate and derived mainly passive income. Legislative Decree No. 142 of 29 November 2018, which implemented the EU Anti-Tax Avoidance Directive, replaced this system with a single test based on the effective tax rate and the nature of the income.²

Under the current Article 167 paragraph 4, a controlled foreign company is caught if two conditions are met. It must be subject to an effective taxation lower than 15 per cent. Until the 2023 tax period the threshold was half of the taxation to which the entity would have been subject if resident in Italy. Legislative Decree No. 209 of 27 December 2023 replaced it with the fixed rate from the 2024 tax period. In addition, more than one third of its income must fall within listed categories of passive or low-value income.³ The list includes interest, royalties, dividends, financial leasing income and insurance and banking income. Of particular relevance for trading companies is "income from transactions involving the purchase and sale of goods with little or no economic value added, carried out with entities that directly or indirectly control the controlled entity, are controlled by it or are controlled by the same entity that controls it". It also covers income from services with little or no economic value added rendered to such related entities.⁴ A Lugano trading company may buy from its Italian parent and resell to third parties, or buy from third parties and resell to Italian group companies. If its own contribution to such transactions is slight, it may satisfy the income test.

The effective tax test and the 15 per cent rules of 2023

Under the former rule the effective tax test compared the Swiss tax actually paid with the Italian corporate income tax (IRES, 24 per cent) that would have been due on the same income computed under Italian rules. Since 2024 the Swiss effective rate is measured against the fixed threshold of 15 per cent. With an effective Swiss rate of about 15.5 per cent in Lugano, an ordinary trading company in Ticino taxed at the full rate will in most cases pass the test, although the margin is narrow and depends on the commune and on the computation of the tax base.⁵ The position was different before 2020, when a mixed company could be taxed at rates below 12 per cent, which was half of the Italian rate. Many Italian-owned trading companies in Lugano were then potentially within the CFC rules and had to rely on the exemption for genuine economic activity described below.

Legislative Decree No. 209 of 27 December 2023, which implemented the minimum tax in Italy and reformed international taxation, added two further rules. Under paragraph 4-bis the equivalent national minimum tax due by the controlled entity, that is a qualified domestic minimum top-up tax of the foreign state, counts as tax when the effective rate is computed. Under paragraph 4-ter the effective taxation is deemed to be not lower than 15 per cent if the controlling entity opts to pay a substitute tax of 15 per cent of the controlled entity's net accounting profit. Paragraph 4-quater makes the option conditional on the controlled entity's financial statements being audited and certified by authorized professionals in its state. The option exempts the controlling entity from the CFC rules for three years and is automatically renewed unless revoked.⁶ The substitute tax is not deductible and applies from the 2024 tax period. For an Italian owner of a Lugano trading company that is taxed at about 15.5 per cent, the fixed threshold makes the CFC rules a matter of careful computation. Where the margin above 15 per cent is uncertain, the substitute tax offers an alternative for audited companies.⁷

Notes

1. TUIR, Art. 167 para. 1 and 2, text at Brocardi.it, https://brocardi.it/testo-unico-imposte-redditi/titolo-iii/capo-ii/art167.html. ↩
2. TUIR, Art. 167, note on the amendment by Art. 4 para. 1 of Legislative Decree No. 142 of 29 November 2018 (implementing Council Directive (EU) 2016/1164 of 12 July 2016, ATAD), applicable "a decorrere dal periodo d'imposta successivo a quello in corso al 31 dicembre 2018" (Brocardi.it, above). ↩
3. TUIR, Art. 167 para. 4 lit. a ("tassazione effettiva inferiore al 15 per cento") and lit. b, text at Brocardi.it (above), updated to 4 July 2026; Bargagli (below) (15 per cent threshold introduced by Legislative Decree No. 209/2023, from the tax period following that in progress at its entry into force). ↩
4. TUIR, Art. 167 para. 4 lit. b (Brocardi.it, above): "redditi da operazioni di compravendita di beni con valore economico aggiunto scarso o nullo, effettuate con soggetti che, direttamente o indirettamente, controllano il soggetto controllato non residente, ne sono controllati o sono controllati dallo stesso soggetto che controlla il soggetto non residente". ↩
5. TUIR, Art. 77 (IRES rate of 24 per cent), https://brocardi.it/testo-unico-imposte-redditi/titolo-ii/capo-i/art77.html; Art. 167 para. 4 lit. a (Brocardi.it, above). The Swiss rate of about 15.5 per cent is the calculation in the section on Lugano above. ↩
6. TUIR, Art. 167 paras 4-bis (equivalent national minimum tax counted), 4-ter (deemed taxation of 15 per cent on payment of 15 per cent of net accounting profit) and 4-quater (audit and certification of the financial statements), Brocardi.it (above); Marco Bargagli, "Controlled Foreign Companies: analisi delle recenti novità", EC News, 6 October 2025, https://www.ecnews.it/fiscale/fisco-e-patrimonio/fisco-internazionale/controlled-foreign-companies-analisi-delle-recenti-novita/ (substitute tax not deductible; three-year option automatically renewed). ↩
7. Bargagli (above) (application from the 2024 tax period). ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of October 2026.