Italy: Italian tax authorities issue ruling on application of Imported Hybrid Mismatch Rules

In brief

With Tax Ruling No. 288, issued on 7 April 2023, the Italian tax authorities expressed their interpretation of a case in which a hybrid mismatch would occur, thus triggering the imported hybrid mismatch rule.


This position may have a significant impact on multinational enterprises (MNEs) with similar arrangements in place, and lead them to redesign their business model or implement specific anti-hybrid supporting documentation addressing those transactions which may trigger the risk of possible tax challenges in Italy.

The case analyzed by the Italian tax authorities refers to a multinational group whose ultimate parent company was a US resident and with the Italian affiliate acting as a limited risk distributor (LRD). The latter incurred cost of goods sold (COGS) in relation to transactions in place with its Swiss parent company, owning 100% of the stock of the Italian entity.

Until 2019, the Swiss parent company benefitted from the so-called Swiss principal company regime providing for the unilateral recognition by the Swiss Confederation of the existence of a deemed foreign permanent establishment (PE) and the attribution to the latter of part of the Swiss company's profits.

Essentially, this specific regime allowed the Swiss company to reduce its taxable basis of an amount equal to the income attributed to such deemed foreign PE.

Starting from 1 January 2020, the repealing of the Swiss principal company regime led to a repatriation of the deemed PEs from foreign jurisdictions.

As a consequence of the repatriation, the Swiss principal was entitled to book a foreign-originated goodwill without paying any income tax in Switzerland, with amortization quotas deductible over a 10-year period.

Through the recently issued tax ruling, the Italian tax authorities ruled out that the booking of the foreign-originated goodwill and the deduction of related depreciation quota gave rise to a hybrid mismatch that falls within the scope of Italian ATAD Decree No. 142/2018 (specifically Article 6(1)(r)(5)). That is because the foreign-originated-goodwill represented a negative item that triggered a deduction without a corresponding attribution of income in the country where the permanent establishment was deemed to exist.

Given the foregoing, the Italian tax authorities considered whether the imported hybrid mismatch rule set forth by the Italian ATAD Decree (specifically Article 8(3)) applies. In this respect, the Italian tax authorities reiterated their previous position that the following three conditions lead to the application of the regime:

  • The existence of an imported mismatch payment consisting of the deduction of a negative item of income by the Italian entity that acts as a payor, and the inclusion of the corresponding positive item for the purpose of the calculation of the foreign payee's income.
  • The existence of a hybrid deduction consisting of the deduction of a negative income component in a foreign jurisdiction and the exclusion of the corresponding positive item from the income of the beneficiary, due to a hybrid mismatch.
  • The existence of a "link between the imported mismatch payment and the hybrid deduction," meaning that the imported mismatch payment has been (directly or indirectly) offset with the hybrid deduction.

In the Italian tax authorities' view, under the facts described above, these three conditions were met:

  • The imported mismatch payment was represented by the COGS incurred by the Italian LRD vis-a-vis its Swiss parent company.
  • The hybrid deduction was represented by the deduction of the amortization quota of the foreign-originated goodwill by the Swiss parent company but did not lead to the inclusion of the corresponding (taxable) positive item in Italy (i.e., the country where a permanent establishment of the Swiss entity was deemed to exist).
  • The "link between the imported mismatch payment and the hybrid deduction" arises from the circumstance that the COGS financed the hybrid deduction, in that the revenue corresponding to the COGS paid by the Italian company vis-à-vis its Swiss parent company have been offset due to the deduction of the amortization quota of the foreign-originated-goodwill.

Given the foregoing, the Italian tax authorities considered the imported hybrid mismatch rule laid down by Article 8(3) of the Italian ATAD Decree as applicable and, consequently, denied the deductibility of the COGS incurred by the Italian affiliate acting as LRD, up to the value of the depreciation quota of the foreign-originated goodwill from which the Swiss parent benefitted.

Notably, this solution (from the perspective of the Italian tax authorities) applies irrespective of the fact that the revenue of the Swiss principal was subject to tax both in Switzerland and in the US, as a result of the US CFC regime, since in their opinion no equivalent adjustment under Article 8(3) of the Italian ATAD Decree materialized.

The position taken by the Italian Tax Authorities may be disruptive for several MNEs having similar structures in place. In this regard, we would recommend a review of the business model aimed at redesigning it where necessary in accordance with the Italian anti-hybrid rules and/or to implement specific anti-hybrid documentation covering all transactions that may be at risk of being challenged by the Italian tax authorities according to this interpretation.

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