The development of a judicial anti-abuse principle in Italy

In a recent series of decisions culminating in 2008 and 2009 the Italian Corte di Cassazione (the “Cassazione”) introduced a new judicial anti-abuse principle into the Italian tax system. According to this principle the transactions carried out by the taxpayers which have the exclusive goal of obtaining a tax benefit are deemed to constitute tax abuse, and therefore the tax effects of such transactions can be disregarded by the tax authorities. The arguments used by the court in virtually all the cases is based on a common structure which can be summarized as follows. There is no doubt that the taxpayer can freely choose to carry out its activities in the most effective way to reduce the tax burden, as the freedom to conduct private economic activities is expressly protected by Article 42 of the Italian Constitution. The limit to the exercise of such a freedom is the inappropriate use of legal arrangements which amount to an abuse of law (“abuso della forma giuridica”). Such an abuse results from the selection of a particular legal arrangement whose exclusive goal is to obtain a tax reduction, and therefore is an abuse of a fundamental right (the freedom to conduct private economic activities) provided for by the domestic legal system and community law. The paper analyses in general the case law of Cassazione and focuses in particular on Cassazione, case n. 1465, January 21, 2009. This decision confirms that the anti-abuse principle operates on a case-by-case analysis of the facts of the transaction and commits the Cassazione in the future to factual analysis on economic substance and valid business reasons. This probably is a more important case than the whole series of anti-abuse cases as, for the first time, the Cassazione has adopted a substance over form approach. It can be argued that this constitutes the common core of existing approaches to tax avoidance. In this approach, the letter of the law and the literal approach are abandoned in favour of a practical analysis of the transaction. The language adopted by the Italian court sounds similar to the leading cases in the subject matter in the United Kingdom and United States. As a result of this last case a factual analysis of the transactions and especially any commercial purpose behind the transaction, may become the pivotal element in anti-avoidance cases in Italy.