“Foreign Dressed” Companies: New Rulings by the Court of Cassation

da Valeria Tempesti | Mag 10, 2022 | Blog

The Court of Cassation, with rulings no. 11709 and 11710 of April 11, 2022, has returned to deal with “esterovestizione“, which, literally translated, means “foreign dressed” companies.

The issue of “foreign dressed” companies has been the subject of many judjments of the Supreme Court over the years. Which, in numerous rulings, has defined it as “the fictitious localization of the tax residence of a company abroad, in a country with more advantageous tax treatment than the national one, to avoid the more burdensome national regime“. In other words,it is the case of a company that pretends to be resident abroad, in order not to be subject to the Italian tax regime, but which in fact is resident in Italy according to the provisions of the law.   

In fact, article 73 of DPR 917/1986 (Italian Tax Code) includes three indicators to determine when a company is resident in Italy. The article states that “companies and bodies are considered resident if they have their registered office, headquarters or main purpose in the territory of the State for most of the tax period“.  




However, it is worth remembering that a company that transfers its business to a foreign country does not, per se, engage in any evasive or abusive behavior according to the principle of freedom of establishment, based on which taxpayers are generally free to choose the organizational structures and operating methods they deem most suitable for their economic activities, even if this choice allows them to obtain favorable tax treatment.   

However, for there to be abuse of this freedom of establishment, thus implementing a “corporate transfer”, it is necessary to verify whether the transfer abroad is real and corresponds to the effective exercise of a substantial and stable economic activity in the host country. In fact, it is necessary to understand whether the operation put in place is artificial and involves the setting up of a fictitious structure that does not correspond to the economic reality.  

In relation to the Supreme Court judjments and the case being assessed by the “Guardia di Finanza”, the dispute concerned a company with registered office in China, a subsidiary of an Italian company, which was engaged in the manufacture of electrical equipment.   

Among the factors that led the inspectors to consider this company as resident in Italy for tax purposes are the following   

  • the presence of three individual’s resident in Italy on the board of directors of the Chinese company 
  • two of the above-mentioned directors had never been to China during the relevant tax periods while the third, although he had been there, had, by his own admission, visited the country to carry out activities unrelated to his role as director  
  • the aforesaid directors also held senior roles within the Italian company that controlled the Chinese subsidiary.  

 In short, therefore, it was contested that these directors, also through the departments that they managed in the Italian parent company, gave the directives for the administrative and operational management of the foreign company, while the local managers did not have any substantial power (not even in terms of commercial management on contractual and commercial issues). Therefore, it was deemed that the headquarters of the Chinese subsidiary had to be located in Italy and that (pursuant to art. 73 paragraph 3 of the Consolidated Income Tax Act) such company was to be considered resident in our country.   

 The pronouncements of the Supreme Court, by extensively arguing the above summary, highlight an interesting point regarding the concept of “abusive” foreign dressed companies. In fact, the Supreme Court has clarified how the ratio and function of art. 73 paragraph 3 of the TUIR are simply to indicate the criteria of connection between taxable persons and the territory of the Italian State. Therefore, the contestation of “foreign dressed companies” based on this rule does not necessarily have to take into consideration the presence of a tax advantage that the company can derive from the establishment in a foreign State. In other words, companies found to be foreign invested are not always abusive structures, but their tax residence in Italy can also be ascertained based on the criteria of the above-mentioned regulation.   

 Another interesting point is linked to the concept of “place of effective managementseat of administration“. The Supreme Court, clarifing that this concept coincides with the place where the corporate bodies dictate the impulses necessary for carrying out the activity (such as, for example, the place where management and administrative activities are carried out, where the meetings of the top bodies are convened, etc.), has continued its analysis by concluding that the criteria set out in article 73, paragraph 3, should be read in conjunction with further evidence regarding the place where the main activity of a company is carried out. This is because the place where the company’s main object is carried out would not constitute a requirement but would integrate the concept of actual registered office.  


The Supreme Court has highlighted a very important issue which is constantly debated and on which multinational groups must always question themselves in the structure and governance of foreign companies controlled by Italian companies, especially in the organization of the ordinary management of the company and of the persons assigned to this task, who are part of the administrative body. We will follow further developments in this regard to better understand  “foreign dressed companies”. 



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