Italian law provides for several tax crimes in connection with both fraudulent and non-fraudulent conducts of taxpayers.
The most relevant fraudulent conducts that are punished as a crime under Italian law are the following:
i. Fraudulent tax return through the use of invoices or other documents concerning fictitious transactions (Section 2 of Legislative Decree No. 74/2000). Such crime punishes whoever, in order to evade income tax or value added tax, using invoices or other documents for fictitious transactions, indicates fictitious taxable elements in the tax return.
ii. Fraudulent tax return through other fraudulent means (Section 3 of Legislative Decree No. 74/2000). Such crime punishes whoever, in order to evade income tax or value added tax, by carrying out objectively or subjectively fake transactions or by using fake documents or other fraudulent means capable of hindering the assessment and misleading the tax authorities, indicates in one of these tax returns positive items for an amount lower than the actual amount, or fictitious credits, or fictitious withholding taxes, when, jointly:
(a) The tax evaded is higher than thirty thousand euros;
(b) The total amount of the undeclared positive items, also by indicating fictitious passive elements, is more than 5% of the total amount of the positive items indicated in the return, or, in any case, is greater than one million five hundred thousand euros, or if the total amount of the fictitious credits and withholdings decreasing tax is greater than 5% of the amount of the tax or in any case, amounts to thirty thousand euros.
iii. Issuance of invoices or other documents for fictitious transactions (Section 8 of Legislative Decree 74/2000). Such crime punishes whoever, in order to allow third parties to evade income tax or value added tax, issues invoices or other documents for fictitious transactions.
iv. Concealment or destruction of accounting documents (Section 10 of Legislative Decree 74/2000). Such crime punishes whoever, in order to evade income or value added tax, or to allow the evasion to third parties, conceals or destroys all or part of the accounting records or documents that must be kept, in order to obstacle the assessment of income or turnover.
v. Undue offsetting of taxes (Section 10-quater of Legislative Decree 74/2000). Such crime punishes whoever offsets non-existent or undue tax credits against tax debts.
The most relevant non-fraudulent conducts that are punished as a crime under Italian law are the following:
vi. False tax return (Section 4 of Legislative Decree No. 74/2000). Such crime punishes whoever, in order to evade income or value added tax, fails to indicate positive items in the tax return when, jointly:
(a) The tax evaded is higher than a hundred thousand euros;
(b) The total amount of the undeclared positive items, also by indicating fictitious passive elements, is more than 10% of the total amount of the positive items indicated in the return, or, in any case, is greater than two million euros.
vii. Omitted tax return (Section 5 of Legislative Decree No. 74/2000). Such crime punishes whoever, in order to evade income, value added tax or withholding taxes, fails to file a tax return, provided that the unpaid tax is higher than EUR 50,000.
A criminal investigation can start either as a result of a tax audit of the Italian tax authority (Agenzia delle Entrate) or the Italian tax police (Guardia di Finanza) or as a result of an autonomous initiative of the Italian Public Prosecutor.
In general terms, it is very common that tax audits into large taxpayers result in criminal investigations. This because, pursuant to Italian law, certain tax evasion conducts are criminalized even in the absence of a fraudulent behavior, if some (low) thresholds of tax evasion are exceeded. This happens in almost all cases where the Italian tax authority or the Italian tax police assess an undeclared permanent establishment of a non-Italian company, which entails a criminal investigation for omitted tax return.
In case of transfer pricing assessments, the preparation of transfer pricing documentation compliant with Italian transfer pricing regulation generally prevents criminal investigations into the taxpayer.
No, because the tax and criminal proceedings are two separate proceedings that, at least from a pure technical perspective, are not intermingled. Criminal proceedings are triggered because of tax criminal law provisions, irrespective of any tax penalty that may be imposed under tax law.
Criminal intention (i.e., mens rea) is a requirement.
Filing spontaneously an amended tax return before the initiation of a criminal proceedings may, in some cases, prevent the initiation of criminal proceedings for certain tax crimes. A full payment of tax is required.
The prosecutor can prosecute tax crimes on their own initiative. However, most criminal proceedings for tax crimes arise from the initiative of Italian Tax Authority / Italian Tax Police, because of tax audits conducted by them into the taxpayer. The Italian Tax Authority / Italian Tax Police report all the findings identified during the tax audit in a tax audit report, which is subsequently transmitted to the prosecutor.
As a matter of fact, the prosecutor, in carrying out preliminary investigations, relies in the majority of cases exclusively on the tax audit report / tax assessments and, only in a limited number of cases, carries out additional investigations.
The statute of limitations for the most relevant tax crimes is as follows:
i. Fraudulent tax return through the use of invoices or other documents concerning fictitious transactions (Section 2 of Legislative Decree No. 74/2000): 10 years and 8 months - 13 years and 4 months in case of in case of interrupting acts (for crimes committed after October 19, 2021, the first degree sentence - in case of conviction - permanently interrupts the course of the statute of limitations. Nevertheless, in the event of a declaration of annulment leading to the regression of the proceedings to the first instance or to an earlier stage, the statute of limitations starts to run again from the date of the final judgment of annulment).
ii. Fraudulent tax return through other fraudulent means (Section 3 of Legislative Decree No. 74/2000): 10 years and 8 months - 13 years and 4 months in case of in case of interrupting acts (for crimes committed after October 19, 2021, the first degree sentence - in case of conviction - permanently interrupts the course of the statute of limitations. Nevertheless, in the event of a declaration of annulment leading to the regression of the proceedings to the first instance or to an earlier stage, the statute of limitations starts to run again from the date of the final judgment of annulment).
iii. Issuance of invoices or other documents for fictitious transactions (Section 8 of Legislative Decree 74/2000): 10 years and 8 months - 13 years and 4 months in case of in case of interrupting acts (for crimes committed after October 19, 2021, the first degree sentence - in case of conviction - permanently interrupts the course of the statute of limitations. Nevertheless, in the event of a declaration of annulment leading to the regression of the proceedings to the first instance or to an earlier stage, the statute of limitations starts to run again from the date of the final judgment of annulment).
iv. Concealment or destruction of accounting documents (Section 10 of Legislative Decree 74/2000): 9 years and 4 months - 11 years and 8 months in case of in case of interrupting acts (for crimes committed after October 19, 2021, the first degree sentence - in case of conviction - permanently interrupts the course of the statute of limitations. Nevertheless, in the event of a declaration of annulment leading to the regression of the proceedings to the first instance or to an earlier stage, the statute of limitations starts to run again from the date of the final judgment of annulment).
v. Undue offsetting of taxes (Section 10-quater of Legislative Decree 74/2000): 6 years - 7 years and 6 months in case of in case of interrupting acts (for crimes committed after October 19, 2021, the first degree sentence - in case of conviction - permanently interrupts the course of the statute of limitations. Nevertheless, in the event of a declaration of annulment leading to the regression of the proceedings to the first instance or to an earlier stage, the statute of limitations starts to run again from the date of the final judgment of annulment).
vi. False tax return (Section 4 of Legislative Decree No. 74/2000): 8 years - 10 years in case of in case of interrupting acts (for crimes committed after October 19, 2021, the first degree sentence - in case of conviction - permanently interrupts the course of the statute of limitations. Nevertheless, in the event of a declaration of annulment leading to the regression of the proceedings to the first instance or to an earlier stage, the statute of limitations starts to run again from the date of the final judgment of annulment).
vii. Omitted tax return (Section 5 of Legislative Decree No. 74/2000): 8 years - 10 years in case of in case of interrupting acts (for crimes committed after October 19, 2021, the first degree sentence - in case of conviction - permanently interrupts the course of the statute of limitations. Nevertheless, in the event of a declaration of annulment leading to the regression of the proceedings to the first instance or to an earlier stage, the statute of limitations starts to run again from the date of the final judgment of annulment).
For tax crimes connected with tax return filed by taxpayer, the statute of limitations runs from the date of filing of the tax return. For the crime of omitted tax return, the statute of limitations run from the date when the tax return should have been filed.
Most tax crimes are sanctioned with imprisonment. The highest applicable custodial penalty is up to eight years. However, pursuant to Italian law, even upon conviction to a custodial penalty, the offender may benefit from several regimes that prevent imprisonment to apply. In addition to custodial fines, criminal fines and confiscation of profit may apply as well.
Yes, a compliance organizational model along the lines set with Law 231/2001 (which sets forth corporate criminal liability) can mitigate criminal liability for a Company in Italy.
There is a formal procedure that is applicable only to non-Italian taxpayer that overcome certain thresholds in terms of turnover / income, who may settle all tax debts related to a possible non-registered permanent establishment in Italy for previous years, after negotiation with the Italian tax authorities, in exchange of the exclusion of criminal penalties and other tax benefits. Amongst the conditions subject to which the procedure applies, it is requested that non-Italian taxpayer shall have carried out its business in Italy connected to the non-registered permanent establishment through the support of an Italian resident entity or Italian permanent establishment of a non-resident company part of the same multinational group.
In addition, the voluntary disclosure of tax violations that may result in certain tax crimes before any assessment / audit activity may prevent the initiation of criminal proceedings. A full payment of tax is required.
Even in case where the voluntary disclosure of a violation is not sufficient to block prosecution, because the law does not allow for such an immediate effect, such a disclosure may de facto mitigate the likelihood of prosecution and will reduce the potential sentence and fines.
Under Italian tax law, taxpayers can fully pay assessed taxes, interest and penalties to close the dispute under the tax proceedings. This payment, however, has no automatic impact per se on the criminal proceedings, since the tax and criminal proceedings are independent from one another. Nonetheless, the fact that the taxpayer has fully paid assessed taxes, interest and penalties (i) may be factored-in by the public prosecutor as a favorable element when evaluating whether to indict or not a person for a tax crime; and (ii) in any case, determines reduction of criminal penalties up to 1/2 in case of conviction if a settlement is reached before the first hearing of the trial.
To date, the prosecution of a tax offense has no impact on the statute of limitation for tax assessment purposes.
Nevertheless, only in the past, i.e. until fiscal year 2015, the perpetration of a tax offense affected the statute of limitations for tax assessments. Indeed, until FY 2015, if there were clues about the commission of a tax offense, assessment deadlines, in connection with the year in which the offense was committed, were doubled if the tax crime notice was submitted within the ordinary statute of limitations applicable at that time.
As of fiscal year 2016, the doubling of assessment deadlines was repealed. Currently, the applicable statute of limitations is as follows:
- In case of adjustment of a tax return filed by the taxpayer, December 31 of the fifth year following the one in which the tax return was filed;
- In case a taxpayer failed to file a tax return, December 31 of the seventh year following the one of failure to file the tax return.
Yes.
Under Italian tax law, taxpayers can reach a settlement agreement with ITA in order to amicably close the dispute. This settlement, however, has no automatic impact per se on the criminal proceedings, since the tax and criminal proceedings are independent from one another. Nonetheless, the fact that the taxpayer has reached a settlement agreement with the ITA (i) may be factored-in by the public prosecutor as a favorable element when evaluating whether to indict or not a person for a tax crime; and (ii) in any case, determines reduction of criminal penalties up to 1/2 in case of conviction if a settlement is reached before the first hearing of the trial.
Under Italian criminal law, a plea bargain may be reached with the public prosecutor and shall be validated by the judge.
Both individuals (generally speaking, directors and employees in charge of tax matters) and companies may be prosecuted for a tax crime.
In general terms, criminal liability in Italy is on individuals only. However, corporate criminal liability under Law 231/2001 (Italian law on corporate criminal liability) can be triggered for crimes under 1.(i)-(iv) above. As to crimes under 1.(v)-(vi) above, corporate criminal liability under abovementioned Law 231/2001 can be triggered if these are committed in the context of cross-border fraudulent schemes with the purpose of evading value added tax amounting to not less than ten million euros.
Yes, foreign employees or directors can be prosecuted.
The Company is in any case liable for the amounts claimed in the context of the tax proceedings. The Company may be liable for the amounts claimed in the context of the criminal proceedings in case of confiscation.
In general terms, over the last decade, there has been an increase of the criminal prosecution of tax crimes in Italy, particularly with respect to permanent establishments and VAT.