In Germany, the term 'Auslandsbekleidung' (foreign management, ital. esterovestizione) is used when a limited liability company (Srl) is formally based in Italy but is actually managed from abroad (in this case, Germany). This issue often concerns German corporate groups that manage a subsidiary/branch in Italy and whose managing director (amministratore) resides in Germany.
Definition and delimitation
In Italian tax law, however, the term esterovestizione actually refers to the opposite case: a company formally established abroad for the purpose of evading Italian taxes, whose effective management is exercised from Italy. This article deals with the 'reverse' situation, in particular the case of an Italian company managed from Germany (also known in Italian as esterovestizione inversa).
Pursuant to Article 73, paragraph 3, of the Consolidated Income Tax Law (TUIR), a company is considered resident in Italy if it meets at least one of the following criteria:
- its registered office (sede legale) is located in Italy,
- the place of effective management is located in Italy,
- the place where the company's ordinary management is mainly carried out.
Only one of these characteristics is sufficient to determine tax liability in Italy.
When is there a risk?
The risk of so-called 'esterovestizione' (foreign incorporation) only exists if the Italian company does not carry out any real activity in Italy, but exists only on paper.
This would be the case, for example, if:
- there are no employees or business premises in Italy,
- all decisions and accounting records are made exclusively in Germany,
- the company has no customers of its own and does not generate any turnover in Italy.
In such cases, the German tax office could argue that the effective management ("head office") is located in Germany. This would result in dual residence, which would have to be resolved on the basis of the double taxation agreement between Germany and Italy.
When is there no risk?
In practice, this situation does not pose any problems for German entrepreneurs if the Italian company is operational, i.e. it has its own employees, premises, customer relationships or orders in progress and turnover in Italy. In this case, the business clearly remains taxable in Italy, even if the managing director lives in Germany and makes strategic decisions from there.
Example: An Italian limited liability company (Srl) employs five people in Milan, provides services to customers in Italy and is wholly owned by a German limited liability company. The managing director resides in Germany and manages the business from the Italian headquarters.
In this case, there is no tax or foreign relocation risk.
The company is legally resident in Italy and is subject to corporation tax (IRES) and regional tax on productive activities (IRAP).
Recommendation
German entrepreneurs therefore do not need to worry if they manage an Italian company from Germany. It is essential that the company has actual economic substance in Italy, for example through:
- local employees or service providers and/or
- an office or permanent establishment and/or
- the preparation of annual financial statements and tax returns in Italy.
These points clearly demonstrate that the company is not a shell company, but a genuine Italian business.
Conclusion
So-called 'esterovestizione' does not pose a threat to German entrepreneurs who carry out operational activities in Italy.
As long as there are, for example, staff or operational activities in Italy, the company is clearly considered resident in Italy for tax purposes, even if the managing director lives in Germany. Only fictitious or shell companies that exist only on paper and are not operational could be subject to dispute. Nevertheless, taxation in Germany should be clarified between accountants in Germany and Italy.
Further information is available in our glossary entries on corporation tax (IRES) and limited liability companies (Srl) in Italy or permanent establishments in Italy.