June 01, 2004 | By Keith Martin in Washington, DC

Italy ruled out deductions for payments to tax havens.

Italy refused in April to let an Italian company deduct payments it made to a company in Lichtenstein for services. Payments to companies located in tax havens cannot be deducted unless the Italian taxpayer making the payments can show that the recipient conducts a real business in the tax haven or that there was a business purpose for the arrangement. The taxpayer in this case claimed a business purpose: it argued that the Lichtenstein company helped it bring in another customer worth €1.2 million a year. The Italian authorities were not persuaded.

The ban against deductions only applies to payments to companies in tax havens outside the European Union. Thus, a payment to a company in Holland or Luxembourg would not be affected.

Keith Martin