When does VAT apply within the relationship between a
parent company and a permanent establishment in Italy? Like many
family relationships, the rules are rather complex.
Art. 9, par. 1 of Directive 2006/112/EC on the common system of
value added tax, defines a "Taxable Person" as any person
who, independently, carries out any economic activity in any place,
whatever the purpose or results of that activity.
By its very nature, a Permanent Establishment does not
independently carry out any economic activity because it is a
non-temporary place of business used by a non-resident business
enterprise to carry out its business activity (producing income in
another country). Therefore, according to European Community
legislation, a Permanent Establishment is not a Taxable Person for
However, art. 7 par. 1 lit. d) of Italian Presidential Decree
no. 633/1972 establishing and regulating value added tax expressly
defines Permanent Establishments of foreign entities as
"Taxable Persons established on Italian territory"
exclusively in relation to transactions to which they are party.
When read in the context of the supranational legislation, this
definition means that every Permanent Establishment residing on
Italian territory is a Taxable Person for VAT purposes with respect
to dealings with third parties, but not with respect to dealings
with its Parent Company.
The Italian Revenue Agency ruled to that effect in Resolution
no. 81/E of 16 June 2006 which cited case C-210/04 of the Court of
Justice of 23 March 2006, essentially confirming that "a fixed
establishment, which is not a legal entity distinct from the
company of which it forms part, established in another Member State
and to which the company supplies services, should not be treated
as a taxable person by reason of the costs imputed to it in respect
of those supplies" (concluding with the express revocation of
Resolution no. 330470 of 20 March 1981).
Nevertheless, although the spirit of the cited regulations
appears to make VAT entirely inapplicable in respect of dealings
between a Permanent Establishment and its Parent Company, Community
regulations and the Italian regulations which implement them
contain certain provisions that appear to limit such
inapplicability to services only, subjecting to VAT all
transactions that relate to transfers of goods.
In particular, art. 38 c. 3 l. b) of Italian Legislative Decree
no. 331/1993 states that the entry into Italian territory by or on
behalf of a Taxable Person of goods from other Member States is
equivalent to an intra-Community acquisition and is therefore
subject to VAT. Moreover, "the provision shall also apply in
the case of goods destined to Italian territory for purposes of
company business from other undertakings belonging to the same
entity in another Member State".
Similarly, art. 41 para. 2 lit. c) of Italian Legislative Decree
no. 331/1993, equates the following to an intra-Community sale:
"sending goods, which are not covered by paragraph 3 below,
into the territory of another Member State by means of
transportation or shipment by the Taxable Person within Italian
territory or by third parties on its behalf".
Therefore, the provisions cited mean that movements of goods
from one State to another are subject to tax, regardless of the
fact that they constitute a supply made against payment or that
they relate to a Permanent Establishment. The movement of goods
from one Member State to another constitutes an intra-Community
sale-supply in the country of departure and an intra-Community
acquisition in the country of arrival, where the tax is due.
In its Circular no. 29 of 28 March 2002, the Association of
Italian Joint Stock Companies (commenting on the Resolution no.
66/E of 9 January 2002) expressly confirmed that, under certain
conditions, VAT may apply in transactions between the Permanent
Establishment and the Parent Company citing, by way of example, the
movement of goods into the territory of another Member State
between operational units forming part of a single entity.
With regard to the importance of the VAT relationship between
branches belonging to the same non-resident entity, no official
guidelines appear to have been issued to date by the Italian
However, the Ministerial Statement on Italian Legislative Decree
no. 191/2002 gives a valid indication of the treatment of the
transfer of goods between Parent Company/Branch and confirms the
concept of the permanence of the entity's unitary identity. In
this regard, it would seem reasonable to infer that relationships
between Branches belonging to the same entity should have the same
VAT treatment as transactions between Parent Company and
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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