Italy: A New Definition Of Permanent Establishment In Italian Domestic Income Tax Law

Last Updated: 16 April 2018
Article by Ruchelman PLLC

Article by Stefano Loconte and Linda Favi (guest authors)

Effective January 1, 2018, Italy's 2018 Budget Law1 significantly amended the domestic definition of permanent establishment ("P.E.") and implemented certain O.E.C.D. guidelines set forth under B.E.P.S. Action 1 (Addressing the Tax Challenges of the Digital Economy) and Action 7 (Preventing the Artificial Avoidance of P.E. Status). The law revised the definitions of both the "Fixed Place P.E." and the "Agency P.E.," by amending the text of Article 162 of the Italian Income Tax Code ("I.I.T.C.").

As regards the Fixed Place P.E., the main changes are (i) the introduction of a new item in the list of cases that are presumed to constitute a Fixed Place P.E., (ii) the modification of the specific activity exemption, (iii) the repeal of Art. 162 (5) of the I.I.T.C. regarding electronic equipment, and (iv) the introduction of an anti-fragmentation rule.

The Agency P.E. rules were changed in compliance with B.E.P.S. Action 7 recommendations concerning commissionaire arrangements.2

THE OLD RULES

Prior to the 2018 Budget Law, the definition of P.E. for Italian income tax purposes – contained in Article 162 of Presidential Decree no. 917 of 22 December 1986 (I.I.T.C.) – was modelled on the current O.E.C.D. Model Tax Convention definition.

Fixed Place P.E.

For the purposes of Corporate Income Tax ("I.R.E.S.") and Regional Tax on Productive Activities ("I.R.A.P."), Italian domestic tax law defined a P.E. to be a fixed place of business through which the business of a nonresident enterprise is wholly or partly carried on in Italy (a Fixed Place P.E.).3

Certain fixed places of business were presumed to constitute a P.E. in Italy, unless the taxpayer could provide evidence to the contrary:

  • A place of management
  • A branch
  • An office
  • A factory
  • A workshop
  • A mine, an oil or gas well, a quarry or other place for the extraction of natural resources4

On the other hand, a fixed place of business was not deemed to be a P.E. in Italy if it was used only to perform certain preparatory or auxiliary activities. These exempt activities included the following:

  • The use of an installation solely for the purpose of storage, display, or delivery of goods belonging to the enterprise
  • The maintenance of a stock of goods belonging to the enterprise solely for the purpose of storage, display, or delivery
  • The maintenance of a stock of goods belonging to the enterprise solely for the purpose of processing by another enterprise
  • The maintenance of a fixed place of business solely for the purpose of purchasing goods or collecting information for the enterprise
  • The maintenance of a fixed place of business solely for the purpose of carrying on any other preparatory or auxiliary activity for the enterprise
  • The maintenance of a fixed place of business solely for any combination of the activities indicated above, provided that the overall activity of the fixed place of business, resulting from this combination, is of a preparatory or auxiliary nature5

In addition to the exceptions listed above, the rules provided that the maintenance of electronic processors and auxiliary equipment used for the collection and transfer of data and information for the purpose of selling goods and services did not, by itself, constitute a P.E.6 This provision was intended to clarify that the mere ownership and use of a server or similar equipment in Italy did not constitute a P.E.

Agency P.E.

In comparison to the lists of conditions that constitute or preclude the existence of a Fixed Place P.E. in Italy, the old rules provided that a person that habitually concludes contracts in Italy in the name of a nonresident enterprise was deemed to be a P.E. of the nonresident enterprise (an Agency P.E.).7 One exception was provided when the person's activity was limited to the purchase of goods. Another exception was provided when the person concluding contracts in Italy was a broker, general commission agent, or any other agent of an independent status. Such persons did not constitute a P.E. when they would act in the ordinary course of a business that was carried on independently in Italy.8

THE NEW RULES

The "Digital P.E." as a Fixed Place P.E.

The 2018 Budget Law introduced a new concept of Fixed Place P.E. enacted in the context of tax measures for the digital economy. In time, the new definition may impact other businesses as well.

Under the amended text of Art. 162 (2) of the I.I.T.C., a foreign entity's significant and continuous economic presence in Italy may constitute a fixed base that could give rise to an Italian P.E. even if it does not result in a substantial physical presence.

This new P.E. definition is based on the nexus rules proposed for the digital economy by B.E.P.S. Action 1 and, in particular, on the notion of "significant economic presence," so that nonresident digital companies can trigger taxable presence in a country in ways that are not uncommon in the digital economy. These include (i) the earning of revenues from customers situated in the country, (ii) the presence of a local digital platform, (iii) the frequency of digital transactions, and (iv) the number of users.

At the same time that this new Digital P.E. concept was introduced into law, Italy introduced a Web Tax, designed to be an alternative to the income tax that applies when a foreign company does not have an Italian P.E. The Web Tax is a 3% tax on the amount realized (net of V.A.T.) for digital services supplied electronically. It will apply as of 2019 to services supplied by resident and nonresident taxpayers that carry out more than 3,000 digital transactions in a calendar year and will be levied on the recipient of the services such as Italian business taxpayers but not private individuals.

As consequence of the introduction of this new regime, Art. 162 (5) of the I.I.T.C. on servers as Fixed Place P.E.'s became redundant and was repealed.

The Specific Activity Exemption for Fixed Place P.E.'s

The list of exempting activities has been rephrased to provide that a fixed place of business will not constitute a P.E. if the taxpayer can prove that any and all activities – and not only their combination as under the old rule – have a preparatory or auxiliary nature with respect to business of the foreign entity. The amendment applies to any business activity. It may be particularly relevant for digital enterprises based abroad that maintain a stock of goods in Italy to provide prompt delivery to customers. As a consequence, the maintenance of a local warehouse and the storage of goods in the warehouse might be regarded as a core activity for digital enterprises focused on retail purchases. For these businesses, storage would not fall within the preparatory and auxiliary exemption.

The Anti-Fragmentation Rule in the Definition of Fixed Place P.E.

The 2018 Budget Law introduced the so-called anti-fragmentation rules – proposed in B.E.P.S. Action 7 – aimed at preventing foreign companies from splitting up a business into smaller units or using other related legal entities or P.E.'s to benefit from the preparatory or auxiliary exemption. In substance the new rules are designed to take into account not only the activities carried on by the same enterprise at different locations but also of the activities carried on by closely related enterprises at the same or different locations.

To this end, the new Art. 162 (5) of the I.I.T.C. now provides that the specific activity exemption shall not apply to a fixed place of business that is used or maintained by the foreign enterprise if certain conditions are met:

  • The same enterprise or a closely related enterprise carries on business activities at the same location or another location in the Italian territory.
  • The location(s) constitutes a P.E. for either enterprise under the provisions of Art. 162 of the I.I.T.C., or the overall activity resulting from the combination of the activities carried on by the two enterprises at the same place, or by the enterprise(s) at the two locations, are not of a preparatory or auxiliary character.
  • The business activities carried on by the two enterprises at the same place, or by the enterprise(s) at the two locations, constitute complementary functions that are part of a cohesive business operation.

Though this new provision will bring more clarity in applying P.E. identification rules, it is worth highlighting that Italian case law already applied an anti-fragmentation approach. The Italian Supreme Court Decision No. 20597 of 7 October 2011 ruled that it is irrelevant whether activities are carried out in Italy via several distinct entities, rather than by a single entity, for the purpose of ascertaining whether nonresident parent companies have a P.E. in Italy. Instead, the determination will be made by reference to facts and circumstances demonstrating whether the entities carried on business as parts of an economically integrated unitary structure that achieved an overall business purpose of the group with regard to activities in Italy.

The New Definition of Agency P.E.

Under the new Art. 162 (6) of the I.I.T.C., a P.E. is deemed to exist when a person acts in Italy on behalf of a foreign enterprise, and in so doing, habitually concludes or is involved in the conclusion of contracts that are routinely approved by the foreign company without material changes. Contracts covered by the new rule must be either (i) in the name of the enterprise, (ii) for the transfer of ownership or the right to use property owned or used by the enterprise, or (iii) for the provision of services by that enterprise.

In such cases, an Italian P.E. is deemed to exist unless the activities performed under the contract signed by the person acting in Italy on behalf of the foreign enterprise are limited to exempt activities described above. Consequently, agreements that are negotiated and signed by a person that are not binding until accepted abroad will be attributed to a P.E. and taxed in Italy as if the contract were legally binding prior to acceptance abroad.

New Art. 162 (7) of the I.I.T.C. provides an exception to the P.E. rule when the person acting in Italy on behalf of a foreign enterprise carries on its own business in Italy as an independent agent and acts for the enterprise in the ordinary course of that business. Note, however, that where a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related, that person will not be considered to be an independent agent with respect to any such enterprise.

For the purposes of identifying an independent agent, a person is considered closely related to an enterprise if, based on all the relevant facts and circumstances, one controls the other or both are under common control of a third person or enterprise. In any event, the requisite degree of control will exist when (i) one person or enterprise directly or indirectly possesses more than 50% of the beneficial interest in the other or, in the case of a company, more than 50% of the aggregate vote and value of the issued and outstanding share capital; or (ii) another person directly or indirectly possesses more than 50% of the beneficial interests in both persons or enterprises or, in the case of a company, more than 50% of the aggregate vote and value of the share capital in both companies.

Ultimately, these changes to the Agency P.E. definition may not have a material impact on Italian business and administrative practices, since existing Italian case law contains a broad interpretation of the Agency P.E. concept. The most relevant judicial case is Phillip Morris,9 where the Supreme Court affirmed, inter alia, the following principles:

  • The participation of officers or representatives of an Italian company in phases of the negotiation or conclusion of contracts on behalf of a related company abroad constituted an Agency P.E. even if it was not granted a formal power of representation. If, under a formal grant of authority, other nonresident companies would ordinarily execute the function of the controlled Italian company, an inchoate grant of authority would be deemed to exist, resulting in an Agency P.E. in Italy. In this respect, the Court observed that the Italian company was not acting in the ordinary course of its business when providing services to related nonresident companies that were not included in its statutory business purpose and were performed without any formal mandate by the nonresident group companies.
  • A national structure carrying on management of business transactions for the benefit of a nonresident company should be deemed to constitute a P.E. in Italy, even though only one area of the nonresident's business was managed by the domestic structure.
  • Factors indicating the existence of a P.E. in Italy, including dependence and the authority to conclude contracts, should be assessed on the basis of the substance rather than exclusively on the basis of the mere legal form of the business transactions.
  • A company situated in Italy may be deemed to be a P.E. of multiple foreign companies within the same group that pursue a common business strategy. In such instances, the nature of the activities performed in Italy will be assessed in light of the common business strategy of the group. In the view of the Court, regardless of the relationship between the Italian company and each single nonresident group company, the Italian company would be viewed to act in Italy for the benefit of the whole group. The legal and contractual relationships between the various group companies with reference to the activities performed in Italy should not be analyzed separately but should rather be considered as a whole.
  • Group companies that are subject to a unified strategy aimed at maximizing Italian profits for all nonresident companies involved have an Agency P.E. in Italy, and it is misleading to consider each fragment of the strategy separately. The Court referred to the wording of Paragraph 24 of the Commentary to Article 5 of the O.E.C.D. Model Income Tax Treaty, stating that a domestic structure could act as management office of the group in a way that has international ramifications.10

As a reaction to this interpretation, the O.E.C.D. amended the Commentary on Article 5 in 2005; however, Italian representatives at the O.E.C.D. inserted the following observation, "Italy wishes to clarify that, with respect to paragraphs 33, 41, 41.1 and 42, its jurisprudence is not to be ignored in the interpretation of cases falling in the above paragraphs . . ." Therefore, notwithstanding the fact that under Italian income tax law and constitutional law tax treaty provisions take precedence over Italian domestic provisions when they are more favorable to the taxpayer, Italian judicial interpretations of Agency P.E. override tax treaty provisions on a de facto basis.

ADVANCE RULINGS REGARDING AN ITALIAN P. E.

Because the Italian Tax Authorities quite aggressively audit the Italian operations of M.N.E.'s, it is advisable for an M.N.E. to seek advance clearance from the Italian Tax Authorities on the existence of and profit attribution to an Italian P.E. Several ruling procedures are available. Included are (i) advance tax rulings for international companies and (ii) advance tax rulings on new investments. The latter is reserved for investment projects with a significant impact on employment levels and worth at least €30 million. It would be shameful for management of an M.N.E. to invest substantial funds in Italy only to find out retroactively that a newly formed Italian subsidiary caused various group members to have a P.E. in the country.

Footnotes

1. Law No. 205 of 27 December 2017.

2. See, in detail, " O.E.C.D. Issues Proposed Changes to Permanent Establishment Provisions Under Model Tax Convention," Insights 9 (2017).

3. Art. 162 (1) of the I.I.T.C.

4. Id., Art. 162 (2).

5. Id., Art. 162 (4).

6. Id., Art. 162 (5).

7. Id., Art. 162 (6).

8. Id., Art. 162 (7).

9. Supreme Court judgments 3367, 3368, and 3369 of 7 March 2002; 431926 of 26 March 2002; 7682 and 7689 of 25 May 2002; 10925 of 22 September 2002; and 17373 of 6 December 2002.

10. In the view of the Court, the domestic structure exercised "supervisory and coordinating functions for all the departments of the enterprise located within the region concerned."

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions