Italy: an updated definition of Permanent Establishment
By Roberto M. Cagnazzo, Studio Tributario Cagnazzo
The Italian Budget Law 2018 has introduced substantial modifications to the domestic definition of permanent establishment (PE). The changes consist mainly in the redefinition of the traditional classification and criteria for the identification of the ‘material’ and ‘personal’ PE. The lawmaker has made these changes in line with the new provisions of the OECD Base Erosion and Profit Shifting project (BEPS), the OECD Model Tax Convention on Income and on Capital and the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.
It is important to point out that the domestic definition applies only if there is no double tax treaty or if it is more favourable than that provided for in the double tax treaty.
The first amendment regards the introduction of a new typology of PE in the so-called ‘positive list’.
According to Article 162, Par. 2, of the Income Tax Code (ITC), the term PE means a fixed place of business through which a non-resident enterprise wholly or partly carries on its business in Italy. In particular, the provision clarifies that the term includes:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;
(g) a significant and continuous economic presence in the territory of the State, built in such a way that it does not look to have a physical presence in that territory.
The new Subparagraph (g) of the list specifies that a ‘significant and continuous economic presence’ also constitutes a PE in Italy even without a significant physical presence of the non-resident enterprise. Clearly, the definition refers to those typical situations of the digital economy in which an enterprise participates on a regular and continuous basis to the economic life of a country without having a physical presence there due to the use of technology. However, it is important to point out that this new typology may also affect non-resident enterprises operating in businesses other than the digital economy.
The second amendment regards the replacement of the typologies that do not constitute a PE in the so-called ‘negative list’.
According to Article 162, Par. 4, of the ITC, the term PE does not include:
(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;
(e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity;
(f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e).
In this specific case, the lawmaker, moving from an ‘automatic’ to a ‘caseby- case’ approach, has decided that the inclusion of a specific activity in the negative list will be based on the fact that the said activity, whether taken individually or in combination with other activities of the list, is of a preparatory or auxiliary character.
The third amendment regards the introduction of a so-called ;anti-fragmentation rule; that completes the said changes in the negative list.
According to Article 162, Par. 5, of the ITC, the exclusions in the negative list do not apply if the activities are ‘fragmented’ among group companies in order to meet the exceptions for activities that have preparatory or auxiliary nature.
In brief, if one or more related enterprises carry on a number of activities in Italy, a PE occurs if:
- there is a PE in Italy, or
- the overall activity resulting from the combination of the activities carried on by the enterprise or closely related enterprises is not of a preparatory or auxiliary character.
In both cases, for the rule to apply, the activities must constitute ‘complementary functions that are part of a cohesive business operation’.
The fourth and final amendment regards the introduction of the definition of ‘personal’ PE in line with the provisions of the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.
According to Article 162, Par. 6, of the ITC, a ‘personal’ PE occurs if the following two conditions are met:
- an individual (whether resident or not) acts in Italy on behalf of a non-resident enterprise and regularly concludes contracts or perform acts for the purpose of concluding contracts without substantial modification by the said enterprise;
- the contracts are concluded in the name of the enterprise or relate to the transfer of ownership or the granting of the right to use of property owned or used by the enterprise, or which relate to the provision of services by the enterprise.
Obviously, a personal PE does not occur if the individual limits his duties to those of a preparatory or auxiliary nature. From 2018 onwards, therefore, a multinational group, to verify if the minimum requirements for the existence of a PE in Italy are met, has no longer to refer only to the single legal entity and its activities, but has to extend the investigation, in an overall perspective, to the functions carried out in Italy by the other entities belonging to the same group.
At the beginning of 2018, the Tax Authorities issued the first operational guidelines to carry out the audits to prevent multinational groups from avoiding the status of permanent establishment by pulverising their business into numerous micro-operations that, if considered individually, would lack the minimum level required to get an autonomous tax relevance.
Prof Dr Roberto M. CagnazzoStudio Tributario Cagnazzo, Torino, Italy
T: +39 011 580 8352
Studio Tributario Cagnazzo is a “boutique” firm mainly focused on providing integrated tax advice and assistance all over Italy to corporations, banks, multinational groups and high-net-worth individuals on a wide range of domestic and international tax and corporate issues. The company provides its clients with specialist knowledge for strategic advice that ranges from corporate tax systems to extraordinary financial transactions, such as domestic and cross-border reorganisations, IPOs, takeover bids, and M&A.
Prof Dr Roberto M. Cagnazzo, Founder and Partner, is a Chartered Accountant and Statutory Auditor with considerable expertise in domestic and international taxation acquired as Head of Tax in some of the leading listed Italian multinational groups and as Professor of Tax Law and International Tax Law at the University of Torino.
Published: May 2018 l Photo: Boris Stroujko - Fotolia.com