Focus on Italian permanent establishment regulations
Italian regulations around permanent establishment (PE) have been under the spotlight since a number of changes were introduced by a decree reforming tax ruling procedures in October 2015.
“Companies carrying out multinational activities” may start a dedicated procedure aimed at reaching a five-year validity agreement with Italy’s Inland Revenue, concerning:
- transfer prices applied in controlled transactions and determination of assets and liabilities’ fiscal value whereby an Italian company becomes non-resident or a foreign company becomes Italian tax resident
- identification of a foreign company’s PE in Italy
- determination of income/loss to be attributed to the foreign company’s PE in Italy
- payment of dividends, interest and royalties to/from foreign entities.
With regards to b) and c), foreign companies which are considering operations in Italy may initiate this procedure and open early consultations with the Italian tax authorities in order to assess the potential identification of an Italian PE. However, consultations on this matter should be shared with the other state’s tax authorities through a ‘Mutual Agreement Procedure’.
Moreover, the decree aligned the Italian rules on profit attribution to PE with the OECD “functionally separate entity” approach (Report on the attribution of profits to Permanent Establishments”, 22 July 2010). On the basis of the Italian corporate income tax code, the PE attributable income and its “free” capital shall result from an analysis of functions performed, risks assumed and assets used by the PE, and be considered as a functionally separate and independent entity. Furthermore, the prices applied to transactions between PE and its parent company must be set in compliance with the arm’s length principle.
The decree also provides an optional “branch exemption” regime, an alternative to “foreign tax credit” relief, which allows Italian companies to be exempt from tax on their foreign PE income and losses from outside Italy.
The PE tax framework is rapidly evolving and companies should re-examine domestic rules in conjunction with recent OECD BEPS Action Plans to allow a revision of current flows and implementation of more effective tax value chain models.
For more information, contact:
Gian Luca Nieddu or Federico De Rosa
Hager & Partners, Italy
T: +39 (02) 7780711