Permanent establishment in Italy Legal and tax aspects of a foreign subject
How can a foreign company carry out a business in Italy? Types of business organizations: • The representative office (“ufficio di rappresentanza”) • The branch (“sede secondaria”)
The representativeoffice It’s the simplest business structure available to a foreign company, because it has: • No legal registration formalities • No financial statement • No corporate tax
A representative office does not allow a foreign investor to handle commercial or financial transactions of any kind, • nor can it act as an agent or distributor of a foreign company.
Branch • Foreign investors who do not want to incorporate an Italian subsidiary may conduct their business in Italy through a registered branch.
It is a permanent establishment; • Profits are subject to italian corporate tax; • A tax return must be filed.
The permanent establishment in italian regulation • Before the Tax reform occurred in Italy in 2004, the term Permanent establishment was used only in treaties to avoid double taxation, which follow the wording of the OECD model. • In this respect, a definition of the term "permanent establishment" has been introduced into domestic legislation with effect from financial years staring on or after 1 January 2004 (Art. 162 T.U.I.R.).
The definition follows the wording of Art. 5 of the OECD MC, with the following deviations: • computers and auxiliary equipment for the collection of information and the transmission of data for the sale of goods or services will not of themselves constitute a permanent establishment; and • maritime trade agents or trade brokers entitled to manage vessels of non-residents will not of themselves constitute a permanent establishment.
Another difference concerns the building site or construction or installation project that: • constitutes a permanent establishment only if it lasts for more than 12 months, according to Art. 5(3) OECD model; • 3 months under the domestic law.
The Italian law allows the foreign entity to choose the regulation included in the Double Tax Treaties when this is more favourable than the domestic one is.
PE for VAT purposes • The Italian legislation does not state any notion of the PE for VAT purposes • it can be taken out by the EC VAT Sixth Directive and particularly by the Art. 9(1) of the mentioned Directive, which considers a fixed establishment.
The absence of a proper concept of a permanent establishment for VAT purposes has been the reason of many court cases in the matter also before the European Court of Justice, • mainly caused by the fact that the fixed establishment has been often interpreted as a Permanent Establishment under Art. 5 OECD Model Tax Convention.
the case "Berkholz" • The main focal point still remains the court decision of the Court of Justice regarding the Case “Berkholz” (No. C-168/84), • where it is stated a concept of fixed establishment other than the usual concept of permanent establishment for income tax purposes.
The "human" and "technical" elements • Precisely it is laid down the needed co-existence of the "human" and "technical" elements for having a fixed establishment apart from the obvious requirement of making transactions (the latter being the basis for the VAT taxation).
The “Philip Morris”case • the Italian Supreme Court in the "Philip Morris" case has clarified once more that the concept of fixed establishment has a proper meaning for VAT purposes; • And has recalled the interpretation given by the European Court of Justice, which stresses the need of the existence of the human element of the existence of the fixed establishment for VAT purposes.
Tax fulfilments • Branch’s establishment must be notified to the local tax office within 3 months; • Italian tax authority assign a tax code; • Branch’s taxation is similar to corporations with some exceptions
Branch’s profits are liable to : • Corporate tax (IRES) 33% • Local tax (IRAP) 4,25%
Taxable base • the taxable income for IRES results from the ordinary accounting of the Italian branch in Italy, but some items considered not deductible. • The IRAP taxable base is similar to the corporate tax one, but the costs of personnel and financial costs are not deductible.
tax losses • tax losses of branches can be carried forward for 5 tax years; • only for IRES purposes. • losses incurred in the first three years of activity may be carried forward for an unlimited number of tax years.
In general a branch is subject to a taxation very similar to the corporations excepting for the following differences: • No branch remittance tax applies, i.e., no withholding taxes or similar levies on branch's remittances of net profits to the head office, regardless of whether it is located within the EU or some where else; • The sale of the assets of a branch is generally subject to tax, while the sale of the shares of a local subsidiary can be exempted from Italian taxation in accordance with the majority of the tax treaties signed up by Italy.
VATFulfilments • The opening of a branch must be notified to the local VAT office within 30 days, • The local VAT office assigns a VAT code (partita IVA in italian),
A branch in Italy of a foreign enterprise is subject to the value added tax on goods delivered, on services rendered as well as on imports. • The standard rate is levied at 20%, the reduced rate is 10% and the minimum rate is 4%. • Monthly/quarterly (depending on the annual turnover),the branch must pay the difference between the VAT charged to their customers and the VAT debited to them by their suppliers in the same period.
If the credit exceeds the VAT liability, the credit may be carried forward so that it can be deducted in the following period (month or quarter) and so on until the end of the calendar year. • The balance not offset in the annual VAT return can be deducted in the following months/quarters of the subsequent year. • The refund must be claimed by filing the annual VAT return.