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

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...