New Financial Regulations For Airlines Which Operate In Italy

Last December 17, the Italian Parliament adopted a new Law N. 221 in order to stimulate economic growth in the country. Among these new measures a new provision, established in Article 38, has been introduced regarding the aviation sector.

The purpose of this Article is to level the playing field for Italian airlines and non-national airlines operating in Italy. Article 38 is designed to have a significant impact on low cost carriers, most notably Ryanair, which has not paid the same taxes as Italian carriers, in particular payroll tax. This is not the first time low cost airlines have come under scrutiny, for example, Ryanair's tax affairs were investigated by the French authorities a few years ago.

The Italian tax authorities have always considered the Irish low cost airline to have a permanent business activity in Italy, which obliges a non-Italian company to pay taxes in Italy. In contrast, Ryanair has always argued that it doesn't have any legal 'connection' to Italy.

To legally strengthen the position of the Italian tax authorities, the Italian Parliament introduced Article 38, which establishes that: In the context of aviation law, the term 'base', shall refer to a set of individual locations and infrastructures used permanently, repeatedly and continuously for air transport services by a business activity, using employees that conduct their professional activities in the aforementioned set of locations and infrastructures, in the sense that they work, supply services and return to their homes after their professional activities have finished.

An air carrier, with a license granted by a member state of the European Union other than Italy, is considered to be established in Italian territory when it carries out an air transport business permanently or continuously or repeatedly, using a 'base' as defined above.

Article 38 represents a detailed clarification which allows the application of a fundamental principle of tax law in Italy regarding the aviation sector: namely, the principle of permanent establishment for all non- Italian companies operating in Italy as defined by national law.

Not so many years ago, after a period of uncertainty regarding the exact legal definition of permanent establishment, the term was clarifiedin accordance with the OECD Model Income Tax Treaty.

Article 162 of Italian Legislative Decree 12 December 2003, N. 344, defines the term 'permanent establishment' as a...

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