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Permanent Establishments under Italian Tax Law: An Overview

Presented by: Raffaele Russo, Tax Treaty Adviser, OECD, Paris, and Edoardo Pedrazzini, Studio Pedrazzini, Milan.
The views expressed in this article are the personal views of the authors and should not be construed in any way as the views of the organisations to which they belong.
The article is published in European Taxation, Issue 7, 2007.
© copyright by IBFD

Contents

1. Introduction
2. Definition of a PE
   • 2.1. In general
   • 2.2. Fixed place of business PE
     • 2.2.1. Domestic law
     • 2.2.2. Tax treaties
   • 2.3. List of examples
     • 2.3.1. Domestic law
     • 2.3.2. Tax treaties
   • 2.4. Construction clause
     • 2.4.1. Domestic law
     • 2.4.2. Tax treaties
   • 2.5. Exclusions
     • 2.5.1. Domestic law
     • 2.5.2. Tax treaties
   • 2.6. Electronic equipment
   • 2.7. Agency PE
     • 2.7.1. Domestic law
     • 2.7.2. Tax treaties
   • 2.8. Group companies
     • 2.8.1. Domestic law
     • 2.8.2. Tax treaties
   • 2.9. Special provisions for insurance companies
3. Landmark Cases
   • 3.1. Possession of immovable property and PEs
   • 3.2. Construction activities and PEs
   • 3.3. Group companies and PEs: the Philip Morris case
   • 3.4. Related companies and PEs
4. Conclusions

1. Introduction

The permanent establishment (PE) concept is a cornerstone of international taxation. In general terms, the existence of a PE of a non-resident taxpayer in Italy has the following implications:

1. the business income derived through the PE is deemed to be derived therefrom;
2. the existence of a PE affects the withholding tax applicable on payments attributable to it;
3. it may extend Italy's taxing rights to certain items of income not attributable to the PE ("force of attraction" principle);
4. it creates an obligation to prepare financial statements to determine the total taxable income of the non-resident and the obligation to file an annual tax return;
5. it creates accounting and regulatory obligations; and
6. it obliges the non-resident to act as a withholding agent on payments borne by the PE.

This article addresses the PE concept for Italian tax purposes, taking into account domestic law and Italy’s tax treaty network. Each section includes the relevant tax authority pronouncements, while a special section is dedicated to landmark cases.

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