Italy: Guidance, court cases clarifying PE | KPMG Global
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Italy: Administrative guidance, court cases clarifying definition of permanent establishment

Italy: Guidance, court cases clarifying PE

Guidance by the tax authorities (Guardia di Finanza) and recent decisions by Italian courts have examined and clarified the definition of permanent establishment following amendments made by the budget law of 2018.


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Guidance from Guardia di Finanza

Guidance from the Guardia di Finanza (annex 2 to notice no. 114153/2018 (13 April 2018)) clarifies:

  • The purpose of the reform measures generally is to give taxing authority to the state where the value is created—this also means the establishment of a new nexus for companies operating in the digital economy.
  • There is a new form of “fixed place” permanent establishment (PE) that implements certain recommendations made in the OECD’s base erosion and profit shifting (BEPS) Action 1 report. In effect, this addresses prior limitations under the definition of a PE that required a physical presence in the territory of the country or state, and is expected to allow taxation in Italy of activities conducted through intangibles. Accordingly, the installation in Italy of computers or similar systems that allow for electronic collection and delivery of data may now give rise to a PE.
  • The occurrence of one activity on the “negative list” no longer is sufficient to exclude a PE. Instead, the taxpayer must now prove the preparatory or auxiliary nature of the activities (following an OECD approach).
  • A new “anti-fragmentation rule” means that each single activity of all group companies in Italy must be examined. Business processes and functions that are integrated with each other must be grouped together and the preparatory or auxiliary nature of the combination of the activities must be evaluated.
  • Under the term “dependent agency PE,” it will be necessary to look beyond the legal aspects and formalities of situations involving a resident commissionaire that does not formally conclude contracts in the name of the foreign enterprise, but plays a decisive role in the conclusion of the contracts, and evaluates what functions and authority does the commissionaire actually have.
  • Entities or persons who operate exclusively (or almost exclusively) on behalf of one or more enterprises to which they are closely related can no longer be considered independent.
  • The amendments generally are effective 1 January 2018 (and not retroactively), absent clarifications.
  • The new domestic PE definition is an alternative to the definition contained in Italy’s network of income tax treaties.

Another notice from the Guardia di Finanza provides guidelines on how to address “hidden PEs”—that is, those “hidden” within a subsidiary belonging to a multinational group.

Court cases

The Supreme Court of Italy issued judgments finding:

  • A foreign enterprise did not have a PE in Italy because it did not have an adequate structure of both human and technical resources in Italy (even though its managers held meetings in Italy). Case no. 12237/2018 (permanent establishment for VAT purposes)
  • A German-resident company engaged in timber sales had a PE in Italy where its main business and place of management were located. Case no. 2407/2018

The regional tax court of Milan issued a judgment concluding that there was no agency PE hidden within the Italian entity. The case involved a software company that was a resident in Italy and that provided sales support to a UK resident company (not belonging to the same corporate group as the Italian company). The work performed by the employees of the Italian entity for the UK company was considered to be merely preparatory and auxiliary.


Read a May 2018 report [PDF 192 KB] prepared by the KPMG member firm in Italy

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