Since the Brexit axe fell many businesses both in Italy and in the UK that formerly enjoyed a good cross-border trading relationship have had to find an alternative route to their previous markets.
For UK businesses wishing to conduct business in Italy, there have been a number of reforms made with the view of streamlining and simplifying the procedures required for foreign business to start and operate a business in Italy. The opportunities are open to EU Member States as well as non-EU countries. A foreign company may now establish a Permanent Establishment (P.E.) in Italy with a reduced minimum capital requirement as well as streamlined registration procedures. A foreign parent company that creates a new P.E. is not considered to be a separate entity from the P.E. Once established, it must be registered with the Register of Companies, however, following the new initiative, there are fewer statutory obligations.
As a general rule, a P.E. will be subject to the same treatment with regard to its tax position as an Italian company and will be subject to the same domestic corporate tax on its profits with the same tax commitments as Italian companies, such as keeping official registers. Also, paying corporate tax, filing tax returns for direct taxes, filing VAT and IRAP (regional duty) returns must be fulfilled. Dependant on the structure, a material P.E. or a personal P.E. will be taken into account.
The tax regulation of the P.E. can typically be found in two legal sources (domestic and international) - Italian D.P.R. 917/1986 and Double Taxation Conventions (DTC) agreements between two States which are designed to protect against the risk of double taxation where the same income is taxable in two States.
A foreign company that intends to operate in Italy through a P.E. is subject to obligations and specific terms related to such an entity. For companies and commercial entities with a P.E. in Italy, the income of the P.E. is determined on the basis of the profits and losses referable to it and according to the rules of Section I, Chapter II, Title II, D.P.R. 917/1986.
For the purposes of the determination of income, the P.E. is considered a separate and independent entity, carrying out the same or similar activities, under identical or similar conditions, taking into account the functions carried out, the risks assumed and the assets used.
Italy imposes corporate and personal income tax on its residents on their worldwide income (Worldwide taxation rule - WWT). Corporate income tax (IRES, its Italian acronym) is imposed under D.P.R. 917/1986 (also known as the income tax code, or ITC) and it is currently levied at a tax rate of 24%. Non-residents who carry on business in Italy and generate business profits therein are subject to corporate income tax (IRES) in Italy only on the Italian source income.
The foreign parent company will include the income of the P.E. in its tax base and it will file the tax return in the foreign country reporting the income of the P.E. , the parent company will also have to pay taxes in the foreign country related to the activity carried out in Italy by the P.E. Should double taxation arise, it can be avoided in accordance with the provisions of the Double Taxation Convention (DTC).
In addition to the corporate income tax, the regional tax on commercial activities (IRAP) is levied at a general tax rate of 3.9%. Regional authorities may increase or decrease this rate to 0.92% on companies, partnerships and individuals that carry on activity aimed at the manufacturing or trading of goods and the supplying of services. Non-resident companies are also subject to IRAP if that they maintain a P.E. in Italy for a specific period.
The P.E. of a foreign company in Italy invokes applicable domestic rules on VAT. In the D.P.R. 633/72 it is stated that a P.E. of a foreign business located in Italy is within the limits of its actions, creating an established taxable subject.
The foreign parent company must file tax returns annually with the Italian tax Authority and the most common are, although this is not an exhaustive list: the corporate income tax return (model S.C., RF panel), the regional income tax return, the VAT return and the withholding agent tax return.
The lawyers in Giambrone's corporate and commercial team confirm that the regulatory framework of the P.E. is certainly complex. It is strongly recommended that a foreign parent company should seek specialist legal advice.
There have been consequences related to the Covid 19 pandemic and recently, the Organisation for Economic Co-operation and Development (OECD) issued recommendations regarding the interpretation of Double Taxation Conventions (DTC) in light of Covid-19 and the potential effect on the normal dynamics in the real economy at the international level.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.