24 Jan 2018
The concept of permanent establishment (P.E.) is a very important concept both for VAT and income tax purposes. Article 162 of the Consolidated Italian Law on Income Tax (TUIR) specifically defines the concept.
This article was recently amended by Italy’s 2018 Budget Law, which has effectively incorporated into Italian law the provisions of Action 1 BEPS relating to the field of the "Digital Economy" (Addressing the Tax Challenges of the Digital Economy). The result is an update to the so-called "POSITIVE LIST", that is the list of cases that can give rise to a P.E., and the "NEGATIVE LIST", or the cases which are believed not to give rise to one.
In the POSITIVE LIST we now find that "a significant and continuous economic presence on Italian territory which is configured such that it does not appear to encompass a physical presence in Italy", suffices to constitute a P.E. This introduces into Italian law “de facto” the concept which if literally translated from Italian is “a virtual stable organization” and which means, essentially, a virtual P.E.
In other words, this is a P.E. which is created not necessarily by some standard of clear physical presence of a foreign person, but by virtue of revenues generated from Italy and probably other links which at first might seem “elusive”. We consider that these changes will likely find application by the rather activist Italian tax authorities and Guardia di Finanza in sectors including but not limited to the digital economy, and also likely to find application in connection with Italy’s prospective WEB TAX. The latter being, in itself, a concept and area of law recently introduced, applicable as of 1 January 2019 and on which there are to date more questions than answers.
The second group of definitions, i.e. the NEGATIVE LIST, has been revised in a no less incisive way. It includes, for example, more specific and restrictive provisions on when a P.E. is not present due to the nature of the activities being carried out in Italy being merely auxiliary or preparatory. Again, any non-Italian person carrying on an economic activity offered to persons in Italy relying on a structure set up on the basis of advice received that activities carried out in Italy by its group, any related person or even third parties are merely preparatory or auxiliary, would do well re-examine its structure in light of these recent amendments.