notwithstanding, Italy is the eighth
largest economy in the world and the
fourth largest European economy.
The Italian economy is, and has
always been, characterized by a large
number of small and medium industries
focused on the export of niche market
and luxury products. At the same time,
Italy has a smaller number of global
multinational corporations than other
economies of comparable size. Lastly,
Italian locations are known worldwide
for their touristic appeal.
Due to these characteristics, the
Italian market has attracted a wide
range of international corporations,
which have tended due to high
Italian taxation rates to set up local
structures with the aim of minimizing
the tax burden.
Italian tax authorities, however, are
showing firm and increasing opposition
to this trend by utilizing a wide range
of legal "tools," among which is the
concept of permanent establishment
(PE), which is increasingly utilized
government coffers.
Permanent establishment is a
concept created in 1963 by the OECD
(Organization for Economic Cooperation
and Development), and thereafter
included in most international income
tax treaties. Since 2004, the permanent
establishment concept has also been
included in the Italian Income Tax Law.
Very briefly, a permanent
establishment is a "fixed place of
business" in State A which may generate
turnover for a corporation resident of
State B. In other words, the turnover
generated by (i) sales activity carried out
partly or wholly in Italy on (ii) a non-
occasional basis and (iii) with the use
of personnel, assets or not-independent
entities there, is subject to income
and VAT taxation in Italy, even if the
corporation is tax resident abroad.
Recently, the field of application
of the PE concept has been somewhat
broadened by Italian tax authorities
as well as by Italian tax courts. For
example, a foreign corporation may be
subsidiary of the group active in Italy;
the commercial activities (such as the
mere agreement on quantity discount,
while the purchase order was filled
abroad) is carried out in Italy;
an agent who is formally independent,
but economically dependent on the
foreign corporation.
foreign corporation does duly comply
with its tax obligations in the other
country) or "hidden."
In the latter case, no income tax
statement or financial statements
have been filed in Italy, thus allowing
Italian tax authorities to assess the
taxable income on the basis of mere
presumptions. Presumptions whose
(mis)application often yield an amount
of taxes, as well as proportional
administrative fines, that are often
higher than usual. The large amounts
of assessed taxes may also lead to the
indictment of the legal representatives of
the corporation.
Should the existence of a hidden PE
be discovered, the tax authorities can
demand payment of all relevant income
taxes due (an average of 31.4% in 2011),
VAT (21%), interest and administrative
According to the Italian Tax Agency
Studio Legale F. De Luca in Milan, Italy. Mr. Bico, the author of
numerous academic books and papers, practices in the area of
white collar crime. Mr. De Luca focuses his activity in tax litigation
and compliance. They jointly assist international corporations,
dealing, respectively, with matters relating to criminal law and
Italian tax issues.
Piazza Borromeo
Milan, Italy 12-20123
+39 02 721 4921 Phone
+39 02 805 2565 Fax
bico@deluca1974.it
deluca@delucastudiolegale.it
www.deluca1974.it