tax assessed). Further penalties may
be imposed in the case of avoidance of
withholding tax duties (regarding, for
instance, the payment of wages).
This nightmarish scenario is made
even worse by the fact that Italian tax
authorities are entitled to assess taxable
income on a presumptive basis, without
taking into consideration the financial
statements of the enterprise (should
such statements ever have been drafted).
Therefore, even actual costs related to
commercial activity in Italy may not
be considered to be deductible for the
purposes of assessing the taxable income
of the PE.
Moreover, should any tax crime be
ascertained, Italian tax authorities may
extend the assessment back 11 previous
tax years. The length of this timespan
may not only result in the multiplication
of the amounts due, but at the same time
significantly hamper the possibilities
of the foreign corporation (and of its
advisors) to gather all documentation
and/or information necessary for
the purpose of an appeal to the tax
authorities and/or for eventual litigation.
From the point of view of criminal
law, should Italian authorities discover
a hidden PE, the risks for a criminal
procedure, in parallel with the tax
procedure, are very high.
with a hidden PE may lead either to
an indictment for the crime of "income
tax statement omission" (and those
found guilty may face one to three years
of detention) or for fraudulent income
tax statements (punishable by prison
sentences ranging from 18 months to six
years in length). While Italian public
prosecutors and courts move between
these two possibilities, it is certain that
the assessment of a hidden permanent
establishment has extremely relevant
consequences from a criminal point of
view.
The risks concern not only the
Italian subjects involved (i.e. the legal
representatives of the Italian subsidiary),
but also the foreign corporation's legal
representatives, who would be indicted
for the omitted/fraudulent income tax
statement of the PE. In a worst case
scenario, individuals involved could
even be charged with conspiracy.
Moreover, should the existence
of a tax crime be found, there is the
possibility for the Public Prosecutor's
office, during even the preliminary
phases of investigations, to seize an
amount of money or other economic
values (i.e. the stakes owned by the
foreign subject in the Italian corporation)
equivalent to the income taxes allegedly
due, in view of a possible confiscation
in the event of a guilty outcome at the
criminal trial.
hidden PE can easily lead not only to
indictments for the legal representatives,
but also to considerable economic
damages for the corporation itself.
The consequences of a hidden
permanent establishment in Italy may
thus not only lead to truly negative
economic impacts on the foreign
corporation, but also create a major
threat for the continuity of its activities
on the Italian market.
It is therefore highly advisable that
foreign corporations request that their
tax advisors carefully evaluate the
characteristics of their Italian activities
(as well as those of any local structures),
with the aim of verifying whether
such activities might be deemed to be
permanent establishments.
Should the outcome of such
verification be positive, it is highly
advisable to evaluate whether to operate
as an overt permanent establishment,
paying higher taxes but avoiding any
further drastic fiscal and criminal
sanctions. Should the outcome be
negative, on the other hand, it would in
any case be sound advice to set aside
adequate documentation and evidence
attesting to that fact, which might be
useful in the event of a specific audit by
Italian tax authorities or in case of any
future tax litigation. After all, knowing is
half the battle.