Permanent Establishments and new developments in Italy 1
General rules in order to define a domestic Permanent Establishment (P.E.) 1. Art. 162 Italian tax law 2. Art. 5 OECD Model Convention 2
General principle in order to define a domestic Permanent Establishment (P.E.) a fixed place of business through which the business of an enterprise is wholly or partly carried on Place of taxation 3
MATERIAL PERMANENT ESTABLISHMENT Place of management Branch Office Factory Workshop Mine an oil or gas well, a quarry or any other place of extraction of natural resources. Specifications / exceptions / absence ref.: commentary on OECD Model 4
PERSONAL PERMANENT ESTABLISHMENT Ref.: Agent clause A foreign company is supposed to have a P. E. in Italy if, under certain conditions, a person (physical and /or juridical) is acting on behalf of said foreign company even if said foreign company has not (in Italy) a fixed place of business. 5
PERSONAL PERMANENT ESTABLISHMENT Ref.: Agent clause art. 5 OECD Model Clarification Agent Independent Agent P. E. No P. E. 6
Recent Italian Judgment Supreme court decision May 29, 2012 no. 20678 The case: 1. Step 1: At the beginning activity fully carried out in Italy by Mr. X legal representative of two companies performing the business 2. Step 2: Set up of a NEWCO located in San Marino. 30% Mr. X (through a fiduciary mandate), 70% Mr. X s daughter. No fixed place in Italy. NEWCO is deemed to agree with third Italian companies a part of the business. Mr. X is formally in charge for NEWCO management (i.e.: financial management) unless not appointed as MD of NEWCO. 3. Step 3: assessment. NEWCO does not perform any significant business. Activity is 100% still performed in Italy. NEWCO only performs quality controls. No independence from IT company of NEWCO for the reason of collection of all controls and key functions c/o IT company. 7
Recent Italian Judgment Supreme court decision May 29, 2012 no. 20678 The decision: San Marino company is a Permanent establishment. 8
Recent Italian Judgment Supreme court decision May 29, 2012 no. 20678 General principle behind the decision Observation on the commentary 43. Italy does not adhere to the interpretation given in paragraph 12 above concerning the list of examples of paragraph 2. In its opinion, these examples can always be regarded as constituting a priori permanent establishment. 9
Recent Italian Judgment Supreme court decision May 29, 2012 no. 20678 General principle behind the decision OCSE: * list sub par. 2 art. 5 is not exhaustive * list is not absolute. Place of management represent a PE if requirements under paragraph 1 are met (fixed place) Our legislation: * if a situation falls under provisions of paragraph 2 it is deemed to be a PE (apart from any eventual fixed place). 10
Recent Italian Judgment Supreme court decision May 29, 2012 no. 20678 The reason if the decision: Introduced a new approach of assessment of a material PE in Italy not only in consideration of the concept of art. 5 OECD Model (fixed place) but also with reference to intangible indications such as the management of the business assigned to a third Italian entity. To grant a foreign company with a de facto power to manage the activity of any third company. In the specific case Mr. X was directly involved in management of NEWCO. 11
Recent Italian Judgment Supreme court decision May 29, 2012 no. 20678 The proof which justify the decision: Presumed indication such as the identity of people acting both for domestic and foreign company and / or the possibility to take part to negotiations and signing of contract even if no representation power is granted. 12
Other judgments have been issued taking into consideration same principle. 13