Foreign businesses that want to operate in Italy have multiple options: they can set up a local business unit (such as a representative office), establish a branch or form a new company in the country. While branches and direct incorporation of a new company are subject to the same tax requirements as any other resident company, local business units do not generate income in Italy and therefore are not subject to taxation in the country. However, in order for a local business unit to qualify for this tax regime, it is important that it only carries out ancillary activities (i.e., those that serve as support for the core business and are not an essential part, such as gathering information for the business, purchasing goods or merchandise, etc.). Any other activities would classify it as a permanent establishment, and subsequently make it subject to corporate income tax in Italy.

But what exactly is a permanent establishment? In this article, business owners can learn more about the concept of permanent establishments, the different types that exist, and their tax implications.

What’s in this article?

• What is a permanent establishment in Italy?
  
• Types of permanent establishments
  
• How to open a permanent establishment in Italy
  
• Tax obligations for permanent establishments in Italy
  

What is a permanent establishment in Italy?

In order to carry out ongoing business activities in Italy (not ancillary), a foreign business must be considered a permanent establishment in Italy.

A permanent establishment is a fixed place of business through which a nonresident company carries out all, or part, of its primary activities in Italy. The definition of a permanent establishment is outlined in Article 162 of the Consolidated Income Tax Act (TUIR). This legislation was later amended by the 2018 Budget Law, Law No. 205 of December 27, 2017.

The key changes covered in the 2018 Budget Law include:
- An updated definition of “personal permanent establishment”
- Introduction of the anti-fragmentation rule
- Examples of cases that do not constitute permanent establishments
- A new provision stating that a permanent establishment in Italy can also be recognized as “a significant and continuous economic presence in the territory of the State, even if it lacks a physical presence in the territory.”

Italian law aligns with relevant international conventions in regard to permanent establishments and taxation, particularly the following:

• The Base Erosion and Profit Shifting (BEPS) project, promoted by the Organisation for Economic Co-operation and Development and the Group of 20 (OECD/G20). The BEPS project aims to combat strategies used by multinational companies to exploit differences in regulatory frameworks, allowing them to shift their tax base from high-tax countries to countries with low or no tax burdens.
  
• The OECD Model Tax Convention against double taxation.
  
• The Multilateral Convention for the implementation of measures related to tax treaties is designed to prevent the erosion of the tax base and the shifting of profits.
  

Types of permanent establishment

Legislation in Italy provides definitions for three different types of permanent establishments in Italy.

Material permanent establishment with physical presence

A material permanent establishment with a physical presence must consist of a fixed place where a nonresident company carries out all or part of its business in Italy. Examples of permanent establishments in Italy have been provided by Article 162 (2) of the TUIR; they are as follows:

• Headquarters
  
• Branch office
  
• Office
  
• Workshop
  
• Laboratory
  
• Mines, deposits, quarries, and other places of extraction of natural resources
  
• Significant and continuous economic presence in Italian territory, without obvious physical presence
  
• Construction or assembly sites lasting more than three months
  
• Any significant and continuous economic presence in Italy, without an obvious physical presence
  

The following cases, however, do not constitute a permanent establishment (Article 162(4)):

a) An installation used solely for storage, display, or delivery of goods or merchandise belonging to the business
b) The availability of goods or merchandise owned by the business, stored solely for the purposes of storage, display, or delivery
c) The availability of goods or merchandise owned by the business, stored solely for the purposes of processing by another business
d) The availability of a fixed place of business used exclusively for purchasing goods or merchandise, or for collecting information on behalf of the business
e) The availability of a fixed place of business used exclusively for carrying out any other activity on behalf of the business
f) The availability of a fixed place of business used solely for the combined pursuit of the activities listed in points (a) through (e) above

Material permanent establishment without physical presence

In the 2018 Budget Law, an amendment to the TUIR was introduced specifically to address businesses with a “significant digital presence” in Italy. Paragraph f-bis in Article 162 of the TUIR states that the term “permanent establishment” also includes “a significant and continuous economic presence in the territory of the State, structured in such a way that it does not have a physical presence in the territory itself.” This means that the concept of a permanent establishment is no longer linked solely to a fixed place of business in Italy; it is also now an intangible presence. This new definition was introduced to adapt legislation to the digital economy, with the aim of taxing ecommerce transactions.

In order to determine the presence or absence of a permanent establishment, objective criteria must be used, such as the volume of direct sales in a given market, the number of registered users in that market, or the presence of a server in Italy.

Personal permanent establishment

A nonresident enterprise that does business in Italy is considered a personal permanent establishment when a natural person acts as an agent on its behalf. The agent must regularly finalize contracts (or takes steps to do so) which are not been substantially modified by the enterprise itself. These contracts must also match one of the below descriptions:

• Made in the name of the principal business
  
• Concern the supply of goods or services by the business
  
• Involve the transfer of ownership or grant the right to use assets owned or used by the business
  

The company is not considered a personal permanent establishment if the agent carries out only preparatory or ancillary activities. There is also no permanent establishment if the agent acting on behalf of the nonresident enterprise acts as an independent representative and acts for the enterprise as part of its regular business. However, agents will not be considered independent if they act exclusively or almost exclusively on behalf of one or more closely related enterprises.

Anti-fragmentation rule

Paragraph 5 in Article 162 of the TUIR introduced a provision aimed at preventing nonresident enterprises from artificially dividing a single activity into several related entities, which—when considered individually—might not meet the criteria for acquiring independent tax significance, and therefore would not be considered a permanent establishment.

How to open a permanent establishment in Italy

Here are the steps a foreign company must take to open a permanent establishment in Italy.

• Provide a formal record on the resolution to establish an office in Italy.
  
• Appoint of a legal representative in Italy.
  
• Activate of a certified email address (Posta Elettronica Certificata or PEC).
  
• File the company’s meeting minutes and bylaws with a notary public.
  
• Register your company with the Italian Business Register.
  
• Apply for a tax identification number and value-added tax (VAT) number from the Agenzia delle Entrate.
  
• Register with the Italian National Institute for Insurance against Accidents at Work (INAIL) if there are employees.
  
• Register with the Italian National Social Security Institute (INPS) if the company meets the requirements.
  

Tax obligations for permanent establishments in Italy

In Italy, a permanent establishment is considered a separate tax entity from its foreign parent company and is subject to independent taxation. Because the permanent establishment is considered a resident entity in Italy, it must pay corporate income tax (IRES) and regional tax on productive activities (IRAP). Both taxes are calculated based on financial statements prepared using the accounting principles that apply to resident companies.

Consequently, permanent establishments in Italy must issue electronic invoices for sales transactions and register incoming invoices. They must also submit annual income tax returns using the capital companies (società di capitali or SC) income form.

Because a permanent establishment is considered an independent taxable entity in Italy, as well as in the parent company’s country of residence, double taxation can occur; however, this can be mitigated or eliminated through the application of Conventions for the avoidance of double taxations.

Staying current with constantly changing tax regulations can be challenging for your business. To address this need, automated platforms such as Stripe Tax are available, which generate detailed reports to help you file your tax returns. Tax works without any coding, allowing you to file in just a few clicks or with a single line of code.