Permanent establishment in Italy: legislation changes to ensure consistency with OECD guidelines

The topic of the “permanent establishment”, corresponding to the foreign concept of “subsidiary”, is currently of great interest due to the considerable uncertainty that has characterised the regulation of this subject matter until now.

To answer the many questions regarding its interpretation, Article 12 Par. 1 of Act No. 23, March 11th 2014, has delegated to the government the power to issue the regulations needed to reduce the uncertainty surrounding the calculation of income and net value of production.

This delegation has now led to changes to Articles 151 and 152 of the Consolidated Income Tax Law.


In Par. 1 of the previous version of Art. 151, the total income of non-resident companies was defined as including only income produced in Italy and excluding tax-exempt income and income subject to withholding or substitute tax. Par. 2 stated that corporate income should also include capital gains and losses on the goods used in, or related to, business activities carried out in Italy, even if not carried out through permanent establishments, as well as profits distributed by companies and entities as identified by Par. 1:a and b of Art. 73, and capital gains as indicated in Art. 23, Par. 1:f.

De facto, this article has introduced the so-called “force of attraction of the permanent establishment” principle.

Art. 152 provided for: the income of a permanent establishment in Italy to be calculated according to the same criteria used for entities subject to IRES and resident in the country, on the basis of an income statement prepared by the permanent establishment (Par. 1); total income to include, in the absence of a permanent establishment, the individual profits calculated pursuant to Title I of the Consolidated Income Tax Law related to the applicable categories, the “separate treatment of profits” principle (Par. 2).


In the new legal framework, the Articles 151 and 152 of the Consolidated Income Tax Law have been modified, and the provisions on the “force of attraction of the permanent establishment“, in conflict with OECD guidelines, have been repealed.

The new provisions, which will be applied from 2016, have moreover clarified the principle of “taxation of profits on a separate basis”.

The new Art. 151 provides for the income of the permanent establishment of a non-resident company:

1) to be calculated on the basis of the profits and losses attributable to the permanent establishment according to the provisions for entities subject to IRES;

2) to be calculated on the basis of the results of a set of financial statements;

3) these financial statements must be prepared according to the same accounting principles applicable by resident entities with similar characteristics.

The new version of Par. 2 has dropped the reference according to which are treated as produced in Italy: a) the profits distributed by companies with share capital and commercial entities resident in the country; b) the capital gains specified in Art. 23, Par. 1:f, of the Consolidated Income Tax Law.

Lastly, Par. 3 of Art. 151 regulates the taxation of profits on a separate basis excluding the corporate incomes of the permanent establishments referred to in Art. 152.

With regard to the taxation of profits on a separate basis, it is stated that companies without a permanent establishment in Italy cannot be considered as carrying out business activities and therefore must be treated from the income point of view as resident non-commercial entities for which income is calculated using principles similar to those used for physical persons.

Profits are therefore taken in consideration for the calculation of total income only if produced in Italy and if they do not represent corporate income (for which a permanent establishment is instead assumed to be necessary).

Par. 3 of Art. 152 also specifies the deductions that may be made from total income.

By changing Art. 152, it has been possible to introduce also the principle that the permanent establishment is a distinct and separate entity with respect to the parent company, a fundamental principle set in the OECD guidelines, where it is known as the “separate entity” principle.

The application of said principle is confirmed also in the calculation of the net value of production for IRAP purposes.

In addition, the new provisions make use of the arm’s length principle with explicit reference to the functions carried out, the assets used and the risks taken by the company through its “permanent establishment” and through the other parts of the company. To calculate correctly the income of the “permanent establishment”, it is therefore necessary to consider all activities carried out including the transactions with independent or related parties and the relationships that the permanent establishment has with other parts of the company.

On this point, the new version of paragraph 3 of Art. 152 of the Consolidated Income Tax Law provides for the transactions between parent company and permanent establishment to be identified pursuant to Par. 7 of Art. 110 of the Consolidated Income Tax Law, that is, on the basis of the normal value of goods sold, services provided and goods and services received.

This provision allows the application to the relationship between permanent establishment and parent company of the concept of transfer price, treating the permanent establishment in Italy as a “company”.

As a last innovation, the last sentence of Par. 2 of Art. 152 has introduced the regulation of the “endowment fund of the permanent establishment”, a key concept also considered by the OECD guidelines.

The permanent establishment, being an entity separate from the parent company, requires its own capital; this must be quantified on the basis of calculation methods that will be specified by one or more regulations of the Director of the Italian Revenue Agency, without penalties for the tax years prior to the issue of these regulations.


The restyling has set out:

  • Accounting and tax principles to be followed in the drafting of the financial statements;
  • Distinction between taxation of the “permanent establishment” and taxation of individual profits for non-resident companies;
  • Separation of the permanent establishment from the parent company – “separate entity”;
  • Evaluation with arms’ length and transfer pricing methods;
  • Endowment fund.

Argento Bollini Ravera & Partners

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