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Italian permanent establishment voluntary disclosure with new rules

24 Jun 2019

The Italian Revenue Agency set out the implementing rules of the procedure for the voluntary disclosure of Italian hidden permanent establishments, introduced by Article 1-bis, Law Decree no. 50/2017. This is a special, innovative and voluntarily-based procedure for the settlement of tax violations connected to the assessment of an Italian (hidden) PE, accompanied by particular tax benefits. It is a further step towards a more effective cooperation between foreign taxpayers and the Italian Tax Administration.

Article 1-bis, Law Decree no. 50/2017, introduced a special, innovative and voluntarily-based procedure whereby:
a) foreign enterprises may undertake in cooperation with the Italian Tax Administration a tax assessment procedure aimed at establishing whether the requirements for the existence of a permanent establishment in the Italian territory are met or not;
b) foreign enterprise may voluntarily settle all past tax violations related to the disclosure of an Italian PE, benefitting from a series of tax advantages.
On 16 April 2019, the Italian Revenue Agency published implementing rules, so the new measure can now come into effect.
Who can benefit from the PE voluntary disclosure?
The special tax assessment procedure applies on a voluntary basis and addresses foreign enterprises that may see their activity performed in Italy close to meet the conditions under which an Italian permanent establishment is deemed to exist.
The following table indicates the subjective limitations to the new procedure.
The foreign enterprise shall be part a multinational group.
Stand-alone entities would be excluded. Entities part of a national group without subsidiaries in at least two different countries could be excluded as well.
Consolidated group revenues shall exceed 1 billion Euros.
Only revenues from the sale of goods or provision of services (operative revenues) are included. The value is the highest one resulting from the consolidated financial statement of the previous three FYs.
Operative revenues from sale of goods or services provision carried out in the Italian territory shall exceed 50 million Euros.
The value is the highest one resulting from the consolidated financial statement of the previous three FYs.
The foreign enterprise should carry out a business activity in Italy with the support of an Italian auxiliary enterprise.
The Italian auxiliary enterprise shall be part of the same group and perform auxiliary activities to the business carried out in Italy by the foreign enterprise.
The foreign enterprise shall not be formally aware of any tax inspection activity performed or criminal investigation initiated in Italy in its regards.
The scope of this limitation is confined to the cases where the tax inspection activity and/or the criminal investigation is linked to the existence of a hidden Italian permanent establishment.
How does the PE voluntary disclosure work?
The foreign enterprise that intends to benefit from the PE voluntary disclosure procedure should file to the Italian TA a formal request according to a dedicated model published on the online website of the Italian Revenue Agency. The request shall be accompanied by the following documentation:
– description of the activity and business model carried out;
– description of the factual and legal grounds under which a hidden PE could be deemed to exist in Italy, taking into account the Italian domestic PE definition (Article 162 of the Italian Income Tax Code) or the definition established under the applicable double tax treaty;
transfer pricing master file and national documentation on the relationship with the Italian auxiliary enterprise(s) for the previous three FYs;
– consolidated group financial statements for the three previous FYs, stand-alone financial statements for the auxiliary enterprise(s) and the group entities that, in the same FYs, obtained revenues from activities carried out in the Italian territory.
After the filing of the request and the related documentation, the procedure enters a phase of assessment that entails a discussion between the taxpayer and the Administration in order to evaluate whether the PE requirements are met in the situation at issue. If an Italian PE is deemed to exist, the discussion is extended to determine the PE’s attributable taxable income and Italian VAT base. A conclusion shall be reached within 180 days.
The Italian TA has the power to undertake inspection activity to the offices of the Italian auxiliary enterprise and to the Italian premises of the foreign enterprise. This would entail the power to interview employees.
If the Italian TA concludes that the requirements for the existence of an Italian PE are not met, this conclusion is binding for the Italian TA, unless (a) the factual or legal circumstances of the case are subject to future change or (b) the documentation provided by the foreign enterprises is shown to be untrue or incorrect.

What are the tax benefits?

In order to encourage foreign enterprises to disclose hidden Italian PEs the procedure provides for a series of benefits:
i. administrative sanctions for past tax violations (e.g., failure to file corporate income tax returns and pay Italian corporate income tax for income attributable to the PE in past FYs, failure to file VAT return and pay Italian VAT for the PE, failure to apply Italian withholding taxes on the remuneration paid to Italian employees) are reduced to 1/6 of the minimum.
ii. if the foreign enterprise settles all the past and current tax violations, this would preclude criminal liability for having not filed income tax and VAT returns.
iii. the full payment of the tax debt arising from the PE disclosure brings a further benefit: the Italian disclosed PE could access the so-called cooperative compliance regime. This regime essentially requires the applicant to implement a tax control framework for the prevention of tax risk. In turn, the regime provides for a set of tax advantages including (a) advance tax rulings on interpretative issues rendered by the Italian TA in 45 days (instead of 90); (b) administrative sanctions for tax violations reduced by half; (c) no obligation to provide guarantees to the Italian TA in case the applicant asks for a tax refund.
The cooperative compliance regime is highly attractive but its access is currently limited to taxpayers with a revenue threshold of minimum 10 billion Euros. This limit does not apply to Italian PE disclosed under the voluntary tax assessment procedure.

Potential combination with the Advance Tax Agreements for enterprises with international activities

With the aim to ensure taxpayers certainty on international tax issues, Italian tax law entitles taxpayers to reach a prior settlement and a shared evaluation with the Italian TA on:
– defining the transfer pricing policy for intercompany transactions;
– defining entry or exit value of assets in cases of transfer of residence;
– assessing whether the requirements for the existence of an Italian PE are met;
– assessing the tax treatment of income (e.g., dividends, interests, royalties or other income items) paid to/received from non-resident companies determining the attribution of profits/losses to a permanent establishment.
This instrument – Advance Tax Agreement for Enterprises with International Activities – can be successfully combined with the PE Voluntary Disclosure.
On one hand, the PE Voluntary Disclosure enables foreign enterprises having a hidden Italian PE to regularize all past tax violations at more favourable conditions than in case the Italian TA carries out an autonomous tax inspection. On the other hand, the Advance Tax Agreement for Enterprises with International Activities can be an opportunity to confirm the existence of the Italian PE after a group reorganization process or for establishing the criteria for the attribution of income to the PE in the future FYs. Whilst the PE Voluntary Disclosure procedure serves to square things up with the past, the Advance Tax Agreement could look at the future of the Italian presence of the foreign enterprise.
This combination could enhance the level of cooperation between the Italian Tax Administration and international MNE groups enabling them to reach a highly-reliable degree of legal certainty on crucial issues of Italian tax law.