5. Italian Iternational Taxation - What's new - Cristiano Lenti

RSM Italy 2018 

Italian International Taxation 

What’s new 

RSM Studio Palea Lauri Gerla

Italy what’s new 

In the last months the Italian Government has made a few changes in the International Tax regulations. The main 

topics affected by the modifications are: 

Permanent Establishment Arm’s length principle Corresponding adjustments 

In order to be consistent with the 

innovations deriving by the BEPS 

project, the 205/2017 Italian Budget 

Law amends the concept of 

permanent establishment. The 

modifications are aimed at transpose 

the concept stated in the Action 7 

“Preventing the Artificial Avoidance 

of PE status” and Action 1 relating to 

the field of “Digital Economy”. 

For many years, Italian transfer 

pricing law has used the concept of 

“normal value” as the basis for 

pricing intercompany transactions. 

This concept was similar to the 

OECD arm’s length principle, 

although not precisely the same and 

potentially open to various 

interpretation. The new definition 

formally endorses the OECD 

standard. 

Art. 31-quater of Presidential Decree 

n. 600 of 1973 introduce a 

procedure allowing Italian taxpayers 

to obtain a unilateral downward 

adjustment on their taxable income 

as a result of transfer pricing 

adjustment made by foreign tax 

authorities as opposed to initiating 

the ordinary mutual agreement 

procedure (MAP) 


Permanent establishment – what’s new 

Article 162 of the Consolidated Italian Law on Income Tax 

On 18 December 2017, the OECD released the 2017 OECD Model Tax Convention which incorporates significant changes developed under the 

OECD/G20 project to address base erosion and profit shifting. The Italian Government, in order to be compliant with the new rules for the 

identification of the PE status has released new measures reflecting a broader definition of permanent establishment (PE) for Italian law. The 

main changes are described below. 

01 

02 

03 

04 

• A permanent establishment is also deemed to be a 'significant and continuous economic presence in the territory of Italy, 

built in such a way that it will not result in a physical presence in Italy’; 

• The preparatory and auxiliary activities of a non-resident enterprise that do not give rise to a permanent establishment are 

specifically defined; 

• Activities performed by closely-related enterprises at a fixed place of business are analysed together for the purpose of 

evaluating whether they may qualify as preparatory or auxiliary, provided that the business activities of the closely-related 

enterprises constitute complementary functions that are part of a cohesive business operation. 

• An independent person acting in Italy exclusively or almost exclusively on behalf of one or more enterprises to which 

the person is closely related, does not qualify as an independent agent and therefore gives rise to a permanent 

establishment of the nonresident enterprise. 



01 New Economic Nexus 

The new definition implies the possibility of a PE presence even in the case where a company does not have a physical presence in the Italian territory 

to the extent other factors may indicate a significant presence (e.g., revenues, number of customers etc). The new provision on the economic nexus 

would seem to originate from and be consistent with the OECD final report on the tax challenges of the digital economy (Action 1). In fact, starting 

from 1 January 2019 in Italy will be in force a “web tax” with the following features: 

• B2B only – Web Tax applies exclusively to business-to-business (B2B) digital transactions. Business-toconsumer 

(B2C) digital transactions will be excluded from the application of the new tax. Also the online 

sale of goods (e-commerce) B2B would seem to be excluded. 

• 3% rate and 3,000 transactions threshold – Web Tax is applied at the rate of 3% on the value of any 

transaction, exclusive of VAT and is due only by operators performing more than 3,000 digital transactions 

yearly. Whether this minimum threshold is met or not must be communicated by the service provider on the 

invoice issued to the client or in another document to be issued together with the invoice. 

• Collected by the purchaser – The Web Tax is collected a bit like a withholding tax. The purchaser is 

responsible for charging and collecting the Web Tax and for all obligations relating to the tax. The tax must 

be paid by the 16th day of the month following the one in which the payment for the digital service occurs. 

• Compliance – The provisions on Value Added Tax apply to the assessment, penalties, and the collection of 

the Web Tax and related proceedings 

BEPS – Action 1 

This new P.E. definition 

is based on the nexus 

rules proposed for the 

digital economy 

by Action 1 so that 

nonresident digital 

companies can trigger 

taxable presence in a 

country in ways that are 

not uncommon in the 

digital economy 



02 Preparatory and auxiliary activities 

The second change concerns the enactment of an additional requirement to the negative list of activities which 

are excluded from the definition of permanent establishment. For the exclusions to apply, it is required that 

each of those activities be preparatory or auxiliary in nature. A preparatory activity precedes the enterprise’s 

core business activities, while an auxiliary activity supports, but is not an essential and significant part of, the 

activity of the enterprise as a whole. 

The list of exempting activities has been rephrased to provide that a fixed place of business will not constitute a 

P.E. if the taxpayer can prove that any and all activities – and not only their combination as under the old rule 

– have a preparatory or auxiliary nature with respect to business of the foreign entity. The amendment applies to 

any business activity. It may be particularly relevant for digital enterprises based abroad that maintain a stock 

of goods in Italy to provide prompt delivery to customers. As a consequence, the maintenance of a local 

warehouse and the storage of goods in the warehouse might be regarded as a core activity for digital enterprises 

focused on retail purchases. For these businesses, storage would not fall within the preparatory and auxiliary 

exemption. 


The Report states that: 

“Depending on the 

circumstances, activities 

previously considered to 

be merely “preparatory 

or auxiliary in nature 

may nowadays 

correspond to core 

business activities” 



03 Anti-fragmentation rule 

The new definition aimed at preventing foreign companies from splitting up a business into smaller units or using other related legal entities or 

P.E.’s to benefit from the preparatory or auxiliary exemption. In substance the new rules are designed to take into account not only the activities 

carried on by the same enterprise at different locations but also of the activities carried on by closely related enterprises at the same or different 

locations. 

Complementary functions 

The business activities 

carried on by the two 

enterprises at the same 

place, or by the 

enterprise(s) at the two 

locations, constitute 

complementary functions 

that are part of a cohesive 

business operation. 

Be part of a Group 

The same enterprise or a 

closely related enterprise 

carries on business 

activities at the same 

location or another location 

in the Italian territory 

RSM Studio Palea Lauri Gerla 

Anti-fragmentation 

Rule 

Combination of activities 

The location(s) constitutes a 

P.E. for either enterprise 

under the provisions of Art. 

162, or the overall activity 

resulting from the combination 

of the activities carried on by 

the two enterprises at the 

same place, or by the 

enterprise(s) at the two 

locations, are not of a 

preparatory or auxiliary 

character 


The so-called antifragmentation 

rules – is 

proposed 

in Action 7 – aimed at 

preventing foreign 

companies from splitting 

up a business 

into smaller units or 

using other related legal 

entities or P.E.’s to 

benefit from 

the preparatory or 

auxiliary exemption


04 Independent Agent 

The fourth change concerns the definition of "dependent agent" permanent establishment. A permanent establishment now includes a dependent 

agent who habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification 

by the enterprise, and these contracts are: 

In the name of the enterprise; or 

For the transfer of the ownership of, or for the granting of the right to use, property owned by that 

enterprise or that the enterprise has the right to use; or 

For the provision of services by that enterprise. 

The new provision covers commissionaire arrangements, whereby the agent does not sign contracts in 

the name of the enterprise, but promote the conclusions of contracts that are entered into by the enterprise 

without material modifications. 



“a person will not be 

considered to be an 

independent agent if it 

acts “exclusively or 

almost exclusively on 

behalf of one or more 

enterprises to which it is 

closely related” 


Arm’s length principle – what’s new 

Article 110(7) of the Consolidated Italian Law on Income Tax 

The Italian Government introduced an important changes affecting the definition of the arm’s length principle for transfer pricing purposes. Art. 59 

of Law Decree n.50/2017, in fact, replaced the concept of “normal value” mentioned in Art. 110 paragraph 7 of the ITC, fully aligning the wording 

of the domestic rule with the OECD arm’s length principle. 

Before 

After 

The previous wording of Art. 110(7) 

stated that elements of income arising 

from transactions with non resident 

companies which control - directly or 

indirectly – the enterprise, ora are 

controlled by the same enterprise, are 

evaluated on the basis of the «normal 

value» of the good supplied, the services 

rendered and the goods and services 

received. 

The amended provision, profit from 

transactions between Italian enterprises 

and related foreign enterprises shall be 

estimated “by reference to the 

conditions and prices that would have 

been agreed between subjects 

operating in open market conditions 

under comparable circumstances” 


Arm’s length principle– what’s new 

Article 110(7) of the Consolidated Italian Law on Income Tax 

The amended provision referred to further guidance on the transfer pricing criteria and methods, in line with the respective OECD Guidelines, to 

be provided by virtue of the forthcoming Ministerial Decree. 

In this regard, the Ministry of Economy and Finance launched on February 21 2018 a public consultation on the Draft Ministerial Decree (draft 

decree), which contains the guidelines on the application of transfer pricing rules. 

In particular, the draft covers the following topics: 

Definitions to be considered within a transfer pricing context, i.e. related parties, controlled transactions, terms of transaction, etc. In 

particular, following the draft decree, the concept of control seems to be related to the cases where a company owns, directly or 

indirectly, more than 50% of the shares of another company as well as to all cases in which a set of circumstances is indicative of a 

given company’s influence over the entrepreneurial decision of another; 

Notion of comparability and economically relevant characteristics to be taken into account for the comparability analysis; in this 

regard, the provisions of the draft decree are fully aligned with the OECD Guidelines; 

Circumstances under which more transactions could be aggregated for transfer pricing purposes; in this regard, in cases where 

separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis, the draft 

decree provides the possibility to “aggregate” transactions for the comparability analysis and for the selection of the most appropriate 

method; 

Criteria for selecting the best transfer pricing method to be adopted in accordance with OECD guidelines. The draft decree 

underlines that the audit by the tax authority must be performed on the basis of the transfer pricing method selection by taxpayer; 

Determination of the arm’s-length range; in this regard, the provisions of the draft decree are fully aligned with the OECD Guidelines. 


Corresponding adjustment – what’s new 

Article 31 quarter Presidential Decree No. 600/1973 

The Decree contains a new provision that extends the range of possibilities avalable to Italian taxpayers to mitigate double taxation arising 

from transfer pricing adjustments by introducing Article 31 quater of Presidential Decree No. 600/1973, the Italian code governing tax 

assessments. Before the Decree, obtaining corresponding adjustments was possible only through the mutual agreement procedure (MAP), 

including the EU Arbitration Convention. Now it is also possible to obtain a corresponding adjustment in the following conditions: 

1 

2 

3 

The foreign primary Transfer Pricing 

adjustment is final, i.e. not subject to 

modifications 

The foreign Country has concluded a 

double tax treaty with Italy which allows an 

adequate exchange of information 

The foreign primary Transfer Pricing adjustment is 

compliant with the arm’s length principle 



“it would be more 

efficient if 

countries would also 

have the possibility to 

provide for 

corresponding 

adjustments 

unilaterally in cases in 

which they find the 

objection of the taxpayer 

to be justified” 


Corresponding adjustment – what’s new 

Dispute Resolution 

Map Under EU AC Map Under MTC Art 31 quater 

• Certain elimination of double 

taxation; 

• If no agreement is reached the 

contracting states must elect an 

arbitation board; 

• The tax negotiation occurs 

between two tax authorities and 

not between the taxpayer and the 

tax authorities (with the 

consequent balance of “negotial 

power”); 

• Possible suspension of tax 

collection; 

• Should be settled in 2 years; 

• Does not allow to contrast 

eventual internal tax court’s final 

judgment 

• The tax negotiation occurs 

between two tax authorities; 

• Possible suspension of tax 

collection; 

• Possible, not certain, elimination 

of double taxation (if the MTC do 

not include par. 5 of art. 25); 

• If no agreement is reached the 

taxpayer should request an 

arbitation board; 

• Does not allow to contrast 

eventual internal tax court’s final 

judgment. 

• The decision to eliminate the 

double taxation is taken 

autonomously by the Italian Tax 

Authority; 

• No need to start a litigation 

procedure or a Mutual 

Agreement Procedure; 

• Allows to continue the domestic 

and international litigation; 

• No certainty of a positive 

outcome. 


RSM Studio Palea Lauri Gerla 

Thank you for the 

attention

5. Italian Iternational Taxation - What&#039;s new - Cristiano Lenti

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5. Italian Iternational Taxation - What's new - Cristiano Lenti