Extended definition of Permanent Establishment

Italy’s 2018 Finance Act made some significant changes to the definition in the domestic Tax Code of Permanent Establishment (PE).

Specifically the changes:

  • extend the definition of agency PE;
  • make ALL the listed activities (deriving from the OECD standard model) which are deemed not to give rise to a PE conditional on the activities being preparatory or auxiliary in nature. This is a significant departure from the OECD model which allows foreign companies to maintain stocks of goods in Italy at any stage of the business process;
  • include an ‘anti-fragmentation rule”.

A translation of the revised art. 162 of the Code is shown below.

Often the definition in an applicable double treaty will override the domestic provisions.  But in the past the Italian courts have been willing to deny the application of a more favourable treaty provision in cases of perceived tax avoidance or treaty shopping.

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