Hiring an Employee – the Permanent Establishment risk

A non-Italian business considering employing an individual in Italy needs to consider whether the activities carried on by an Italian based employee in Italy create a corporate income tax (IRES) liability on the profit attributable those activities. Foreign corporations with a “permanent establishment” (or fixed base) in Italy generally need to register with the Register of Businesses and with the Italian Tax Agency for corporate income, regional production tax and value added tax, VAT.  By doing so, they account for corporate income tax, regional production tax as well as VAT on sales and purchases. 

The overriding tax theory is that Italy, under her domestic legislation, EU regulations and international tax treaties, has the right to tax business profits/income arising in the hands of foreign businesses which have a permanent establishment on Italian soil. Italian income tax is due on the part of the overall profit that is attributable to the activities being carried on in Italy and VAT may be due on sales made by the PE. 

Determining whether a certain activity constitutes a permanent establishment is generally a question for a specific professional consultation as it involves a technical examination of the domestic legislation and interaction with an applicable tax treaty, applied to the facts and circumstances surrounding the activity of the employee.  These facts and circumstances include factors such as:

  • the functions/role of the employee,
  • the seniority within the organisation of the employee;
  • the powers granted to the employee to act in the name of the business, and to bind the foreign company to contractual obligations; 
  • the infrastructure, (offices, telecommunications and IT equipment) available to the employee;
  • publicity materials and other items such as business cards, correspondence address on business cards, letters and e-mails showing an address or a function in Italy;
  • whether the employer is registered for VAT in Italy;
  • what commercial relations (clients, suppliers), the employer maintains in Italy
  • the presence of other activities involving Italy, possibly not connected with the employee.
 The position is especially critical for employees:
  • with a senior role within the business – “significant people”
  • with a sales function who are actively generating sales in Italy and/or employees who are remunerated on the basis of sales; 
  • anyhow involved in client facing income generating activities;
  • authorized to execute contracts of sale and/or purchase of goods and services on behalf of the employer.
However it should be noted that the absence of such functions is not an absolute guarantee that no PE  exists.  Italy’s double tax treaties and domestic legislation set out a series of limited circumstances which will not give rise to a permanent establishment.  Thus for example, warehousing /logistical activities, on their own, will not constitute a PE.  And neither will activities that are preparatory and auxiliary to the business carried on by the foreign company.  However where an employee who is involved in the profit generating activity of the business, and that activity is not preparatory or auxiliary to the business,  it is clear that the Italian Tax Agency may  feel entitled to claim that the presence and activities of the employee gives rise to the presumption of a permanent establishment.

There is an argument that the presence of a remote worker, who interfaces exclusively with their employer, possibly via a VPN, does not constitute a permanent establishment within the definition under Italian law.  However this view is not guaranteed to be accepted by the Italian Tax Agency or the Courts.  Certain some clarification, possibly at EU level of the status of cross-border remote workers would be welcome.

Finally it should be noted that a foreign company has the possibility of requesting an advance ruling from the Italian Tax Agency confirming whether or not the proposed activities of an employee give rise to the existence of a Permanent Establishment or not.

Whatever the  role of the employee, the PE issue needs to be confronted, and monitored over time.

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