Italy: Permanent establishment – the relevance of the activities performed for VAT purposes to be assessed on a case-by-case approach


published on 2 October 2023 | reading time approx. 3 minutes

The Italian Revenue Agency, through its reply No. 374/2023, once again returns to the issue of the involvement of the permanent establishment that carries out multiple activities in purchase and sale transactions that are territorially relevant for VAT purposes in Italy.

The recent reply is thus in addition to a series of other replies to rulings and circulars through which, over the years, the Agency, in short, has clarified that the verification of whether a permanent establishment is a permanent establishment, both for direct tax purposes and for VAT purposes, must be conducted on a case-by-case approach, taking into account the concrete characteristics of the structure through which the non-resident entity operates in the territory of the State and the concrete manner in which it carries on business in Italy.
The overlapping of several answers to questions on this matter, however, has generated more uncertainty on the subject since, in consideration of recent interpretations, in order to eliminate the risk of a concealed PE, it is necessary to assess on a case-by-case basis and specifically the individual activities carried out by the PE and the relevance of these activities with respect to the main operations carried out by the parent company.
In specific, this ruling concerns a Dutch company that intends to extend its business in Italy through a permanent establishment. The branch, consisting of an organisational set-up of seven employees, will be responsible for information gathering, identification of new business activities, customer relations, incoming and outgoing goods management, invoicing, as well as quality control and new product development, adequately remunerated through a fee paid by the parent company.
However, the approval of major activities, the negotiation of terms and conditions and the signing of contracts will remain under the responsibility of the parent company. The applicant highlights that, although some of the activities to be performed are of a mere support and marginal nature, other activities carried out by the permanent establishment (product development and quality control) appear to be relevant for the performance of the main transactions to be carried out by the parent company and could, therefore, subject the permanent establishment to the VAT obligations provided for in Italy.
In this regard, the Agency, recalling previous answers to reply (52/2021 and 57/2023), specifies that the performance of a mere support activity (e.g., administrative or marketing activities) is not sufficient for the purpose of considering the participation of the permanent establishment in the transaction as relevant and that, in any event, the involvement of the permanent establishment must be assessed on a case-by-case basis, in relation to each transaction.
The question asked by the Dutch company probably originates from the reading of Article 192a of the VAT Directive, according to which a taxable person who makes supplies of goods or services in a Member State in which he has a fixed establishment is not considered to be established in that Member State if that permanent establishment does not participate in the supply.
The internal VAT legislation, Article 17(2) and (4) of Presidential Decree No. 633/1972 provides that obligations relating to the supply of goods and services by non-resident persons to taxable persons established in the territory of the State are fulfilled by the transferees or purchasers, with the exception of transactions carried out through a permanent establishment.
It can therefore be inferred that when the transaction is concluded through the active participation of a permanent establishment, the latter acquires the status of a VAT taxable person in Italy.
In addition, Article 53 of EU Regulation 282/2011 identifies the prerequisites required for the permanent establishment to be considered an active party under Art. 192-bis in VAT-relevant transactions:
  • the permanent establishment must be characterised by a sufficient degree of permanence and an adequate structure in terms of human and technical resources to enable it to carry out the supply of goods or services in which it intervenes
  • those technical and human means are used by the non-resident for carrying out transactions inherent in the making of the supply of those goods or services in the Member State, before or during the making of that supply
In consideration of these provisions, it seems straightforward to define the perimeter of operation of a permanent establishment. But, on the other hand, in practice the question arises as to how to assess and interpret the prerequisites under Art. 53.
In particular, the main question involves the assessment of the adequacy of the human and technical resources possessed and the quantification of the degree of permanence of the permanent establishment.
In fact, it seems clear that as the nature and size of the enterprise (parent company) changes, the assessment of the adequacy of the requirements possessed by the permanent establishment must change, and as the requirements possessed by the permanent establishment change, so must the obligations on it.
For example, the absence of the requirement of an adequate structure in terms of human resources subjects the permanent establishment exclusively to direct tax obligations, whereas, on the contrary, the existence of this requirement, in the presence of all the others, also requires the fulfilment of VAT obligations.
In view of the foregoing, one wonders whether the lack of guidelines enabling the perimeter of operation of a permanent establishment to be clearly identified may give rise to conflicts of interpretation between the tax authorities and the taxpayer.
In fact, according to the different interpretation of the rule and the Agency's recent provisions, a permanent establishment already operating could unwittingly fall into the status of a taxable person for VAT purposes.
In this case, it would be advisable to review processes and the distribution of activities between the parent company and the branch in order to properly fulfil tax obligations and to avoid the risk of tax assessments and consequent penalties.



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