ITALY Law and Practice Contributed by: Giuliano Foglia, Foglia & Partners
2.6 Definition of Permanent Establishment The domestic definition of permanent establishment (“PE”) is provided by Article 162 of the ITC, whose current version is the result of the amendments made by Law No 205/2017 that has aligned the domestic notion to the one contained in the latest version of the OECD Model (2017), which, in turn, has incorporated the conclusions of the Final Report on Action 7 of the OECD BEPS Project. In addition to the examples of places of business that can be regarded as constituting a material PE under Article 5 (2) of the OECD Model (so-called “positive list”), Article 162 (2)(f-bis) of the ITC includes the case of a significant and continuous economic presence in the Italian territory, without any physical presence therein. Such an example has been included primarily to address issues related to the profits generated by digital businesses. The definition of construction PE provides for a three- month threshold (Article 162 (3) of the ITC), shorter than the one provided for in Article 5 (3) of the OECD Model (12 months). In line with Article 5 of the OECD Model, the Italian domestic provision includes a rule subjecting all the exceptions to the existence of a PE (so-called “nega - tive list”) of paragraph 4 to the “preparatory and aux - iliary” condition (Article 162 (4-bis) of the ITC) and the so-called anti-fragmentation rule (Article 162 (5) of the ITC). The domestic notion of agent PE set forth by Article 162 (6) of the ITC only refers to persons “operating” for the conclusion of contracts that are routinely con - cluded without material modification by the foreign enterprise, without requiring (as Article 5 (5) of the OECD Model) that they should also play the “principal role” in this respect. Article 162 (7-ter – 7-quinquies) of the ITC contains a safe-harbour from the existence of an agent PE for asset managers or advisory companies operating in Italy and acting on behalf of foreign investment vehi - cles or their controlled entities (so-called investment management exemption” or “IME”). Under the IME, the former entities are considered independent and,
thus, do not give rise to an agent PE of the foreign investment funds or of the other entities of the invest- ment structure (to be noted that, as clarified in Circular Letter No 23/2024, IME does not apply to exclude the existence of an agent PE of the non-Italian manage - ment company), if the following cumulative conditions are met: • the investment funds and their (directly or indirect - ly) controlled entities for which the asset manager/ advisory company operates are resident in a white- list jurisdiction; • the investment funds meet specific requirements of independence (ie, professional management of investments in the interest of investors and autono- mously from them, according to a predetermined investment policy; subjection to regulatory supervi - sion; plurality of investors); • the asset manager/advisory company does not have positions in management or supervisory bodies of the foreign investment funds (or of any of their direct or indirect subsidiaries) and is not entitled to more than 25% of the economic results; and • the asset manager/advisory company supplying services within the same group is remunerated at arm’s length and the remuneration is supported by adequate documentation prepared in accordance with the transfer pricing rules. The great majority of the DTCs currently in force have been concluded on the basis of versions of the OECD Model that predate 2017. As those versions are usu - ally more favourable to the taxpayers, the provisions of the relevant conventions should prevail over the current domestic definition of PE; in particular: • no reference is made in the positive list to the significant and continuous economic presence in the Italian territory, without any physical presence therein; • the definition of construction PE generally provides for a qualifying threshold higher than three months (six or 12 months); • no reference is generally made to the “preparatory and auxiliary” condition in the negative list or to the anti-fragmentation rule;
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