Italian Corporate Income Tax (ITR) – PE and Non-Resident Taxation

Article 169 and the precedence of international law

• The Italian Tax Rules (ITR) Article 169: "The provisions of this Italian Tax Rules apply, if more favorable to the taxpayer, also in derogation of international agreements against double taxation".
• General principle: International law prevails over domestic law in case of conflict, including tax matters, as supported by constitutional considerations.
• Exception (Article 169): Domestic rules prevail when they provide more favourable tax effects or regime for the taxpayer than treaty/international-law provisions.
• Constitutional basis: Article 117 of the Italian Constitution assigns legislative power to the State and regions, in compliance with the Constitution and international obligations; Article 169 acts as a constraint, limiting the primacy of international law when a domestic provision yields more favorable results for the taxpayer.
• Practical takeaway: In cross-border tax scenarios, auditors assess whether the domestic provision or the treaty provision yields better outcomes for the taxpayer; if the domestic rule is more favorable, it applies notwithstanding an international agreement.

Application of Italian Corporate Income Tax (CIT) to non-residents

• Article 23(1)(c) ITR (definition): For non-residents, the following shall be deemed to have been produced in the territory of the State: (a) …; (b) …; (c) “business income from activities exercised in the territory of the state through permanent establishments”.
• Article 162 ITR defines the term «permanent establishment» under Italian/domestic tax law.
• Implication: Non-residents are taxed on business income earned through a PE in Italy; the PE acts as the taxable nexus.

Permanent Establishment under ITR

• Article 162, para 1, ITR: For income tax purposes (IRES or CIT) and IRAP, PE means a fixed place of business through which the non-resident enterprise carries on all or part of its activity in the State.
• PE concept: A non-resident enterprise is taxable in the source country when the minimum nexus (PE) threshold is met, enabling taxation of the income generated there.
• Core idea: PE marks the allocation point of taxing rights between Source State (where income is generated) and Residence State (of the enterprise).

Positive list (of PE) under Article 162, para 2

• The term ‘permanent establishment’ includes, in particular:
  • (a) a place of management;
  • (b) a branch;
  • (c) an office;
  • (d) a workshop;
  • (e) a laboratory;
  • (f) a mine, an oil or gas field, a quarry or other place of extraction of natural resources, including in areas beyond the territorial sea where, in accordance with customary international law and national legislation concerning the exploration for and exploitation of natural resources, the State may exercise rights in respect of the sea-bed, its subsoil and natural resources.
  • (f-bis) a significant and continuous economic presence in the territory of the State constructed in such a way that it does not appear to have a physical presence there.
• Important notes:
  • This list is illustrative, not exhaustive.
  • The f-bis category was introduced by the 2018 Italian Budget Law to address digital economy nexus beyond traditional PE concepts. It is not part of the OECD Model Convention (OECD MC) definitions, raising interpretative and implementation issues.
• Practical implication: Taxpayers and tax authorities must consider both literal list items and evolving nexus concepts, especially for digital/economy types of activities.

Construction site as PE

• Article 162, para 3, ITR: A construction, assembly, or installation site, or the exercise of supervisory activities connected therewith, is a PE only if the site/project/activity lasts more than 3 months.
• Rules:
  • Supervisory activity can create PE even if the construction site itself lasts less than 3 months.
  • The duration clause applies retroactively when the condition is met.
  • The duration is determined across fiscal years if the site spans more than one year.
• Practical takeaway: Time thresholds determine when construction-related activities trigger tax presence; supervision can amplify PE even with short physical site duration.

Auxiliary and preparatory nature

• Article 162, para 4-bis, ITR: The provisions of para. 4 apply provided that the activities referred to in sub-paragraphs (a) to (e) or, in the cases referred to in sub-paragraph (f), the overall activity of the fixed place of business are of a preparatory or auxiliary character.
• Implication: Activities that are merely preparatory or auxiliary generally do not give rise to a PE, clarifying the boundary between substantive business operations and incidental actions.

Negative list

• Article 162, para 4 of ITR, not-withstanding paras (1) to (3), the term PE does not include:
  • (a) use of an establishment solely for storage, exhibition, or delivery of goods belonging to the enterprise;
  • (b) availability of goods stored solely for storage, exhibition, or delivery;
  • (c) availability of goods stored solely for processing by another enterprise;
  • (d) fixed place of business used solely for acquiring goods or collecting information for the enterprise;
  • (e) fixed place of business used solely for carrying on any other business for the enterprise;
  • (f) fixed place used solely for the combined pursuit of activities in (a)–(e).
• Practical takeaway: The negative list excludes certain passive or ancillary uses from triggering PE status.

Anti-fragmentation rule

• Article 162, para 5, ITR: Paragraph (4) (the preparatory/auxiliary criteria) shall not apply to a fixed place of business if:
  • a closely related enterprise carries on business in the same or another place within the State, and the same or another place constitutes a PE for the enterprise or closely related enterprise; or
  • the overall activity resulting from the combination of activities carried on by two enterprises in the same place (or by the same enterprise or closely related enterprises in two places) is not preparatory or auxiliary, and the activities form complementary functions within a single set of enterprise operations.
• Practical effect: This rule prevents circumvention of PE by fragmenting activities across entities or locations to avoid PE status.

Personal PE

• Article 162, para 6, ITR: If a person acting within the State on behalf of a non-resident enterprise habitually concludes contracts or operates for the purpose of contract conclusion without substantial modification by the enterprise, and such contracts are in the name of the enterprise (or relate to transfer of ownership or licensing), the enterprise is deemed to have a PE for those activities carried out by that person in the State.
• Exception: If the person’s activities are limited to those set forth in para. 4, and those activities would not, if carried on through a fixed place of business, constitute PE under para. 4.

No Personal PE (independent agent)

• Article 162, para 7, ITR: Para 6 does not apply when the person acting on behalf of a non-resident enterprise is an independent agent in the ordinary course of business.
• However, if the person acts exclusively or almost exclusively on behalf of one or more enterprises with which it is closely connected, such a person shall not be considered an independent agent in relation to each such enterprise.

Closely related person

• Article 162, para 7-bis, ITR (10A): For purposes of this Article, a person is closely related to an enterprise if:
  • one has control of the other or both are controlled by the same person.
  • In any event, a person is closely related if one owns directly or indirectly more than 50\% of the shareholding of the other, or more than 50\% of the total voting rights and share capital, or if both are owned by another person for more than 50\% of shareholding or voting rights.
• Article 162, para 9, ITR (10B): The mere fact that a non-resident enterprise controls a resident enterprise (or vice versa), or both are controlled by a third party, is not sufficient to treat any of the undertakings as a PE of the other.
• Practical takeaway: The notion of closely related persons affects the assessment of agency and PE status; control thresholds are central.

Income attributable to the PE

• Article 152 ITR (paras 1–2):
  • Para 1: For companies and commercial entities with a PE in Italy, the PE’s income is determined on the basis of profits and losses attributable to it, following Section I of Chapter II of Title II, and using an appropriate statement of income and assets and liabilities prepared under accounting principles for resident entities with similar characteristics.
  • Para 2: The PE is regarded as a separate and independent entity performing the same or similar activities under similar conditions, taking into account functions performed, risks assumed, and assets utilized. The endowment fund attributable to the PE is determined in full accordance with OECD guidelines, considering those functions, risks, and assets.
• Practical note: The attribution principle ensures the PE’s income reflects its own performance, while aligning with OECD guidance on functional and risk-based allocation.

Branch Exemption (BEX)

• 12A. Article 168-ter ITR: An Italian resident enterprise may opt for exemption of profits and losses attributable to all its foreign permanent establishments.
• Rationale: The exemption method aims to eliminate double taxation by removing foreign PE profits from Italian tax base when certain conditions are met.
• Comparison to credit method: Under the exemption method, the final tax burden is determined by the source country, provided the resident country exempts that income; under the credit method, the burden is determined by the resident country with a foreign tax credit.
• 12B. Conditions and mechanics (summary):
  • All-in vs All-out option: no cherry-picking; applies group-wide and to each PE within the group; not applicable to all entities.
  • Timing: Option may be exercised when a new PE is established; the option is irrevocable and takes effect in the tax period in which the PE is established (and applies to that period).
  • Implication: Once elected, it affects how profits attributable to foreign PEs are taxed going forward; taxpayers must consider the long-term effect on tax burden and compliance.
• Practical takeaway: BEX provides a regime shift to avoid double taxation for foreign PEs but requires strategic planning and irrevocability.

Business Profits (Taxation of resident entities)

• Article 73, para 1, ITR lists the entities subject to corporate income tax (CIT) in the Italian territory:
  • (a) Companies and corporate forms resident in the State (e.g., companies limited by shares, LLPs with share capital, cooperative societies, European companies under Regulation No. 2157/2001, European cooperative societies under Regulation No. 1435/2003);
  • (b) Public and private entities other than companies, and trusts, resident in the State whose exclusive or main purpose is to engage in commercial activities;
  • (c) Public and private entities other than companies, trusts not exclusively dedicated to commercial activities, and undertakings for collective investment, resident in the State;
  • (d) Companies and entities of all kinds, including trusts, not resident in the State.
• Practical takeaway: The CIT framework defines which entities are subject to Italian corporate tax, including resident and certain non-resident entities with Italian nexus.

Tax residence for Business Profits

• Article 73, para 3, ITR defines residence for tax purposes: An entity is resident if it has:
  • its registered office (legal seat) in Italy, or
  • place of effective management, or
  • principal ordinary management in the State for the greater part of the tax period.
• Effective place of management: the continuous and coordinated decision-making concerning the entity as a whole.
• Ordinary management: the continuous and coordinated performance of day-to-day management concerning the entity as a whole.
• Practical implication: The residence test uses a mix of formal and substantive indicators; shifting place of management can reclassify tax residence.

Deemed tax residence for Business Profits (esterovestizione)

• Article 73, para 3, ITR (deemed residence): If certain control/management arrangements exist, a non-resident may be deemed resident in Italy for tax purposes even if not formally resident.
• Elements: If the entity is controlled, directly or indirectly, by residents; or administered by a board predominantly composed of residents, the entity may be deemed resident in Italy.
• Esterovestizione: A term describing the dissociation between formal and substantive residence to obtain a more favorable tax regime while operating primarily in Italy.
• Practical takeaway: Tax planning can involve structuring governance and control to influence deemed residence status; such arrangements attract scrutiny to ensure substance aligns with formal status.

Tax period and Tax Rate

• Article 76, para 1: The tax is due per tax period.
• Article 76, para 2: The tax period is the financial year or the company’s period of operation; if not defined by law or deed, or if it spans more than one year, the tax period is the calendar year.
• Article 77: The tax rate is 24% (i.e.,
  ext{Tax rate} = 24\% ).
• Practical implication: Tax computation follows a defined fiscal period with a flat statutory rate, subject to adjustments via incentives, exemptions, and BEPS rules.

Application of tax to non-residents (expanded reference)

• Article 23 (non-residents): For non-residents, the following are deemed produced in the Italian territory:
  • (a) Income from land;
  • (b) Capital income paid by the State, by residents or by permanent establishments in the territory of non-residents (and other specified payors);
  • (c) Income from employment performed in Italy, including employment assimilated to employment;
  • (d) Self-employment income derived from activities carried out in Italy;
  • (e) Business income derived from activities carried out in Italy through permanent establishment; and
  • (f) Miscellaneous income derived from activities carried out in Italy.
• Practical takeaway: The non-resident regime enumerates several income streams subject to Italian tax, ensuring comprehensive coverage of cross-border business and employment activities.

Connections to previous principles and real-world relevance

• Precedence of international law informs treaty interpretation and cross-border tax planning.
• The PE concept anchors the allocation of taxing rights between source and residence states, guiding both tax compliance and international structuring.
• The positive/negative lists, and the anti-fragmentation rule, reflect ongoing attempts to standardize nexus while preventing treaty shopping and artificial arrangements.
• The BEX regime illustrates Italy’s approach to avoiding double taxation via exemption rather than credit, with group-wide irrevocable choices.
• The deemed residence (esterovestizione) concept highlights the need for economic substance and governance alignment; improper structuring can lead to unexpected residency and taxation outcomes.
• Practical implications for multinational groups:
  • Assess presence of PE through activities, e.g., fixed places of business, personnel actions, and digital/economic nexus.
  • Evaluate whether to elect Branch Exemption and the long-term tax implications.
  • Monitor changes in law (e.g., f-bis) that broaden nexus beyond traditional physical presence.
  • Consider compliance requirements for attribution of PE income (Article 152) and the consequences of deemed residence.

Ethical, philosophical, and practical implications

• Ethical: Tax should reflect economic substance; artificial arrangements for tax avoidance are ethically questionable and increasingly scrutinized.
• Philosophical: Balancing sovereignty (domestic law) with international obligations; the architecture of tax law reflects a tension between protection of national revenue and fair cross-border taxation.
• Practical: Taxpayers must implement robust transfer pricing, governance, and documentation to substantiate PE status, income attribution, and residence conclusions.

Key numerical references and formulas

• Three-month threshold for construction sites: 3\;\text{months}
• Control thresholds for closely related persons: >50\% of shareholding or voting rights
• Tax rate for CIT: R = 0.24 or 24\%
• Residence tests thresholds: greater part of the tax period (i.e., >50% of the period) for place of effective management/ordinary management
• Branch Exemption (BEX) option: irrevocable decision applicable from the time the PE is established

Quick-reference outline (for exam prep)

• Article 169 ITR: precedence rules between domestic and international law; exception when domestic rule is more favorable
• Article 23(1)(c) ITR: non-residents taxed on business income via PE in Italy
• Article 162 ITR: permanent establishment definition and scope
• Positive list (para 2) and f-bis: defined PE categories; note OECD Model Convention alignment gaps
• Construction site as PE (para 3): duration rule; retroactivity and cross-year implications
• Auxiliary/preparatory (para 4-bis): limits PE to substantial activities
• Negative list (para 4): explicit non-PE uses of fixed places
• Anti-fragmentation (para 5): prevents funneling activities to avoid PE
• Personal PE (para 6): agent-related PE via habitual contract conclusions
• No Personal PE (para 7): independent agent test and closely related person caveats
• Closely related person (10A, 10B): control and relationship tests
• Income attributable to PE (Article 152): attribution and OECD guidance
• Branch Exemption (12A, 12B): exemption method, irrevocable election, all-in/all-out
• Business Profits (Art. 73(1)): entities taxed in Italy for corporate income
• Tax residence for Business Profits (Art. 73(3)): residence tests (registered office, place of effective management, ordinary management)
• Deemed residence (esterovestizione) (Art. 73(3) para 3): governance/control-based residence shift
• Tax period and rate (Arts. 76–77): annual period and 24% rate
• Application to non-residents (Art. 23): comprehensive enumeration of income sources taxed in Italy