Tax residence and fiscal domicilei Corporate residence
Companies are deemed to be resident in Italy if, for the greater part of the tax year, they have their legal seat, place of management or main business purpose in Italy. The place of management is deemed to be the place where the main decisions regarding the business are taken (usually, where the board meetings are held).
Moreover, pursuant to certain presumptions set out by the ITC, a foreign-incorporated company is deemed as resident in Italy if it controls an Italian-resident company and, at the same time, it is either controlled by an Italian-resident person (company or individual), or managed by a board of directors with a majority of Italian-resident members. The presumption of residence can be rebutted by the taxpayer.
Among the amendments the Italian tax system underwent in 2015 and 2018, new rules have been laid down to assess the tax basis of the assets of companies that move from another country and take up Italian residence.
In this respect, starting from 2015, inbound transfers of residence are to be distinguished depending upon the former country of residence: if the company was a resident of a white-listed country, for Italian tax purposes the entry tax basis of its assets and liabilities is equal to their arm's-length value; on the other hand, if the company is exiting a blacklisted country, the entry tax basis of its assets and liabilities is equal to their arm's-length value subject to a successful ruling. Where a ruling does not succeed, for Italian tax purposes the tax basis of the company's assets will be the lowest among their cost basis, book value and arm's-length value and, as to liabilities, the highest among their cost basis, book value and arm's-length value.
Further, pursuant to the Italian undergoing implementation of the ATAD, the scope of application of such provision now covers the transfers to the Italian territory of: (1) a permanent establishment of a non-resident company; (2) a business; (3) a permanent establishment of a resident company under the branch exemption regime; and (4) cross-border mergers. In a public ruling (Resolution No. 69/E of 5 August 2016), the Italian tax authorities clarified that the entry tax regime is available also to a foreign real estate holding company established in Luxembourg, since it carries out an 'economic' activity. Further, in that context, the Italian tax authorities also confirmed that the assets of the foreign company that are either booked at a lower value than fair market or are no longer booked in the company's accounts owing to full depreciation can be booked at their arm's-length value upon entry in the Italian tax system.ii Branch or permanent establishment
Under the ITC, a permanent establishment is defined as a fixed place of business through which the business of a non-resident enterprise is wholly or partly carried out in Italy (physical permanent establishment). In addition, a permanent establishment occurs when a person who is not independent from the foreign enterprise has the power to engage the non-resident enterprise and usually does so (agency permanent establishment). A fixed place of business is not considered as a permanent establishment if the activity carried out is of an internal nature (i.e., it is rendered solely in favour of the enterprise owning such fixed place of business), or has a preparatory or ancillary nature in respect of the ordinary activity carried out by the enterprise. A special definition of permanent establishment applies to businesses engaged in the gambling sector, according to which if a resident carries out betting intermediary activity by means of a fixed place of business on behalf of a non-resident – even by collecting the bets or by providing the customers with the proper machines – and the financial flows related to such activities overcome the threshold of €500,000, the non-resident is deemed to have a permanent establishment in Italy.
Starting from 2018, the legislator has introduced a new definition of permanent establishment that, on the one hand is in line with the new Article 5 of the OECD Model Convention, and on the other hand introduces a new definition of digital permanent establishment. The new definition of 'digital' permanent establishment covers cases of significant and continuous economic presence designed to avoid a physical one.
Such domestic definition, however, is not applicable insofar as the foreign taxpayer is covered by a double tax agreement that provides for a definition of permanent establishment that is more favourable to the taxpayer than the relevant domestic definition.
As regards the allocation of profits to permanent establishments, reference is made to OECD guidelines and principles; such principles are adopted by the Italian tax authorities according to the functionally separate entity approach.
While Italy relieves double taxation through the ordinary credit method (both in its double tax treaties and through domestic rules), a 2015 piece of legislation provides for an alternative relief method for foreign branches of Italian companies (the s.c. branch exemption). Under the branch exemption regime, an Italian company having permanent establishments located in white-listed countries can elect for the application of the exemption method rather than the credit method. The election is irrevocable and follows the 'all-in, all-out' approach. The election for the exemption method does not 'defuse' the controlled foreign corporation (CFC) legislation, but exemptions can be sought through the ruling procedure.