Tax News

Permanent Establishment: enhanced cooperation procedure

On 16 April 2019 the Italian Revenue Office issued Order n. 95765/2019 defining the implementation methodologies for the “Enhanced cooperation procedure” ex art. 1-bis of Law Decree 50/2017. This procedure can be used by non-resident companies part of multinational groups carrying out economic activities in Italy which may give rise to a permanent establishment.

In particular, by filing an application for the enhanced cooperation procedure, a collaboration and exchange process between the taxpayer and the Revenue Office is initiated, with the aim of evaluating in a cross-examination whether the prerequisites for the existence of a permanent establishment exist and, if so, to determine the revenues and taxable base for the purpose of calculating the VAT on operations referable to the PE.

In order to access said procedure, companies need to meet the following prerequisites:

• being part of a multinational group with consolidated revenues over 1 billion Euro/year

carry out in Italy supply of goods or services for an amount exceeding 50 million Euro/year, also with the support of related companies.

Transfer pricing – burden of proof

With judgement n. 376/2019, the Lombardy Tax Court expressed itself on the topic of the burden of proof within the scope of the transfer pricing regulation.

In particular, as concerns the allocation of the burden of proof in case of a tax audit on the transfer prices applied, it specified that: (i) the Tax Authorities, from the one hand, have the obligation to demonstrate the actual discrepancies in the assessed intercompany transactions compared with comparable transactions carried out between unrelated parties; (ii) on the other hand, the taxpayer is liable to demonstrate that such transactions were carried out at arm’s length.

In the specific case, the Judge deemed the evidence provided by the taxpayer as suitable, since the information on the functions performed and the organisational chart of the foreign company were sufficient to provide a comprehensive description of the specific characteristics of the companies within the Group. The Judge further confirmed the reliability of the CUP method applied, to demonstrate both the compliance with the market’s regulations, granted by the presence of independent German shareholders, and  their actual performance of significant functions.

Transfer pricing – Comparability analysis

With judgement n. 376/2019 dated 21/11/2018, the Lombardy Tax Court clarified some key transfer pricing issues, which are often debated during tax audits and tax litigations.

The following point have been clarified in particular:

• should a company have applied a method in compliance with the provisions of Ministerial Decree dated 14 May 2018, the Revenue Office will have to base their audit on the same method; therefore the application of the TNMM method by the company is to be considered correct;
• the territorial scope should not be limited to the domestic territory; the taxpayer had included some European companies among the comparables , whereas the Revenue Office limited their analysis to Italian companies. In the specific case, the inclusion of European comparables was deemed consistent with the activity carried out;
• the reference period cannot include the audited FY;
• the use of versions of databases which were not available when the taxpayer carried out its analysis is considered unlawful.
  
  

Foreign dividends 95% exempt based on the collection date

The criteria applied to identify black listed countries have changed over the years and this gave rise to the case of the distribution of profits attained in FYs in which foreign companies were not considered as black listed, but which were considered as such upon distributing dividends.

With principle n. 17 dated 25 May 2019, the Revenue Office clarified  that profits attained starting from the FY following the one underway at 31 December 2014 are not considered as originating in blacklisted countries provided that: (i) they were attained in FYs preceding 31 December 2014, when the companies generating them were resident in non-blacklisted countries, or (ii) they were attained after 31 December 2014 in non-blacklisted countries and subsequently received in FYs in which the companies generating them were considered as resident in blacklisted countries.

Budget Law 2018 overcame the “penalising” interpretation provided under Revenue Office Circular Letter 35/E/2016, which based the determination of whether a company was resident in a blacklisted or whitelisted country on the moment in which the dividends were received and thus provided for the taxation of the total dividends attained when the company generating them was considered as resident in a whitelisted country, but distributed when it was considered as resident in a blacklisted country due to the new regulation in force.

The rule does not apply to the opposite case, i.e. when dividends were attained in a FY in which the foreign companies were resident in blacklisted countries and received when such countries were no longer considered as blacklisted: in this case the principle of the relevance of the receipt of dividends applies.

Inbound individuals – favourable tax regime

Growth Decree n. 34 dated 2019, in force since 1 May 2019, introduced new norms aimed at attracting talents to Italy by reinforcing the favourable measures already in force for inbounds.

In particular, the Growth Decree provides for a further reduction of the taxable base from 50% to 70% for inbounds moving their residence starting from the second tax period following the one in which the Decree entered into force.

Prerequisites to access this regime are:

• the working activity no longer needs to be carried out in favour of a resident company or of one of its controlled entities, but it needs nonetheless to be carried out in Italy;
• the tax periods of residence abroad previous to the transfer have been reduced from 5 to 2.

In addition to employees and self-employed with income treated as employment income, the favourable regime will also apply to individuals starting a business activity from the tax period following 31 December 2019.

The regime is extended for further 5 tax periods, with a 50% taxation of the income generated as inbound, in case the inbound has at least a minor dependent child and purchases a residential property in Italy.

As for the benefit in force for the so-called “brain gain” – providing for that 90% of the remuneration earned by professors and researchers does not contribute to the formation of income from subordinate employment – the Decree extended its duration from 4 to 6 years for individuals moving their residence to Italy from the tax period following 31 December 2019.