Agency Permanent Establishment in Italy

Italian legislation on Agency permanent establishment

From the hierarchical relationship between the two main types of permanent establishment in Italy, aiming to avoid any elusive behaviour regarding the provisions on material PE, derives, as a result, that a foreign enterprise may be taxable in another State even if it has no fixed place of business.

This is the case of an agency permanent establishment or personal PE.

In Italy, according to Article 162, Paragraph 6 of TUIR, this will occur whenever

1. «a person acts in the territory of the State on behalf of a non-resident enterprise
2. and habitually concludes contracts or acts for the purpose of concluding contracts without substantial modifications by the enterprise». More specifically,
3. these contracts must be «in the name of the enterprise, or relating to the transfer of ownership, or the granting of the right of use, of goods of that enterprise or that the enterprise has the right to use or relating to the provisions of services by such an enterprise».

In these cases, the enterprise shall be deemed to have a permanent establishment regarding all the activities performed on behalf of it.

The next Paragraph 7 specifies the case of a so-called independent agent (e.g., a commissionaire), to whom Paragraph 6 shall not be applied (cf. Tax Ruling No. 4/E, 17^th January 2017). An independent agent is a person who operates in the territory of the State on behalf of a foreign enterprise but carries out that activity as an independent agent and in the ordinary course of his business.

However, when this person «acts exclusively or almost exclusively on behalf of one or more undertakings to which he is closely related», pursuant to the definition stated in Paragraph 7-bis, that person shall fall within the case provided by Paragraph 6, thus giving rise to a permanent establishment.

According to the Italian Tax Law, a dependent agent may not give rise to a permanent establishment if the activities carried out are included in the exceptions provided in Paragraph 4 of Article 162 (the so-called negative list), e.g., a fixed place of business used solely for the purchase of goods or services or to gather information for the enterprise.

Case law on Agency PE

Italian Supreme Court guidelines regarding the verification of PE requirements provide that this investigation must be conducted not only on a formal basis, but above all on a substantial one (cf. Judgment No. 992/2024 recalling Judgment No. 14573/2018).

As clarified by the Italian Tax Commissions, e.g., in Judgment No. 4868/2018, in order to have an agency permanent establishment, there are two main alternative conditions that must be satisfied:

1. the dependent agent shall represent the enterprise, or
2. shall play a decisive role in the preliminary negotiations for the conclusion of contracts.

In some cases (e.g., Judgment No. 53/2013), after actions of assessment taken by the Italian Revenue Agency, Tax Commissions have stated that it is not possible to use typical tax assumptions in order to prove that a certain enterprise has an agency PE in Italy. This must be proved with reference to all conditions provided by law, including, for instance, that the agent habitually acts on behalf of the foreign enterprise.

In the same vein, cf. the recent Judgment No. 2911/2024, as well as the guidelines of the Italian Supreme Court (Judgment No. 8488/2010) according to which for an enterprise to be taxable in a foreign country it is sufficient that only one of the alternative requirements, the objective one (i.e., material PE) and the subjective one (i.e., personal PE), is fulfilled.

Moreover, another principle of law stated by the Court is that whenever an enterprise has a stable dependent agent with the power of concluding contracts on behalf of it, this would constitute an agency permanent establishment, even if the same agent acts on orders or directives from the enterprise.

This principle can be also found in the subsequent Judgment No. 8543/2016.

In a different vein, with Judgment No. 2597/2023, the Supreme Court has stated that it does not give rise to permanent establishment the activity of a commissionaire with an independent status, since, among other things, it is immaterial that the foreign enterprise in the host country does not bear the business risk – in the specific case of law, according to the commissionaire’s business, the agent was only doing preparatory and auxiliary activities with reference to the commercial activity of the holding company.

Agency PE in OECD Model Tax Convention

However, the general rule provides that conventional rules shall prevail over domestic rules (Article 169 of TUIR and Article 75 of D.P.R. No. 600/1973) – this general principle has also been stated by the Italian Supreme Court (cf. Judgment No. 23984/2016). Therefore, it must be considered Paragraph 5, Article 5 of the OECD Model Tax Convention, which provides an identical definition of Agency permanent establishment to the one provided by the Italian Tax Law.

It is also specified in the subsequent Paragraph 6 that the provisions of Paragraph 5 «shall not apply where the person acting in a Contracting State on behalf of an enterprise of the other Contracting State carries on business in the first-mentioned State as an independent agent and acts for the enterprise in the ordinary course of that business», or moreover, where the activities performed on behalf of the foreign enterprise are limited to the ones listed in Paragraph 4 (so-called negative list).

Therefore, according to the MTC two conditions must be met in order to avoid having an Agency PE:

1. the agent must be both legally and economically independent
2. the agent must act on the ordinary course of his business.

However, when a person acts exclusively or most exclusively on behalf of one or more enterprises to which is closely related, that person should not be qualified as an independent agent – indeed, the following Paragraph 8 provides a clarification regarding the concept of a person or enterprise closely related to an enterprise that is being represented, that occurs when «one has control of the other or both are under the control of the same persons or enterprises».

Requirements under Model Treaty language

According to the Commentary to Paragraph 5 of Article 5 of the Convention, it is immaterial whether the subject whose activities may trigger a permanent establishment is an individual or a company.

However, taking into account the underlying aim of the Convention to protect international economic relations, it is clarified that not every person acting on behalf of an enterprise would constitute a PE, and therefore Paragraph 5 provides a list of conditions that must occur in order to constitute an Agency PE.

More specifically, there are three conditions that must be met for Paragraph 5 to apply:

1. a person acts in a Contracting State on behalf of the enterprise and has the authority to conclude contracts – it must here be noted that the OECD Model does not take into account the case where an agent acts on behalf of the foreign enterprise but following specific orders or directives;
2. that person habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise – the physical presence of the agent should be more than just “transitory”, having regard to the nature of contracts concluded;
3. and these contracts are either in the name of the enterprise or for the transfer of the ownership of, or for the granting of the right to use property owned by that enterprise has the right to use, or for the provision of services by that enterprise – the Commentary specifies that the wording «in the name of the enterprise» also applies to agents who conclude contracts which are binding on the enterprise, even though they are not concluded in the name of it.

Paragraph 5, according to the Commentary, also provides an “alternative test” in order to determine whether an enterprise has a PE in the host State. Indeed, if the enterprise meets the requirements under Paragraph 1 and 2, it is not necessary to demonstrate that an agent would give rise to an Agency PE.

Main differences between national and international legislation

The main differences between the Italian Tax Law on agency PE and the Model Tax Convention concern the fact that whilst Paragraph 97 of the Commentary on Article 5 specifies that the mere presence or participation to the negotiations of contracts on behalf of a foreign enterprise does not constitute an Agency PE in the host country, Italy has clarified that its national jurisprudence shall not be ignored in the interpretation of this provision – indeed, with reference to the leading Judgment No. 7682/2002 of the Italian Supreme Court (after which Italy has reserved the provisional right to reservation to the application of conventions, with specific reference to Article 5, Paragraph 5 – pursuant to BEPS Convention), it has been stated that an Italian enterprise could be the permanent establishment of different foreign companies under same control which were responsible for negotiating terms and conditions of contracts on behalf of the parent company.

Moreover, it has been noted that with reference to negotiation of contracts, whilst Article 5 of the MTC requires a «principal role» that must be played by the dependent agent, the Italian Article 162 only requires that the same person «acts» in order to conclude such contracts.

Also, while the Italian Tax Law considers activities included in Paragraph 4 of Article 162 as activities that shall not give rise to a PE, the OECD Model Tax Convention expressly states that this won’t occur whenever the activities have an auxiliary or preparatory character.

Mutual Agreement Procedures (MAP)

Whenever a taxpayer fears that his business profit could be double taxed in two different contracting States, thus not in accordance with the provisions of OECD MTC, regardless of any domestic legal remedy available, can address the problem to the competent authority.

In so doing, authorities of both States are obliged to seek a solution, by directly communicating with each other, in accordance with the provisions of the convention and principles of international law, but there is no other condition to fulfill – they are not obliged to effectively solve the problem and reach an agreement.

Mutual Agreement Procedures can be set in motion by the taxpayer without having to wait until the taxation from which the problem arises has been charged or notified to him.

In order to do so, it is sufficient the proof that the “actions of one or both States” will result in double taxation, and that risk is not merely possible but probable.

Whenever the competent authorities can’t reach an agreement by themselves within 2 years (from the date when all the relevant information has been provided to both of them), “any unresolved issues arising from the case shall be submitted to arbitration, if the person so requests in writing”.

To summarize, there are two main phases:

1. the first one is the setting in motion of the procedure itself by the taxpayer, and it concerns the negotiations between the taxpayer himself and the competent authority of his resident State.
2. The second one occurs when the competent authority of the first phase cannot reach an agreement with the taxpayer and addresses the competent authority of the other Contracting State to consult together. According to the Commentary, both the competent authorities are obliged to start negotiations, but not to solve the case.

More specifically, Paragraph 5 (added in 2008) states that whenever, under Paragraph 1, a person has presented a case and the competent authorities, within two years from it, are unable to reach an agreement, any unresolved issue arising from the case shall be submitted to arbitration, but this other mechanism can be used only if the decision on the same issues has not been rendered by a court or administrative tribunal of one of the States and if there is a specific provision in the bilateral convention.

However, according to the Commentary to Article 25, this process is «an integral part of the mutual agreement procedure and does not constitute an alternative route to solving disputes concerning the application of the Convention». Moreover, the new mandatory procedure of arbitration is applicable subject to its inclusion in new (or existing) bilateral conventions being negotiated (or renegotiated).

With such a clause, the efficiency of MAP is reinforced.