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Permanent Establishment

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A permanent establishment, as clarified in article 5 of OECD convention, and then introduced in art. 162 of Tuir, is “a fixed place of business, through which the business of an enterprise is wholly or partly carried on”. Recently, following an update of the Oecd document, a few news were introduced to prevent the avoidance of the status, like the “anti-fragmentation rule”.

Anti-fragmentation rule

When some kind of business is run from one or more linked companies, a permanent establishment happens if these are linked and complementary, except for preparatory or support businesses. To adapt to these new standards, in addition to the implementation of the anti-fragmentation rule, Italy modified art. 162 Tuir, adding new type of permanent establishment (the so-called “digital permanent establishment”) and removing cases which excluded the permanent establishment (electronic calculators used to collect data and transfer information regarding the trade of goods). It has been also introduced a “negative list” with the activities unrelated to a permanent establishment.

Types of permanent establishment

  • Material permanent establishment when the foreign company has a fixed place of business. The criteria used here is the possession of a physical space;
  • Personal permanent establishment when the foreign company has a person, physical or legal entity, who acts on behalf of it making contracts, even if it does not have a physical place. The criteria is, obviously, the usual making of contracts, excluding purchasing of goods as an auxiliary activity;
  • Immaterial or digital permanent establishment, when there is a significant and continuous economic presence in the territory, without having a physical presence in it. This specific category exists even in the absence of Oecd requirements, moving away form the international convention, even though it is coherent with the futures updates of the convention.

A Representative Office of a non-resident company does not constitute a permanent business establishment of the company itself.

The Beps project

The OECD has also introduced the Base erosion & profit shifting (Beps): a project aimed at building an integrated fiscal system between the States, promoting common measures, and trying to remove fiscal avoidances, through the application of a multilateral convention. Regarding permanent establishments, the focus was on the avoidance of the status (art.12-15), exemptions for specific activities and the anti-fragmentation rule.

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Regulatory Framework

OECD Model Tax Convention on Income and on Capital (2017)


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