Legislative Decree No. 147/2015, in force since October 7
2015, introduced the branch exemption regime in Italy. In
particular, the regime contained in the Article 168-ter of the
Italian Income Tax Code (IITC) allows resident enterprises
opting for an exemption regime for the profits and losses of
their foreign permanent establishments (PEs) instead of the
ordinary taxation regime with tax credits.
On August 28 2017, the Italian Revenue Agency published a
statement of practice, foreseen in paragraph 11 of Article
168-ter, containing measures aimed at implementing the
aforesaid exemption regime.
The decree includes important guidance concerning the option
for the regime, the recapture of fiscal losses, the treatment
of internal operations occurred in the previous five-year
period, the attribution of income to the PE under the regime,
the effects on a 'black list' branch, profits arising from
exempt PEs and business reorganisations.
In particular, the application to the regime has to be made
in the company's annual tax return related to the fiscal period
in which the PE has been created. Companies with PEs already
existing on October 7 2015 may adhere to the regime by
finalising the option in the 2018 tax return, with effect
ranging from the 2017 tax period.
The option must be exercised for all the foreign PEs
according to the principle "all or nothing" and it binds any
other branch established later. The company may not withdraw
from the regime that ceases to apply following the closure of
all exempt PEs.
As anticipated, the decree provides relevant clarifications
concerning the recapture of the losses. In fact, if in the five
tax years preceding the one in which the exemption regime takes
effect, a resident company has offset the tax losses generated
by its PE abroad, the taxable income realised by the PE in
subsequent years will be subject to tax and will not benefit
from an exemption until the tax losses have been totally
The determination of the income of the exempt PE has to
follow the so-called 'authorised OECD approach' (AOA) under
which the PE must be considered as a separate entity carrying
out the same or similar activities under the same or similar
conditions, taking into account functions performed, risks
assumed and assets used. Profits and losses of the PE shall be
determined according to Article 152 of the IITC on the basis of
a specific profit and loss and balance sheet considering all
the positive and negative variations required by the tax
legislation in force in the relevant fiscal year.
Moreover, the decree states also that business
reorganisations do not interrupt the branch exemption regime if
the receiving entity (i.e. the entity resulting from the
operation) already benefits from the regime or chooses to opt
for the regime in the tax return for the year in which the
reorganisation takes effect.
There is also a possibility to obtain a binding ruling from
the Italian Revenue Agency on the existence in Italy of a PE of
a resident company abroad, as per Article 144, introduced with
the Legislative Decree No. 147/2015.
Barbara Scampuddu (firstname.lastname@example.org)
and Gian Luca Nieddu (email@example.com)
Tel: +39 02 7780711