Central Revenue rules on the business contribution of a PE in Italy
Gian Luca Nieddu and Barbara Scampuddu of Hager & Partners outline the corporate income tax, VAT and registration tax implications of the Central Revenue’s decision.
The contribution of the entire business of an EU company’s Italian permanent establishment (PE) to another EU company’s Italian PE is tax neutral under section 176 of Italian Tax Code (TUIR). This is the conclusion reached by the Central Revenue, as an answer to the request for advance ruling No. 633 as of December 31 2020.
Circumstances of the case
The case concerned an EU company (hereinafter ALFA) which intended to transfer its PE in Italy (hereinafter ALFA Italy PE) to the BETA company resident in another country of the EU, against of the issue of shares by BETA.
In particular, all active and passive assets of ALFA Italy PE were to flow entirely into a new PE, also in Italy, of the conferring subject, BETA.
Subsequently, the transferring company ALFA would carry out the distribution of profits in kind (corresponding to the investment in BETA, received against the aforementioned business contribution) in favour of its parent company GAMMA.
Accordingly, the Italian PE of ALFA would be transferred to BETA, and ALFA group will continue the activity in Italy, as well as in the other member states, where similar operations will be carried out.
Opinion of the Central Revenue
The Central Revenue expressed its opinion on the case considering the tax treatment in terms of corporate income tax (IRES), VAT and registration tax.
The contribution of the entire business of an EU company’s Italian PE to another EU company’s Italian PE is tax neutral under section 176 of Italian Tax Code (TUIR). However, if the shareholding acquired as a result of the contribution:
Is assigned to the ‘contributing’ PE and then transferred to its parent company; or
Is assigned directly (upon contribution) to the parent company; or
Is not functionally connected with the PE; or
the capital gain, if any, realised by the ‘contributing’ PE is taxable, possibly under the PEX regime if the conditions are met (Italian tax authority, answer to request for advance ruling No. 633 as of December 31 2020).
From the point of view of the applicable VAT regime, the transfer of the business unit consisting of the assets and liabilities constituting the Italian PE of ALFA, in favour of the new PE in Italy of BETA, is excluded from the field of application of VAT, pursuant to Article 2, paragraph 3, letter (b), of the Presidential Decree No. 633 of 1972.
In this regard, Article 19-bis2, paragraph 7, of the Presidential Decree No. 633 of 1972 obliges the taxable person beneficiary of business contribution to rectify the VAT deduction, if the conditions are met.
For the purposes of registration tax, considering that the business contribution is excluded from the field of application of VAT, it must be subject to registration tax according to Article 2, paragraph 1, letter (d), of the Presidential Decree No. 131 of 1986 (TUR), by virtue of the principle of VAT-register, alternatively referred to in Article 40 of the TUR.
In regard to the extent of the registration tax to be applied, it is necessary to refer to Article 4, paragraph 1, letter (b) of the Tariff, Part I, of the TUR, which establishes the application of the registration tax in a fixed amount.
Gian Luca Nieddu