Ruling No. 336, published by the Italian Revenue Agency in June 2023, pertains to the tax treatment (specifically the VAT treatment) of intercompany transactions between an Italian permanent establishment (a branch) and its foreign head office (the parent company) located in Luxembourg (a company engaged in individual portfolio management and subject to VAT in Luxembourg).
The applicant reported that the activities of the parent company involve the following:
Marketing to potential clients;
An informational desk;
Market research in financial markets;
Selection of investment strategies;
Verification of documentation to be sent to depositary banks; and
Reporting to clients.
According to the agreement between the client and the parent company, the latter operates on behalf of Italian clients, both private individuals and enterprises, directly from Luxembourg under the regime of free provision of services.
In 2022, the parent company established a branch in Italy to conduct commercial activities exclusively with regard to the parent company.
The branch reported that:
It solely engages in promotional activities towards potential Italian clients to facilitate the contracting of services between the client and the parent company;
It manages post-sale relationships with acquired or existing clients in the Italian territory;
The core portfolio management activities, including investment decisions and all other related operations, are carried out by the parent company in Luxembourg; and
The personnel employed in Italy consists of four individuals; namely, a branch manager and three employees responsible for promoting and acquiring clients in the territory.
In supplementary documentation, the branch provided further details about the execution of its activities and its relationship with the parent company, which can be summarised as follows:
The parent company defines and implements the marketing strategy, while the branch conducts commercial activities in line with the marketing strategy defined by the parent company and manages relationships with potential clients; and
Once the support account with the designated depository bank is opened and funded, the head office manages the portfolio, while the branch personnel handle client relationships, including reporting activities.
Under the mandate contract between the parent company and the client, the latter pays commissions to the parent company, while the activities carried out by the permanent establishment are remunerated in accordance with the transfer pricing policy adopted by the group.
In particular, according to the intercompany agreement between the permanent establishment and the parent company, the remuneration for the services provided is determined as a percentage of retrocession (40% to be calculated on the amount of fixed commissions recognised to the head office by the final clients managed by the permanent establishment).
Response of the Italian tax authorities
Following the description of the facts and circumstances by the taxpayer, the Italian tax authorities specified that activities such as customer relationship management, research of potential clients residing in Italy, and drafting contractual documentation carried out by an Italian permanent establishment enable the head office to implement its services. Therefore, if the branch has an adequate structure of technical and human resources allowing active participation in defining contracts signed by the head office, the mere fact that it must follow the head office's directives does not imply that the permanent establishment's role can be considered non-qualifying; i.e., merely administrative or supporting.
It is important to note that Article 192-bis of Council Directive 2006/112/EC stipulates that a taxable person with a fixed establishment in the territory of a member state is not considered established in that state if the transaction is carried out without the participation of an establishment of the supplier or service provider located in that member state.
Based on these premises, the parent company believes it can invoice its services to Italian clients according to the territoriality rules outlined in Article 7-ter of Presidential Decree 633/72 (the Italian VAT Code) for general services. In other words, the transaction would be relevant in Luxembourg if the client is a private consumer residing in Italy. For business-to-business transactions, the service would be subject to reverse charge in the territory of the state.
However, the Italian Revenue Agency holds a different opinion. Under Article 17 of the Italian VAT Code, the entity liable to pay the tax is identified as follows:
The Italian taxable person if the transaction is carried out directly by the non-resident supplier without the intermediary of a permanent establishment in Italy; or
The permanent establishment if the transaction is conducted through its intervention.
With respect to EU rules, the Italian tax authorities emphasise that for the intervention to be considered substantial, Article 53 of Regulation (EU) 282/2011 provides the following criteria:
The permanent establishment must have a sufficient degree of permanence and an adequate structure in terms of human and technical resources to enable it to carry out the supply of goods or services in which it intervenes; and
These resources must be used by the foreign taxable person for transactions inherent in the carrying out of the taxable supply of those goods or services in the member state, either before or during the supply.
In this case, the Italian tax authorities noted that Italian clients constitute approximately a quarter of the parent company's total mandates.
The permanent establishment, responsible for promotional activities and client management, plays a significant role in the contracting procedure, considering that its preparatory activity enables the realisation of services subsequently carried out by the parent company. These actions are considered “inherent and prodromal” to the subsequent activity of individual portfolio management. Moreover, if the permanent establishment's tasks were limited to administrative support, it would not be justifiable for the parent company to retrocede 40% of the commissions collected from Italian clients.
Consequently, the Italian tax authorities determined that the permanent establishment is responsible for issuing invoices to domestic clients. Services provided by the permanent establishment to the head office, however, fall outside the scope of VAT.
