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 absorbed.
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.
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