Advising on Permanent Establishment Issues
Foreign investors engaged in activities in Italy that cross a certain threshold may become subject to tax in Italy on income related to their Italian activities. The threshold for triggering Italian tax is referred to as "permanent establishment". It usually requires a direct physical presence (such as an office or other fixed place of business) or regular activities performed by third parties acting on taxpayer's behalf (such as employees or agents). The Italian tax code provides its own definition of permanent establishment and Italian courts are notoriously aggressive in enforcing the permanent establishment provision. As a result, taxpayers are often inadvertently caught in such provisions and suffer adverse tax consequences. We advise our clients on the best practices to avoid inadvertent exposure to Italian permanent establishment tax and help them go through the required due diligence to maintain protection from such exposure.
The U.S. equivalent of the Italian permanent establishment provision is the U.S. trade or business rule, according to which foreign persons are subject to tax in the U.S. on their income effectively connected with their U.S. trade or business. The case-law interpretation of the U.S. trade or business requirement is potentially broad and the statutory and regulatory provisions on effectively connected income are rather complex. We advise clients on issues arising under U.S. trade or business and effectively connected rules.