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Establishing an Italian branch of a foreign company (2)

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The Italian branch/secondary registered office is not a separate legal entity and the parent company is respon- sible for its initiatives, although it is subject to taxation in the foreign country where the economic activity is carried out.
The definition of permanent establishment (PE) is provided by article 5 of the OECD model tax treaty and by ar- ticle 162 of the Italian tax code (TUIR).

In particular, according to aforementioned articles, “the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
The term PE includes especially:
a. a place of management;
b. a branch;
c. an office;
d. a factory;
e. a workshop, and
f. a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.” Therefore, the definition contains the following conditions:
• the existence of a “place of business”;
• this place of business must be “fixed”;
• the carrying on of the activity through this fixed place.

According to the above Law, due to the fact that a PE is not easily identifiable, the Italian Authorities (e.g. Re- venue agency) can assume the presence of a hidden permanent establishment in Italy of a foreign company if some conditions occur (an office in Italy, Italian employees, Italian contracts, Italian managers).
Details of the branch office must be registered with the Business Register (Registro delle Imprese). The registration of a branch office is governed by the Italian civil code (Codice Civile).

In order to incorporate a branch, it will be necessary to:
1. draft the Minute of the shareholder’s meeting (or of the Board of Directors Meeting according to the By- Laws) of the foreign parent company resolving:
a. to open a branch (including the address of the legal office of the new branch, the business activity that will be performed and the financial period of the Italian branch);
b. to appoint a legal representative or “preposto” (including his personal data);
c. to grant the legal representative with the required powers (power of attorney);
2. open an Italian fiscal code for the legal representative of the Italian branch (“preposto”);
3. draft the act of incorporation in front of an Italian public Notary;
4. submit the incorporation act to the Chamber of Commerce;
5. submit the commencement activities declaration to the Italian Revenue Agency.

The deed of appointment, the certificate of incorporation, the articles of association and the registration details of the foreign company must be registered with the Business Register in the area in which the branch office is located.
If foreign companies have more than one branch office in Italy, the publication requirements involving the filing of the abovementioned documents only need to be satisfied for the first Italian branch.
For all the aforementioned documents it will be necessary to provide a certified translation in Italian. Besides all the documents need to be apostilled by a public Notary of the country in which the parent company is loca- ted (or issued by a public authority).
In case of failure in the registration, directors or anyone acting in the name and on behalf of the company will have unlimited liability for all company contractual obligations.
The foreign company and its directors will be liable for company’s obligations contracted in Italy in its name (except for European companies given the European principle of freedom of establishment).

The overall income of a permanent establishment in Italy of a company residing abroad is determined according to the rules governing the determination of the company’s income, as if it were a company domiciled in Italy. As established by the OECD’s attribution report, the procedure in order to allocate costs and revenues to a per- manent establishment is a two-step process. During the first step, a functional and factual analysis is perfor- med, in which the operations and responsibilities of a permanent establishment are determined so that the permanent establishment can be assessed for taxation as an independent, separate entity. During the second step, the arm’s length profit of the permanent establishment is determined by means of a comparability analy- sis.

In order to better define the criteria adopted for the cost (and revenues) allocation between the parent company and the branch in Italy, it could be useful to draft a cost/revenue agreement. In this regard, it could be appropriate to consider the method recommended by the OECD guiding principles and guidelines used by the Italian tax authorities.



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