Family ties and VAT in Italy

When does VAT apply within the relationship between a parent company and a permanent establishment in Italy? Like many family relationships, the rules are rather complex, explains Chartered Accountant Daniele Raimondi.

Art. 9, par. 1 of Directive 2006/112/EC on the common system of value added tax, defines a "Taxable Person" as any person who, independently, carries out any economic activity in any place, whatever the purpose or results of that activity.

By its very nature, a Permanent Establishment does not independently carry out any economic activity because it is a non-temporary place of business used by a non-resident business enterprise to carry out its business activity (producing income in another country). Therefore, according to European Community legislation, a Permanent Establishment is not a Taxable Person for VAT purposes.

However, art. 7 par. 1 lit. d) of Italian Presidential Decree no. 633/1972 establishing and regulating value added tax expressly defines Permanent Establishments of foreign entities as "Taxable Persons established on Italian territory" exclusively in relation to transactions to which they are party. When read in the context of the supranational legislation, this definition means that every Permanent Establishment residing on Italian territory is a Taxable Person for VAT purposes with respect to dealings with third parties, but not with respect to dealings with its Parent Company.

The Italian Revenue Agency ruled to that effect in Resolution no. 81/E of 16 June 2006 which cited case C-210/04 of the Court of Justice of 23 March 2006, essentially confirming that "a fixed establishment, which is not a legal entity distinct from the company of which it forms part, established in another Member State and to which the company supplies services, should not be treated as a taxable person by reason of the costs imputed to it in respect of those supplies" (concluding with the express revocation of Resolution no. 330470 of 20 March 1981).

Nevertheless, although the spirit of the cited regulations appears to make VAT entirely inapplicable in respect of dealings between a Permanent Establishment and its Parent Company, Community regulations and the Italian regulations which implement them contain certain provisions that appear to limit such inapplicability to services only, subjecting to VAT all transactions that relate to transfers of goods.

In particular, art. 38 c. 3 l. b) of Italian Legislative Decree no. 331/1993 states that the entry into Italian territory by or on behalf of a Taxable Person of goods from other Member States is equivalent to an intra-Community acquisition and is therefore subject to VAT. Moreover, "the provision shall also apply in the case of goods destined to Italian territory for purposes of company business from other undertakings belonging to the same entity in another Member State".

Similarly, art. 41 para. 2 lit. c) of Italian Legislative Decree no. 331/1993, equates the following to an intra-Community sale: "sending goods, which are not covered by paragraph 3 below, into the territory of another Member State by means of transportation or shipment by the Taxable Person within Italian territory or by third parties on its behalf".

Therefore, the provisions cited mean that movements of goods from one State to another are subject to tax, regardless of the fact that they constitute a supply made against payment or that they relate to a Permanent Establishment. The movement of goods from one Member State to another constitutes an intra-Community sale-supply in the country of departure and an intra-Community acquisition in the country of arrival, where the tax is due.

In its Circular no. 29 of 28 March 2002, the Association of Italian Joint Stock Companies (commenting on the Resolution no. 66/E of 9 January 2002) expressly confirmed that, under certain conditions, VAT may apply in transactions between the Permanent Establishment and the Parent Company citing, by way of example, the movement of goods into the territory of another Member State between operational units forming part of a single entity.

With regard to the importance of the VAT relationship between branches belonging to the same non-resident entity, no official guidelines appear to have been issued to date by the Italian Revenue Agency.

However, the Ministerial Statement on Italian Legislative Decree no. 191/2002 gives a valid indication of the treatment of the transfer of goods between Parent Company/Branch and confirms the concept of the permanence of the entity’s unitary identity. In this regard, it would seem reasonable to infer that relationships between Branches belonging to the same entity should have the same VAT treatment as transactions between Parent Company and Branch.

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TMF Group is able to assist clients in understanding and applying where necessary the correct VAT on any transaction involving Permanent Establishments of foreign entities located on Italian territory.

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