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Italy - new exemption option for income coming from a foreign branch

September 1, 2017

Starting from 2017, Italian companies with permanent establishments abroad can benefit from the “branch exemption” scheme. With a widespread provision yesterday, the Italian Tax Agency has defined the rules for the option for tax exemption scheme of the permanent establishments set by Article 168-ter of Income Tax Italian Law (TUIR).

 

The option is exercised in the tax return relating to fiscal year when the branch has been established, while for branches already existing as of October 7, 2015 (and for those established until December 31, 2016), the parent can opt in the Tax Return 2018, with effect from 2017 tax period.

 

Article 168-ter of TUIR, introduced by Legislative Decree 147/2015, provides for the chance, for Italian companies having permanent establishments abroad, to opt for the exemption from taxation in Italy of the profits (and use of losses) best produced by these entities in the country of their establishment (so-called “Branch Exemption”).

 

Implementing rules

By this last decision, the Tax Agency dictated the implementing rules of the provision. Under the scheme, the option, which must cover all PEs (even those established after the option), must be exercised in the tax return filed for the year of branch’s incorporation given that the regimen can not be activated later on. With regard to PEs already set up on  October 7th 2015 (date of enforcement of Decree 147), the exemption option may be made in 2017 Return (Revenue 2018) and shall start from that year. The same terms are applicable to branches incorporated after October 7, 2015 and 2016.

 

The effectiveness of the branch exempion option ceases following the closure, even for liquidation or disposal, of all branches.

 

The branch exemption option is valid only if the Italian company has a permanent establishment in the foreign country under the requirements set by the double taxation treaty between Italy and the country of the branch, where applicable, or, in the absence of such agreement, on the basis of the criteria laid down in Article 162 of the TUIR, this in the event except that the foreign country does not recognize the existence of a PE in accordance with its domestic law. In the latter case, the taxpayer may exercise the option of exempting the profits and losses attributable to the branch or, if already in the exemption scheme for other PEs, must include such a PE in the exemption area, in the annual return in which the foreign valuation became definitive. Businesses may, however, submit a qualifying request to satisfy the requirements of the PE.

 

Calculation of income or loss

Article 7 of the measure governs in detail the rules for calculating the income or loss of the branch that will benefit from the exemption. The income is determined on the basis of the 'OECD Authorized Approach'. A PE is considered to be a separate and independent entity, carrying out the same or similar activities under identical or similar conditions, taking into account the functions performed, the risks involved and the assets used.

 

Gains and losses from the PE included in the exemption area do not contribute to the determination of the taxable income of the parent company, except for the assumption of profits from a permanent establishment located in the Countries or territories set by paragraph 4 of Article 167 of the TUIR, contributing to earning income through the black list dividend regime.

More articles will follow on this since the rules are evolving according to new interpretations and clarifications from the Tax Agency.

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