On 17 January, the Italian Revenue Agency released its first investment ruling, clarifying when a logistics hub will avoid creating a permanent establishment (PE) in Italy because the nature of its activity is merely preparatory or auxiliary to the activity of the group. The ruling also clarifies the VAT treatment of flows of goods through logistics hubs.
The advance tax ruling was issued pursuant article 2 of the Decree n. 147/2015, which introduces a new procedure whereby the investors (both resident and non-resident in Italy) intending make long-term and significant investments in Italy can obtain the opinion of the Italian revenue agency regarding the tax treatment of their business plans and related extraordinary operations.
In the case at stake, a multinational group that includes a contract manufacturer company resident in Italy sought to enhance its production in Italy. The company intended to set up a new line of production in 2018 and, by 2019, intended to set up a logistics hub.
A warehouse will be used to store and distribute the group’s finished goods all over the world. The warehouse will be managed by a third party through a service agreement with a group company resident outside of Italy. Moreover, the sales activity of the finished goods will not be managed in Italy, but by a group company resident abroad.
Based on the described factual situation, the multinational requested the Italian revenue agency issue a ruling on whether a PE existed in Italy and on the VAT treatment of the flows of goods deriving from the creation of a logistics hub.
Permanent establishments
After the analysis of the double tax treaty concerned, the tax agency concluded establishment of the logistics hub would not create an Italian PE as long as certain conditions are fulfilled.
First, the use of the warehouse should be exclusive and used only to store and deliver finished goods belonging to the group. The ruling clarifies that the storage, exposition,?display? orand delivery of goods belonging to third parties will cause the logistics hub to lose it its auxiliary and preparatory nature and cause a PE to be created.
Moreover, the ruling clarifies that after-sale activities will create a PE as they go beyond mere storage and delivery activities.
Furthermore, the ruling states that a PE will be created if additional? commercial activity is undertaken though the warehouse. Therefore, receiving orders and selling will create a PE.
The tax authority adds that signing contracts in the name of a group company resident outside Italy or stipulating that a contract is binding on a group company resident outside Italy will create a PE.
The ruling states it is not intended to determine the arm’s length price between related parties, but just provide an opinion on the existence of a PE in Italy.
VAT & logistics hubs
The ruling also provides clarification on the VAT treatment of transfers of goods to and from a logistics hub.
The ruling states that finished goods produced abroad and owned by a nonresident in a warehouse (not relevant for VAT) that are sold in Italy and abroad are subject to the system of intra-community trade and therefore subject to VAT in Italy through the integration of non-taxable foreign tax bill.
This new investment ruling procedure appears to be a useful tool for multinationals, providing legal certainty for cross-border operations. Thus, in the future, the difficulties of legal interpretation may be decreased and the risks associated with cross-border operations may be consequently minimised.
Moreover, this new instrument may create a more cooperative relationship between companies and the Italian tax administration, making Italy a more attractive location for foreign investment.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
Latest posts by Davide Anghileri (see all)
- Swiss government approves new law governing tax treaties - November 11, 2020
- EU states’ compliance with tax avoidance directives assessed in Commission report - August 26, 2020
- Italy clarifies VAT reporting obligations of online marketplaces - June 16, 2020
- EU blacklist: Cayman Islands added with other three jurisdictions - February 18, 2020
- Italy adopts digital services tax, notional interest deduction - January 8, 2020
Be the first to comment