Italy: Accounts of foreign permanent establishment, currency exchange rate conversions

Italy: Accounts of foreign permanent establishment

A provision of Italian income tax law enacted in late 2016 concerns the reporting of foreign currency-based accounts of foreign permanent establishments, and sets forth new criteria for the conversion of the account’s currency into euro.

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The measures (effective for fiscal year 2017) provide that such accounts will no longer be reported at the exchange rate (into euro) as of the end of the reporting period, but will be reported at the exchange rate pursuant to the accounting principles (domestic GAAP or IAS/IFRS) adopted by the Italian headquarter. In general, this will be the exchange rate as of the date of the transaction or the average rate for the accounting period. The difference between the balance of accounts for the current reporting period and that for the previous reporting period will not be included in the calculation of taxable income.

Ruling from tax authorities

The Italian tax authorities issued guidance (a ruling) addressing investments in Italy and clarifying the definition of a permanent establishment (PE) with respect to a “logistic hub” (generally, the entity handling worldwide distribution of the group’s products). In the ruling, the tax authorities clarified that the hub does not constitute a fixed-place PE of the foreign headquarter if: 

  • Only the products of the foreign headquarter are stored in the hub (and not those of other enterprises, including the Italian subsidiary); and 
  • The headquarter only uses the hub for preparatory and auxiliary activities (e.g., storing, displaying or delivering its own goods or merchandise) and not for other activities (e.g., the collection of orders or conclusions of sales).

Also, the hub will not be an agency PE of the foreign headquarter if no one in Italy (other than an agent having independent status, and acting in the ordinary course of its business) has the authority to conclude contracts in the name of the foreign enterprise or to bind and represent the foreign enterprise with third parties.

 

Read a March 2017 report [PDF 183 KB] prepared by the KPMG member firm in Italy

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