THE PERMANENT ESTABLISHMENT UNDER ITALIAN CORPORATE TAXATION

Italian law identifies three distinct forms of permanent establishment, all of which are subject to IRES taxation (the Italian corporate income tax). Accordingly, penalties are imposed when the presence of a permanent establishment has not been duly declared and therefore fails to comply with the Italian fiscal obligations and this omittance may have penal consequences for the legal representative(s) of the company and the persons collaborating with the enterprise in Italy. These forms of permanent establishment, which can be ascertained, are the material, personal, and digital permanent establishment.

(i) The material permanent establishment

Article 162 of Presidential Decree No. 917/1986 (hereinafter ‘Article 162 of the Presidential Decree’) defines a material permanent establishment as a “fixed place of business through which a non-resident enterprise carries on all or part of its business within the territory of the State.”

The business of such a type of permanent establishment is conducted under the control of the parent company and through a structured set of tangible means specifically designed for that purpose. The organization must be of a productive nature, meaning that it contributes to the generation of company profits. To qualify as a permanent establishment, the parent company must conduct all or part of its business activities in Italy through that fixed place.

Paragraph 2 of Article 162 of the Presidential Decree specifies the positive criteria for identifying a permanent establishment, including elements such as headquarters, branches, and offices. Conversely, paragraph 4 of Article 162 of the Presidential Decree outlines a negative list— that is, activities which, by themselves, do not constitute a permanent establishment. These include: the storage of goods or merchandise belonging to the enterprise, solely for the purpose of processing by another enterprise; the use of a fixed place of business exclusively for purchasing goods or collecting information; and the use of a fixed place of business solely for activities of a preparatory or auxiliary nature. Activities included in this negative list generally preclude the recognition of a permanent establishment, particularly where they remain ancillary or preparatory and do not represent the core of the non-resident’s business operations within the national territory.

However, in line with the OECD (Organization for Economic Co-operation and Development) guidance aimed at preventing the abuse of the concept of permanent establishment, paragraph 5 of Article 162 clarifies that mere compliance with the negative list is not sufficient to exclude the existence of a permanent establishment. An overall assessment of the activities performed within the territory remains necessary.

(ii) The personal permanent establishment

Article 162 also defines the personal permanent establishment, which arises when a foreign company operates within the State through a dependent agent who habitually acts on its behalf by concluding contracts.

Paragraph 6 of Article 162 establishes the general principle that a company is deemed to have a permanent establishment in a State if a person acts on its behalf – even in the absence of a fixed place of business. Such persons, referred to as dependent agents, are those who do not operate independently. Only individuals who have, and habitually exercise, the authority to conclude contracts on behalf of the enterprise – other than contracts solely for the purchase of goods – can give rise to a permanent establishment.

Conversely, paragraph 7 provides that no permanent establishment exists when a person acts in the ordinary course of his/her business and is legally and economically independent from the enterprise.

When an individual performs work in Italy for a non-resident employer, such work is generally taxable in Italy if the individual is a tax resident in Italy. When the work is carried out based on an employment relationship, taxation arises in the worker’s country of residence—thus in Italy if the worker resides there. Even if the individual is self-employed and registered for VAT purposes, income is taxable in the country of tax residence.

According to the OECD Commentary, three criteria are relevant in identifying a hidden permanent establishment of a non-resident employer whose workers operate in Italy:

• the worker’s home is at the disposal of the company (i.e. no alternative workplace is provided);
• the work is carried out habitually, which is presumed when the threshold of 183 working days per year is exceeded; and
• the activities performed are not merely preparatory or auxiliary in nature.

(iii) The digital (or virtual permanent establishment)

Italian law also recognizes the possibility of identifying a permanent establishment in cases of significant and continuous economic presence within the territory of the State, even in the absence of any physical presence. These are so-called “virtual” permanent establishments, typically associated with companies engaged in digital business models.

The following factors are considered relevant:

• Revenue-based factors: the amount of income generated through digital transactions within a given jurisdiction;
• Digital factors: the enterprise’s capacity to engage stably and continuously with the target market;
• User-based factors: the extent of interaction with the user base, such as data collection, online contract conclusion, or user registration.

This represents an economic and functional connection with the State rather than a material one.
Furthermore, the presence of a server may also constitute a permanent establishment if it is located within the State’s territory for a sufficiently permanent period and is fully available to the enterprise conducting the business activity.

On 19 November 2025, the OECD released an update to the OECD Model Tax Convention (MTC), introducing significant amendments to the definition and interpretation of the concept of permanent establishment under Article 5 of the OECD Model. In particular, the updated Commentary provides detailed guidance on the circumstances in which cross-border remote working arrangements, including work performed from a home office or other relevant location in another Contracting State, may give rise to a permanent establishment (‘Cross-border working from a home or other relevant place’ – paragraphs 44.1 – 44.21 of the Commentary on Article 5 of the OECD Model).

The key criteria for assessing whether the place from which the individual carries out their activity may qualify a ‘fixed place’ and consequently, as a permanent establishment are the following:

• Facts and circumstances principle: the qualification depends on the facts and circumstances of the relevant period; the mere use of a place by an individual is not sufficient to conclude that such place is ‘at the disposal’ of the enterprise, a specific assessment is required;
• Fixity requirement: the place must display a sufficient degree of permanence to be considered ‘fixed’, meaning that activities must be carried out on a regular basis;
• Exception for preparatory or auxiliary activities: pursuant to new paragraph 44.5, this principle must also be extended to the context of the activities performed by the individual;
• 50% rule: where the individual works from home (or another relevant location) for less than 50% of the total working hours established by the company, in a continuous 12-month period, that location will generally not be regarded as a place of business of the company; where the 50% threshold is met or exceeded, a further assessment of the facts and circumstances is required (paragraph 44.10);
• Commercial test: the existence of a ‘commercial reason’ for the relevance of the individual’s physical presence in the host State is required in order to support the existence of a permanent establishment.

For a permanent establishment to be deemed to exist, all of the above criteria must be duly considered.

(iv) General considerations

Companies with tax residence abroad are required to file an annual tax return if they maintain a permanent establishment in Italy. Failure to do so constitutes the criminal offence under Article 5 of Legislative Decree No. 74/2000, punishable with imprisonment for a term of between two and five years. Of course, failure to submit an annual tax return also constitutes tax evasion, with the inevitable consequences regarding the recovery of evaded taxes and the imposition of the relevant penalties (the main administrative fines for failure to file a tax return range from 120% to 240% of the tax due).

According to consistent case law of the Italian Supreme Court (decision no. 42490/2023; decision no. 10098/2019; decision no. 40327/2014), a permanent establishment is deemed to exist where the company’s administrative, strategic, industrial, and financial management—including the planning of activities necessary to achieve its corporate purpose—is conducted within the Italian territory, regardless of where contracts are executed or services rendered.

Every enterprise situation is different and in case of doubt whether your business structure could qualify as a permanent establishment in Italy, you should contact a corporate/fiscal advisor.

This memorandum gives a brief overview of the main forms of permanent establishments recognized under Italian law and does not purport to be exhaustive. If you wish to explore the argument further, please do not hesitate to contact us.

Romina Protto and Andrea Russo