14 February 2017 Global Tax Alert Italian Tax Authorities rule under Advance Ruling for New Investments that logistics hub for auxiliary activities does not create PE EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: www.ey.com/taxalerts Executive summary On 17 January 2017, the Italian Tax Authorities (ITA) issued Ruling no. 4/E/2017 (Ruling 4/E), providing the first reply to a request for an Advance Ruling for New Investments (New Investments Ruling). Among the requests made, the issue as to whether the establishment of a logistics hub could potentially create the risk of a permanent establishment (PE) in Italy was specifically addressed. The ITA stated that the PE exposure would not exist, as long as the activities performed by the foreign installation are of a preparatory and auxiliary nature as clarified by the Organisation for Economic Co-operation and Development (OECD). Furthermore, the hub s proposed use solely included the storage, exposition, display and delivery of finished goods. On the assumption that the same OECD provisions were met, the ITA also excluded the risk of an agency PE. From a strict business model perspective, the findings reached under Ruling 4/E are of the utmost importance. In fact, the interpretations made by the ITA shed light on some of the most relevant OECD PE rules, and at the same time provide more certainty and reliance to certain operational and organizational strategies related to overseas investments in Italy.
2 Global Tax Alert Finally, this case illustrates the practical importance of the recently introduced New Investments Ruling for foreign groups with Italian operations in terms of providing full clarity on the tax treatment of the entire transaction. Detailed discussion Overview The New Investments Ruling was introduced by Article 2 of Legislative Decree no. 147/2015 (Internationalization Decree). 1 Initial clarifications on the implementation measures were provided on 29 April 2016 by a Ministerial Decree and on 20 May 2016 by the Provision of the Revenue Agency Director no. 77220/2016. Moreover, on 1 June 2016 the ITA also issued Circular no. 25/E, providing further guidance. The New Investments Ruling aims to provide an opinion from the ITA about the tax implications applicable to investment plans and structures, as well as to any side operations described by the taxpayers. Qualifying preconditions in order to file the New Investments Ruling request are that the investment plan in Italy amounts to at least 30 million (even if spread across a number of fiscal years), and presents a positive and enduring employment impact. For investments made by a group/association of companies, the amounts contributed by each entity shall be aggregated in order to quantify the total amount of the investment. The definition of new investment includes both new economic initiatives and operations involving the restructuring of an already existing business, as long as positive effects on employment are satisfied. Moreover, the New Investments Ruling might provide interpretative support to issues such as, for example the existence of potential tax arbitrages, or anti-avoidance issues, or how to gain access to particular regimes. Applicants may also request a ruling on the existence of a going concern (and of a PE) within the Italian territory. From a procedural perspective, the New Investments Ruling provides a safe harbor with regard to the specific investment plan, since the opinion rendered is binding for the ITA, and shall not be amended as long as the underlying legal and factual circumstances remain unchanged. The ruling facts The investment plan described under Ruling 4/E was presented by a multinational group (Group) composed of the following three entities: Company Alpha, based in Italy, that filed the ruling request Company Beta, an affiliated company, based in State B Company Gamma, the parent company, based in State C The plan s investment project forecasted the three following objectives: Enhancement of Alpha s production in Italy Setting a new line of production by 2018 (with regard to this new business, Alpha operates as a contract manufacturer for Beta) Establishment of a logistics hub in Italy by 2019 With respect to the logistics hub, it was clarified that the sole purpose of the logistic hub was the storage of Group s goods for worldwide distribution. The logistics hub s planned operational scheme was the one of a tax, customs and value added tax (VAT) warehouse, where the Group s goods would be stored until the moment of their distribution. In addition, it was clarified that the sale activities would not be managed in Italy, but handled by the Group companies and independent third-party distributors. Based on the described factual circumstances, the Group requested that the ITA rule on: Whether the establishment of a logistics hub would create a PE The applicable VAT treatment to the flows of goods through the logistics hub Existence of a PE With specific focus on the first query, and in view of the above described functions and activities, the ITA ruled that the logistics hub would not constitute a PE. In support, the ITA noted that in accordance with Article 5 of the Double Tax Treaties signed by Italy and related to the States involved in Ruling 4/E, and the related OECD Commentary, the PE was intended to describe a fixed place of business through which the business of an enterprise is wholly or partly carried on. Moreover, Article 5, paragraph 4 (1) of the OECD Commentary to the Model Tax Treaty clarified that the term place of business covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose, and that a place of business may thus be constituted by a pitch in a market
Global Tax Alert 3 place, or by a certain permanently used area in a customs depot (e.g., for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. The above references are also reflected under Article 162 of the Italian Income Tax Code (TUIR), which is substantially aligned with the OECD s recommendations. From an interpretative standpoint, the ITA also observed that in the case at hand the nature of the activities fell within the activity exemptions set forth both under the OECD works and under the mentioned Article 162. According to the ITA, the activities performed by the logistics hub are in fact merely preparatory and auxiliary to the Group activity. The logistics hub would not therefore qualify as a PE, since the storage, exposition, display and delivery of finished goods constitute an exemption for the creation of a fixed PE in Italy. The ITA further observed that the above considerations are subject to the condition that the referred activities have an exclusive character, and therefore no PE risk would arise as long as no functions such as after-sale activities or commercial activities (i.e., receiving orders and sales) will be carried out by the logistics hub. If no dependent agent is able to sign or stipulate binding contracts in the name of the Group companies with third parties, no Agency PE would be deemed to exist. Implications The importance of Ruling 4/E is twofold. First, it provides further guidance on the New Investments Ruling operational procedures, confirming its strong appeal for investors. Second, the position adopted by the ITA clarifies an important interpretative position with regard to a very common investment structure, such as the overseas establishment of a logistics hub for the purposes of business exercise. Even though the business plans and the presence in Italy of foreign entities shall always be analyzed on a case-by-case basis, the ITA laid down a set of requirements, the presence of which would generally not create a PE risk for a logistics warehouse. The above indications also provide increased certainty for other foreign investments in Italy. Endnote 1. See EY Global Tax Alert, Italy issues major changes to internationalization rules, dated 28 September 2015.
4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Studio Legale Tributario in association with Ernst & Young, International Tax Services, Milan Domenico Borzumato +39 02 851 4503 domenico.borzumato@it.ey.com Marco Magenta +39 02 851 4529 marco.magenta@it.ey.com Studio Legale Tributario in association with Ernst & Young, International Tax Services, Rome Emiliano Zanotti +39 06 855 67383 emiliano.zanotti@it.ey.com Studio Legale Tributario in association with Ernst & Young, International Tax Services, Bologna Mario Ferrol +39 051 278 434 mario.ferrol@it.ey.com Ernst & Young LLP, Italian Tax Desk, New York Simone De Giovanni +1 212 773 2351 simone.degiovanni@ey.com Federica-Luisa Testa +1 212 773 7348 federicaluisa.testa@ey.com Emanuela Buono +1 212 773 5554 emanuela.buono1@ey.com
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