Italy

The tax regime for non-resident companies having PEs in Italy is the same as for corporate Italian entities (e.g. joint-stock companies). Accordingly, a PE is subject to IRES as well as to IRAP. Both taxes are determined under the “Authorized OECD approach” (AOA) on the basis of a specific statutory account prepared according to the accounting principles applying to resident enterprises with similar business activity carried out by the PE.

Under step 2 of the AOA transfer pricing principles apply by analogy to internal dealings (to the extent recognised as ‘transactions’) between the head office and its Italian PE. A PE is considered a functionally separate entity, independent from its headquarters, and a PE’s profits and ‘free capital’ are attributed to it on the basis of OECD principles (i.e. the AOA).