International tax law
Permanent establishments & transfer pricing
We check whether your activities abroad create a permanent establishment and assist with setting and documenting transfer prices between related companies.
Service area International tax law
What matters to you
An installation job in Bavaria, a sales representative in Austria or a warehouse in Switzerland: even activities like these can create a permanent establishment in the other country. The result is tax obligations, returns and possibly back payments abroad.
Within a group of companies, a second question arises: at what prices the companies charge each other for goods, services, licences or loans. These transfer prices determine in which country the profit arises and are therefore a focus of the tax authorities.
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When does a permanent establishment arise?
Whether a permanent establishment arises depends on the actual activity and the applicable rules. We examine in particular fixed places of business, construction and installation projects, and possible exemptions for preparatory or auxiliary activities.
A dependent agent permanent establishment can arise even without your own premises if a person in the other country regularly concludes contracts for the company or plays the principal role in preparing them. What counts is the actual practice, not what the contract calls it.
- Employees working permanently abroad or remotely across the border
- Long-term assembly and construction sites
- Dependent agents with authority to conclude contracts
- Warehouses, showrooms or service branches
Consequences of a permanent establishment
A permanent establishment is allocated the profits it would have earned as an independent enterprise. These profits are taxed in the country of the permanent establishment, while the home country either exempts them or credits the foreign tax, depending on the treaty. Foreign companies with a permanent establishment in Italy are subject to IRES and IRAP, together with bookkeeping and filing obligations.
If a permanent establishment is only identified during a tax audit, back taxes, interest and penalties may follow. An early review makes it possible to adjust processes or to register the permanent establishment correctly from the outset.
Transfer pricing at arm’s length
Transactions between related companies must be carried out on terms that independent third parties would also have agreed. Italy follows the OECD Transfer Pricing Guidelines. Typical issues include supplies of goods, management and service charges, royalties for trademarks and know-how, and interest on intra-group loans.
Demonstrating that prices are at arm’s length requires a transparent method and comparable data. We analyse the functions, risks and assets of the companies involved and derive a well-founded pricing policy from them.
Documentation and protection against penalties
Italy provides for transfer pricing documentation consisting of a master document for the group (master file) and country-specific documentation. If documentation that is suitable in form and content is prepared and this is notified in the tax return, penalties can be avoided in the event of later adjustments.
The documentation must be updated regularly. We prepare it, keep it up to date and align it with the documentation of the foreign group companies.
Step by step
How we work together
Stocktaking
We record your foreign activities, local staff and intra-group transactions.
Risk analysis
We assess where permanent establishments exist or may arise and which transfer prices are critical.
Solution and documentation
We propose adjustments to contracts and processes, set transfer prices and prepare the documentation.
Annual update
We update analyses and documentation every year and support you with enquiries from the tax authorities.
Frequently asked questions
Answers on assignments abroad and transfer pricing.
Does an employee working from home abroad create a permanent establishment?
It is possible, but not automatic. Decisive factors include duration, regularity, the type of activity and whether the home office is used at the company’s request. We examine the specific situation and recommend adjustments where necessary.
When does a construction site abroad become a permanent establishment?
The relevant duration is set by the applicable double tax treaty and varies from country to country. Several assignments for the same project may be added together. If you are planning longer assignments, you should have the time limits checked in advance.
Do smaller groups also need transfer pricing documentation?
Smaller groups of companies must also assess cross-border business relationships according to the arm’s length principle. Appropriate documentation can, where the legal requirements are met, protect against certain penalties and make transactions easier to follow during a tax audit.
What happens if both countries tax the same profit?
A transfer pricing adjustment can result in the same profit being taxed in two countries. We examine possible corresponding adjustments and the available mutual agreement or dispute resolution procedures, and coordinate with the advisers in the other country.
How can we help you?
In the initial meeting, we clarify your request and discuss what support you need.