Answering to question no. 449/2021, the Inland Revenue expressed its opinion on the duties of a foreign entity without a permanent establishment in Italy as a withholding agent.
Answering the question, the Inland Revenue stated that elements such as an entity’s permanent establishment or fixed base in Italy, and its possible recourse to the tax representative and direct identification, have become important
The requesting company arrived in Italy in 2020 to carry out its business.
To quickly start its business, the organisation hired about 30 people under an occasional service contract and paid them through a bank current account opened by a company official. The requesting company declared that it paid agreed net fees, which, in most cases, did not exceed €5,000.
The foreign entity did not know that it had to appoint a person as an Italian tax representative. Given its intention to directly pay tax related to the service providers and settle any outstanding amounts, the company asked the Inland Revenue for instructions about fulfilling the tax obligations under Italian law.
Appointment of a tax representative and direct identification in Italy
The requesting company first suggested it retroactively appoint, “a tax representative in Italy (art. 17 of Italian Presidential Decree 633/72) who was the same person who opened the bank account, an individual of non-EU nationality with an Italian tax code but not resident in Italy, or assigning this office to another person resident in the country.”
As an alternative, the company identified the need to “identify itself directly in Italy by requesting a tax code as per Form AA5/6, a non-resident entity […] with tax domicile in the city of […] where it has carried out […], with the qualification of withholding agent […] limited to income paid by a permanent establishment or fixed base in Italy.”
In addition, the company stated that it planned to hire an employee in Italy in 2021. Therefore, the company asked whether the tax identification number obtained based on one of the two alternatives as mentioned above was sufficient to act as a withholding agent, allowing the correct performance of tax operations.
Inland Revenue conclusions
Given the above, the tax authority pointed out that the applicant does not appear to carry out any relevant activity for VAT purposes in Italy, and reference to Art. 17 of Presidential Decree no. 633 of 26 October 1972 ( the “VAT Decree”) is irrelevant, particularly, the tax representative (third paragraph of the above art. 17) and direct identification (art. 35-ter of the same Decree).
On this point, the tax authority said that non-EU parties intending to carry out VAT-relevant transactions in Italy, if they do not have a permanent establishment, fulfil the obligations and exercise the rights arising from the application of such tax, may identify themselves under Art. 35-ter of the VAT Decree only “if they carry out a business, art or profession in a third country where there are legal instruments governing mutual assistance in the field of indirect taxation.” Otherwise, they must appoint a tax representative resident in the country.
In this case, should it be necessary to acquire a VAT position in Italy, the tax representative could not be the person who opened the Italian bank account as that person was not resident in Italy, as reported by the requesting company.
According to the Inland Revenue, the remuneration paid to approximately 30 people hired under an “occasional services” contract constitute occasional self-employment income for the recipients, which is taxable under Article 67, paragraph 1, letter l) TUIR -Consolidated Law on Income Tax.
The permanent establishment requirement
For withholding tax purposes to be levied on such remuneration, it was clarified that non-residents in the country might be a withholding agent, limited to the income paid by a permanent establishment or fixed base in Italy. In the absence of this requirement, the above obligation does not apply.
“only where the foreign entity has set up a permanent establishment or a fixed base in Italy will be required to apply for the tax code and fulfil the consequent obligations as a withholding agent, “consisting of making and paying withholding taxes, certifying payments and submitting Form 770.
To fulfil these obligations, the Inland Revenue has referred to the instructions for the compilation of Form AA5/6 – “Application for assigning a tax code, communication of data changes, merger, concentration, transformation, closure (parties other than natural persons)” – with attention to the instructions for non-resident entities.
Suppose the foreign entity does not have a permanent establishment in Italy, it may fulfil the necessary tax obligations for the remuneration paid only after having become a withholding agent. Failing that, it will be the responsibility of the staff hired under an “occasional service” contract to independently make the appropriate tax return in Italy.