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Tax Assessments Based On “Free Capital” Requirements Of Permanent Establishments Of EU Financial Institutions


Italian tax authorities have significantly increased tax assessments on Permanent Establishments in Italy. Taxand Italy addresses the key issues relating to the Permanent Establishments of EU financial institutions.

Among the key issues checked and challenged (which include internal dealings from a transfer pricing perspective) are that Italian tax authorities disallow interests to be deducted on grounds of minimum "free capital" requirements (in terms of contributions of equity and of retained profits), which can be attributed to Permanent Establishments of EU financial entities, as banks and lease companies.

This approach is grounded by tax authorities on the Italian law's general provision defining the arm's length principle, in lack of a specific provision of minimum free capital requirement and of the methods of determination of such minimum free capital. In certain cases tax authorities, have also raised the issue to the competent public authorities from a criminal tax perspective.

Taxand's Take

To date very little case law has addressed this issue. Tax assistance even prior to tax audits could help to consider strategies and steps to be taken in order to be coherent with Transfer Pricing policy involving PE.

Your Taxand contacts for further queries are:
Guido Arie Petraroli
T. +39 02 7260591

Alberto Alfredo Ferrario
T. +39 02 7260591

Taxand's Take Author