Hidden Permanent Establishments in Italy: EU Case Law and Tax Implications

For VAT purposes, a permanent establishment is defined by Article 11 of Implementing Regulation 282/2011 as an establishment with a sufficient degree of permanence and an adequate structure to receive and use services for its own needs. This definition applies exclusively to the supply of services, not to the supply of goods.

In the Audient case (C-533/22), the CJEU ruled that a hidden permanent establishment exists only if the resources of the subsidiary are managed by the foreign company "as if they were its own." This principle was reiterated in other cases, such as Cabot Plastics (C-333/20). The key element is the foreign company's direct control over the resources.

The CJEU’s conclusions in the VAT context could also be relevant for direct taxation. The definition of a permanent establishment for direct tax purposes is broader and includes economic considerations. Nevertheless, the principle of direct control over resources may also be relevant in this domain.

The position of the Italian Revenue Agency is not entirely aligned with the CJEU’s conclusions. In certain responses, the Agency has stated that a permanent establishment’s involvement in negotiating contracts and defining the technical specifications of goods may qualify as an "intervention" in the transaction, thereby attributing the operation to the permanent establishment.

The Italian Revenue Agency adopts an approach that focuses more on income measurement than on transaction-based VAT taxation.

For VAT purposes, the path of the goods is decisive, whereas for direct taxes, the outcome generated by a complex business activity is the determining factor.

The concept of direct control over resources could also play a role in the domain of direct taxation. It would be surprising to recognize a permanent establishment in Italy solely on the basis of having received services, whether declared or undeclared, from another group company, without having any direct control over the resources through which those services were provided.

Aside from the so-called “personal permanent establishment” (typical in cases involving commercial agents or commissionaires), where the concept of permanent establishment shifts from resource control to control over the legal entity, the CJEU’s case law on hidden permanent establishments offers significant insights for greater legal certainty, both in the area of VAT and direct taxation,​ helping to better delineate the scope of multinational corporations' tax liabilities.