New Italian tax permanent establishment: what impact on gaming?
A change in tax permanent establishment criteria contained in the current version of the Italian draft budget law might have a considerable impact on the gaming industry. As mentioned in a previous blog post, a number of regulatory changes are now being proposed by the Government as part of the measures to be introduced by means of the Italian budget law.
No web tax, but new tax permanent establishment criteria
I covered in several articles the various attempts by the Italian Government to introduce a web tax. However, the new proposal is not introducing a new tax, but is on the contrary impacting on the definition of tax permanent establishment.
In particular, the Governmentis is trying to hit a very common practice in the gaming industry where there in an Italian company which provides marketing services to the foreign entity holding the Italian remote gaming license or running the Italian gaming supplier business. The goal of the foreign entity is indeed to pay only Italian gaming taxes, without being subject to Italian corporation taxes, while the purpose of Italian tax authorities is to prove that the Italian entity runs a substantial part of the Italian business of the foreign entity and therefore the latter shall pay also Italian corporation taxes.
The law proposal provides that the Italian entity in some specific circumstances is a permanent establishment for tax purposes of the foreign entity, leading to the obligation on the latter – in the case of gaming operators/suppliers – to pay Italian corporation taxes in full or in part with reference to its Italian business.
No alarm should be created
The above is just a law proposal and what indicated therein is the transposition into a primary law of the position that Italian tax authorities have been attempting to follow during the last years. The size of the involvement of the Italian entity in the business of the foreign gaming operator/supplier has always been a very delicate issue.
In any case, with reference to entities that are based in countries that have a tax bilateral agreement with Italy, the new law should not change much. The Italian law cannot go beyond what provided by the prevailing international tax treaty. However, for countries like Gibraltar whose position might already considerably change with the Brexit, the Italian law might be relevant since Italy has no tax bilateral agreement with Gibraltar.
What to do now?
Ragardless of whether the law proposal will be approved or not, since this shows a position of the Italian tax authority already consolidated. Gaming operators and suppliers having an Italian entity involved in marketing or other ancillary services shall carefully review the role of the entity, also running a transfer pricing analysis at least every 3 years to be submitted to tax authorities in case of investigation.
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WRITTEN BY GIULIO CORAGGIO
IT, gaming, privacy and commercial lawyer at the leading law firm DLA Piper. You can contact me via email at firstname.lastname@example.org or email@example.com or via phone at +39 334 688 1147.