Foreign investment and permanent establishment

  • April 2025
  • Blog

Corporate foreign investment: a key concept in international taxation

In the context of international taxation one of the concepts that we often hear about is that of corporate foreign investment; let's try to better understand what this article is about.

With the term foreign investment refers to when a company pretends to be resident abroad, generally in countries with a lower level of taxation (Blacklisted countries or that do not allow it exchange of information), in order not to be subjected to the national tax regime.

This practice, which is very widespread, is now receiving increasing attention from national regulations which generally provide for a mechanism whereby in these cases the "foreign" company is instead considered to be resident in the country of origin for all intents and purposes, unless it provides proof to the contrary.

In reality by virtue of the right of establishment, a company is free to transfer its business to another State or other States, without engaging in any evasive or abusive behavior.

Requirements for foreign investiture

Why the hypothesis of corporate foreign investment, it is necessary to verify whether the transfer is actually real, therefore it is necessary to ascertain in fact whether the operation carried out is artificial and provides for the creation of a legal form that does not correspond to economic reality.

The requirements for which the situation of foreign investment are the fictitious nature of the company's location abroad and the consequent undue tax savings.

To ascertain the fictitious or real nature of the company's transfer abroad, criteria such as registered office (legal and administrative), the object of the activity carried out, the place where the decisions are taken strategic decisions for the company or place where the work is mainly carried outbusiness activities.

Therefore, beyond the registered office from a formal point of view, what is relevant is the actual headquarters of a company, which pursuant to Article 4 of the OECD Model, must be considered: "the place where the company carries out its prevalent management and administrative activity for the exercise of the business. That is, the effective center of its interests, where the company lives and operates, where business is conducted and where the various factors of the business are organized and coordinated for the explanation and achievement of the social purposes".

Fictitiousness occurs when, in reality, the company has a rooted in the territory of origin such as to make her considered a fiscal resident in the same country for all purposes.

As regards the interested bodies, the regulations vary from country to country and concern the foreign companies which control other resident entities and which are in turn controlled, managed or administered, directly or indirectly, by resident entities.

In this way, with the application of the presumption of residence, the foreign subject is considered to be resident in the territory of the State for all intents and purposes, unless he provides proof to the contrary, capable of demonstrating his actual residence abroad and the presence of well-founded entrepreneurial reasons and production and/or commercial establishments abroad.

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The permanent establishment

In parallel with the concept of foreign dressing, it is now appropriate to recall, for the sake of completeness, that of permanent establishment, which means a fixed place of business through which the non-resident enterprise carries out, in whole or in part, its activity in the territory of the State or, on the contrary, the resident enterprise carries out, in whole or in part, its activity in the foreign territory, so as to represent a prerequisite and connection for subjecting to taxation in the territory of that other State the income produced there.

Once again it is worth reiterating that every legal system encode the permanent establishment independently, even if in most cases the definition given takes up the one defined by the OECD model (article 5 of the OECD model convention) according to which there are two different types of permanent establishment, namely the “permanent material establishment” , “permanent personal establishment”.

Stable material organization

Yes, there is the stable material organization when the fixed place of business is determined by a complex of physical structures within the territory of the foreign State aimed at economic activity and is controlled and available to the parent company; the OECD also clarifies that the use of fixed installations for preparatory and/or auxiliary purposes, other than those that constitute an essential and significant part of the activity of the enterprise as a whole, fall within the so-called “negative list” and therefore do not constitute a permanent establishment.

Important in this regard is the discipline of theAntifragmentation rule, or the rule aimed at avoiding the evasion of the permanent establishment status through the fragmentation of activities, thus excluding, under certain conditions, that preparatory and/or auxiliary activities fall within the negative list.

This practice in fact consists substantially in an artifice by which the individual unitary activities are divided, so that each of them, considered in isolation, appears to carry out only preparatory or auxiliary activities, thus eluding the discipline of the permanent establishment. The aim is to prevent a company from actually carrying out economic activity in a State, without such activity being formally identified as a permanent establishment and, therefore, leaving the company the possibility of transferring profits to a territory to more favorable taxation.

Stable personal organization

Instead, it has stable personal organization when there is a subject who habitually negotiates, defines and concludes contracts in the name of the company within the territory of the State. In this way the permanent personal establishment It is based on the fact that, under certain conditions, the parent company can carry out its business abroad even indirectly, that is, through a representative, even if it does not constitute a fixed office that it directly owns.

The permanent establishment is therefore not a separate entity from the parent company, which is responsible for the social obligations contracted by the permanent establishment.

Fundamental for the configuration of the stable personal organization it is then the distinction made by the OECD in Article 5 between dependent agent (paragraph 5) and independent agent (paragraph 6) with respect to the parent company for which it operates.

The agent is to be considered independent, with the exclusion of a personal permanent establishment, when he acts in a Contracting State on behalf of an enterprise of another Contracting State, is equipped with economic and legal independence and carries out an activity in the first State acting for the company in the ordinary course of this activity without being subject to its significant control and specific instructions in relation to the methods of carrying out the same.

However, if a person acts exclusively or almost exclusively on behalf of an undertaking or undertakings to which he is closely related, that person cannot be considered as independent agent with respect to each of such undertakings.

The figure of the agent will instead be considered employee in the event that the said person acts on behalf of a foreign company and in the exercise of his/her business habitually enters into contracts in the name of the company.

Tax treatment

From a tax point of view the income produced from permanent establishments are then directly attributed to the parent company and are subject to taxation both in the State of the permanent establishment and in that of the parent company (without prejudice to the recognition of a tax credit equal to the taxes that the permanent establishment has already paid abroad).

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