Three years after entering into force, the time has come to assess the effectiveness of the voluntary disclosure procedure for hidden permanent establishments in Italy (VDPE) for both income tax and VAT purposes.

The VDPE entails assessing whether a non-resident entity had – in the fiscal years still open for assessment – a PE in Italy and, if so, the possibility of settling any past tax violations relating to failures in declaring the existence of the PE (see Art. 1-bis of the Law Decree No. 50/2017 and Implementing Regulations of 16 April 2019).

In brief, the VPDE allows non-resident entities – in cooperation with the Italian Tax Authority (ITA) – to assess: the existence of an Italian PE based on the business activities carried on in Italy in previous tax years, and its related income and VAT turnover. Consequently, the VDPE can exclude the risks of the ITA autonomously claiming the existence of a hidden PE, allow non-resident entities to significantly reduce administrative penalties and exclude the risks of subjectivity to criminal penalties.

Eligibility requirements 

The following requirements must be jointly met:

  • consolidated group revenues to exceed EUR 1 billion
  • operating revenues from the sale of goods or supply of services in Italy – also through the support of one or more Italian-resident related companies or Italian PEs of non-resident related entities (Auxiliary Entities) – to exceed EUR 50 million
  • tax audits or criminal proceedings relating to the existence of a PE against the non-resident entity or the Auxiliary Entities not to have started - formal awareness of a tax audit or criminal investigation being underway in Italy regarding the existence of a PE precludes eligibility to the VDPE procedure

The VDPE procedure

The procedure starts with an applicant filing a request to ITA’s Cooperative Compliance Office, which works closely and in coordination with the relevant local ITA office. It is worth noting that the filed request precludes the relevant local ITA office from starting a tax audit on the applicant with respect to the existence of an Italian PE. If a tax audit is already underway at the time of filing the request, the relevant local ITA office must coordinate with the competent central office of ITA.

Applicants are notified of the successful admission to the procedure within 30 days from ITA’s receipt of the request, and the procedure is entirely concluded within 180 days.

Following completion of the VDPE procedure

ITA’s Cooperative Compliance Office informs the applicants of the outcome of its assessment and the factual and legal circumstances justifying its determination of whether a PE is (or is not) deemed to exist.

The final agreement is binding on both parties. If no PE is deemed to exist, therefore, ITA may reassess its existence only if the factual and legal circumstances change. However, in the case of detecting transfer pricing risks, ITA may undergo further analysis on the non-resident entity’s transfer pricing policy.

Conversely, if a PE is deemed to exist, ITA’s Cooperative Compliance Office must share its findings with the relevant local ITA office, together with a calculation of the PE’s tax liabilities of the past tax years. The local ITA office - which remains competent for the tax assessment - then issues a request to settle the tax liabilities.


The main benefits are the following:

  • foreign entities can assess – in cooperation with ITA – whether a PE existed in previous tax years
  • the Cooperative Compliance Office has far greater knowledge of and experience in handling PE matters than local ITA offices and the tax police
  • administrative penalties for past tax violations (generally ranging from 120% to 240%) are reduced to 20%
  • no criminal penalties apply for the failure to file income tax and VAT returns
  • amounts due may be paid in instalments (up to 16 quarterly instalments)
  • the foreign entity can apply for the Italian cooperative compliance programme (Arts. 3 to 8 of Legislative Decree No. 128/2015), irrespective of the amount of revenue attributable to the PE (the “size requirement” for admission to the cooperative compliance programme is now EUR 5 billion and will be lowered to EUR 100 million)

Why evaluate the access to the VDPE?

The existence of a hidden PE may have significant consequences, not only for corporate income taxes, but also for VAT. Having a PE for VAT purposes can change the place of supply of services and also the person liable to pay the VAT.

Non-resident entities with Italian operations should not overlook this beneficial procedure. 

It is currently the only means to determine the existence of a hidden PE in previous tax years and to settle all past tax violations on more favourable conditions than those of an ordinary tax audit - when ITA increasingly focuses on hunting out hidden PEs.

It also allows for better management of risks relating to the existence of a PE in future tax years. In this respect, non-resident entities may request an “Advance Tax Agreement for Enterprises with International Activities”, which allows both multinationals and ITA to assess (among other things) whether a PE is deemed to exist as a result of, for example, a group reorganisation and to establish the criteria for attributing incomes to the PE.

In line with the recent trends fostered also by the OECD, ITA has been increasing its efforts and introducing tools to start a new phase of cooperation with non-resident entities. Both the VDPE and the Advance Tax Agreement for Enterprises with International Activities are helpful instruments available for non-resident entities to achieve a higher degree of certainty on specific tax issues when investing in Italy.

Why are some maintenance activities recommended?

While the VDPE procedure is already beneficial, the following amendments are nonetheless recommended:  

  • lowering the eligibility thresholds (both the consolidated group revenues and the “Italian” revenues)
  • highlighting the non-applicability of administrative penalties on failure to file VAT returns in cases of BTB services
  • stating explicitly that transactions between the “hidden” PE and the Italian subsidiary are out of scope of VAT
  • identifying the means of applying the anti-fragmentation rule and the assessment of multiple PEs in Italy
  • clarifying that, in the case of a PE assessment in Italy for a non-resident company, all Italian entities (and not only the Italian PE) belonging to the same group can apply for the Italian cooperative compliance programme, irrespective of the “size requirement” for admission
  • extending the benefit of the VDPE procedure to social contributions due in Italy

Three years after its birth, some ‘injections’ will make the VDPE procedure even more appealing … it’s time for rejuvenation!