EU PE developments

EU Commission refers Germany to the Court of Justice on different tax treatment for PEs

On 13 November 2024, the European Commission referred Germany to the Court of Justice of the European Union (CJEU) for violating the free movement of capital under European Union (EU) law.

According to the European Commission, under the German Income Tax Act, resident corporations can defer capital gains tax by deducting these gains from the cost of newly acquired assets in succeeding years. As its press release states, the European Commission found that a "non-resident corporation from other EU/EEA States cannot rely on this provision of the German Income Tax Act if it has assets that are taxable in Germany, such as real estate property, unless these assets are allocated to a permanent establishment in Germany." However, a "German corporation in a similar situation, e.g. a company holding only real estate property and not having a permanent establishment in Germany, can use this beneficial deferral of taxation since it is deemed to have such a PE at its place of management (i.e. in Germany)."

Despite the European Commission's attempts since 2019 to resolve the issue, Germany has not made sufficient adjustments to meet EU law requirements, the Commission asserts.

Other PE developments

Italy issues circular letter with clarifications on the Investment Management Exemption regime

On 19 November 2024, the Italian Tax Authority (ITA) published Circular Letter No. 23/E (Circular) aimed at providing clarifications on the Investment Management Exemption (IME) regime.

Under the IME regime, a foreign investment vehicle and its direct or indirect subsidiaries can claim that they have no Permanent Establishment (PE) in Italy if the asset/investment manager, or an advisor operating in Italy on their behalf or for their benefit, can be deemed to be acting independently of the foreign investment vehicle.

The Circular provides clarifications on some specific requirements for applying the IME regime, such as the independence requirement for foreign investment vehicles and for asset/investment manager/advisory companies. It also contains specific commentary on the scope of transfer pricing guidelines in applying the arm's-length requirement to asset management transactions and on the qualifying documentation required for applying the IME regime.

See EY Global Tax Alert, Italian Tax Authority circular letter provides clarifications on Investment Management Exemption regime, dated 26 November 2024.