Permanent establishment, business profits and associated enterprises

Article 5 and its definition

Article 5 of the convention defines the permanent establishment as "a fixed place of business in which the enterprise carries on its business wholly or partly".¹ Paragraph 2 lists the classical examples: a place of management, a branch, an office, a factory, a workshop, a laboratory, a mine or other place of extraction of natural resources, and a building site or construction or assembly project lasting more than twelve months. Paragraph 3 excludes preparatory and auxiliary activities: the use of facilities solely for the storage, display or delivery of goods, the maintenance of stocks for those purposes or for processing by another enterprise, and a fixed place of business used solely for the purchase of goods, for advertising, for the supply of information or for scientific research. Paragraph 4 treats a dependent agent who has and habitually exercises in the other state an authority to conclude contracts in the name of the enterprise as a permanent establishment. Paragraph 5 excludes brokers, general commission agents and other independent agents acting in the ordinary course of their business, and paragraph 6 confirms that a subsidiary does not by its mere existence constitute a permanent establishment of its parent.²

The definition follows the Model of 1963 and has not been changed by the BEPS project. The convention therefore does not contain the extended agency clause of the OECD Model of 2017, which covers a person who "habitually plays the principal role leading to the conclusion of contracts" that are routinely concluded without material modification. Nor does it contain the anti-fragmentation rule, which denies the exemption for preparatory activities where an enterprise splits a cohesive business operation into several small parts.³ Whether these changes apply between Switzerland and Italy through the Multilateral Instrument is doubtful. Switzerland chose to adopt essentially the minimum standard and entered reservations against the changes to the permanent establishment definition in Articles 12 to 15 of the Instrument. Italy itself reserved the whole of Articles 12 and 14 at signature and chose Option A of Article 13, which cannot take effect against a Swiss reservation. Even after Italian ratification the treaty definition would therefore remain that of 1976.⁴

The Italian domestic definition

Italian domestic law has moved further. Article 162 TUIR, as amended by the Budget Law for 2018, reproduces the extended agency clause and the anti-fragmentation rule of the OECD Model of 2017. It also treats as a permanent establishment a "significant and continuous economic presence" in Italy that is structured so as not to show any physical substance in the country, a rule aimed at digital businesses.⁵ Where a treaty applies, Article 169 TUIR allows the taxpayer to rely on the more favourable treaty definition. For a Swiss enterprise the narrower definition of the convention therefore prevails over the domestic rule. An Italian sales agent who negotiates contracts for a Lugano trading company but leaves their signature to Lugano does not create a permanent establishment under Article 5 paragraph 4 of the convention, while he might under the domestic rule. The practical value of this protection depends on the facts. Italian tax auditors and prosecutors frequently argue that the agent in reality concludes the contracts, or that the Swiss company is managed from Italy and is therefore itself an Italian resident.

This risk is particularly high in the structures typical of Ticino. A Lugano company owned by an Italian family often employs the family members who live in Lombardy, uses an Italian accountant and holds board meetings that are attended by video from Milan. Each of these elements is harmless in isolation. Taken together they may support the conclusion that the place of effective management lies in Italy (Art. 4 para. 3 of the convention) or that the company has a place of management in Italy that constitutes a permanent establishment (Art. 5 para. 2 lit. a). The difference matters. If the company is an Italian resident, Italy taxes its worldwide profits. If it has only an Italian permanent establishment, Italy taxes only the profits attributable to that establishment under Article 7.⁶ Chapter F.II discusses the Italian cases on esterovestizione and the evidence that a Lugano company should keep.

Notes

1. Convention, Art. 5 para. 1, text (above): "una sede fissa di affari in cui l'impresa esercita in tutto o in parte la sua attività". ↩
2. Convention, Art. 5 paras. 2 to 6, as summarized from the text (above). ↩
3. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting of 24 November 2016 (MLI), SR 0.671.1, Art. 12 para. 1 (person who "gewöhnlich die führende Rolle beim Abschluss von Verträgen einnimmt, die regelmässig ohne wesentliche Änderung" by the enterprise are concluded) and Art. 13 para. 4 (activities forming "sich ergänzende Aufgaben ..., die Teil eines zusammenhängenden Geschäftsbetriebs sind"), https://www.droit-bilingue.ch/de-it/0.6/0.67/0.671.1-12-15.html and https://www.droit-bilingue.ch/de-it/0.6/0.67/0.671.1-13-16.html; these provisions correspond to Art. 5 paras. 4.1 and 5 of the OECD Model Tax Convention as revised in 2017 following the BEPS Action 7 report. Convention, Art. 5 paras. 3 and 4, text (above). ↩
4. Roland Böhi, Danielle Wenger and Nicole Fröhlich, "Implementation of Multilateral Instrument (MLI) in Switzerland", Mondaq, 15 May 2019, https://www.mondaq.com/tax-treaties/805558/implementation-of-multilateral-instrument-mli-in-switzerland (Switzerland "largely limit[s] itself to the adoption of the minimum standard"); Federal Decree approving the MLI (draft annexed to the Federal Council's message, Italian text), Art. 1 para. 3 lit. d, https://www.newsd.admin.ch/newsd/message/attachments/50936.pdf (reservations under Art. 12 para. 4, Art. 13 para. 6 lit. a, Art. 14 para. 3 lit. a and Art. 15 para. 2 MLI); OECD, "Italy: Status of List of Reservations and Notifications at the Time of Signature", https://www.oecd.org/tax/treaties/beps-mli-position-italy.pdf (convention with Switzerland of 9 March 1976 listed as covered agreement no. 73; reservations on the entirety of Arts. 12 and 14; Option A under Art. 13 para. 1). ↩
5. TUIR, Art. 162, as amended by Law No. 205 of 27 December 2017 (Budget Law 2018), Art. 1 para. 1010, Brocardi.it, https://brocardi.it/testo-unico-imposte-redditi/titolo-iii/capo-i/art162.html ("significativa e continuativa presenza economica" without "consistenza fisica"; anti-fragmentation rule for complementary activities forming part of a "operazione aziendale unitaria"; dependent agent who habitually concludes contracts or plays the principal role leading to their conclusion without substantial modification). ↩
6. Convention, Arts. 4 para. 3, 5 para. 2 lit. a and 7 para. 1, text (above). ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of October 2026.