Given that these financial statements are not subject to publication, as is the case for Italian companies, Italian tax authorities require the documents to be authentic and provide greater certainty (including in terms of timing), and that the data contained therein be readily accessible.

Regarding tax periods in progress on 31 December 2026 and thereafter, the financial statements must be assigned a certified date by the deadline for submitting the tax return relating to the same tax period. This will require certification with a time stamp or other appropriate means in accordance with Italian law, and the data contained therein must be set out in a specific schedule within the tax return.

From a compliance perspective, Italian branches of foreign companies should consider implementing a formal year-end process under Italian tax law to ensure financial statements are completed, reconciled to the tax computation, and then electronically time-stamped before the filing deadline.

In practice, the supporting documentation should ideally include:

• The branch trial balance;

• Any accounting adjustments required under the applicable accounting framework;

• The profit and loss account and balance sheet;

• Reconciliation to the Italian corporate tax computation;

• Relevant tax return schedules; and

• Supporting transfer pricing documentation related to dealings with the head office and other group entities.

As a matter of best practice, the electronic time stamp should be applied to the final version of the financial statements used as the basis for the tax return, rather than to an earlier draft.

The changes do not alter the substantive principles governing the taxation of Italian permanent establishments.

Profits and losses must be attributed to the permanent establishment as though it were a functionally separate and independent enterprise. The permanent establishment must be attributed an appropriate amount of capital for the functions performed, and assets used and risks assumed by the branch must be properly identified. Dealings between the head office and the permanent establishment must be recognised and priced in accordance with the arm’s length principle, and transfer pricing rules remain applicable.

The amendment is primarily a documentation and evidential requirement, rather than a change in the method used to calculate taxable branch profits. Failure to comply with the new procedures could cause Italian tax authorities to deny the branch’s deductible expenses or invalidate the branch profit computation.

Sergio Finulli specialises in tax and corporate law. He has built up considerable experience in assisting Italian and foreign clients with the setting up of a multidisciplinary approach to the management of their operations, for which purpose he works with lawyers and professionals specialising in other areas.

publications

New accounting requirements for branches of foreign companies in Italy

VAT registration in Italy for non-established entities: Why opt for direct registration?