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Attribution of Free Capital to Permanent Establishment of a Bank: A Vexed Issue, A General Overview and the Italian ‘State of the Art’

The recent Italian experience shows how the attribution of profits to permanent establishments (PEs) is a very complex topic where international consensus is strictly required. After a description of the guidelines developed in the Organization for Economic Cooperation and Development (OECD) Report on attribution of profits to a PE, this article focuses on the allocation of the appropriate ‘free capital’ to PEs of banks with a specific highlight on the Italian experience arising from the recent tax audits carried out by Tax Authorities on the appropriateness and consistency of the ‘free capital’ of most of the Italian PE’s of foreign banks. Authorized and accepted approaches will be commented, the consequences arising for the taxpayer will be analysed, and the ‘state of the art’ in Italy will be described.