Subsidiaries and Branches in Italy: a comparative outlook
The main object of the present article is one of the mostly debated aspects concerning a foreign company intending to set a development plan of its business strategy in the Italian Peninsula and therefore realize profit in Italy.
A subsidiary is a kind of company which acts separately from the parent company, given that also subsidiaries have an obligation to draw up independent financial statement. Contrary to the subsidiary, a branch directly reports to the parent company’s director and carries out the same social object and operations as the parent, but in a different country than the one in which the parent company is performing its social object.
A fundamental aspect in underlining the difference between a subsidiary and a branch in Italy attains to the correspondance between the branch’s and the parent company’s financial statements.
In the planning phase of their business undertaking, company directors or entrepreneurs willing to start a business in a foreign country must choose the specific kind of legal entity to adopt while starting operating abroad.
After having carefully taken a look at Italian Tax and Financial Disposition on the point, it looks advisble to establish a subsidiary: despite investing in a subsidiary is much more financially challenging than establishing a branch, from a factual point of view it involves a much lower level of risk in terms of liability.
The main difference relies on the fact that if an established branch violates its legal duties, the main company will be held liable: on the contrary, in case a subsidiary fails to comply with the Italian applicable law by incurring debt, it will be deemed entirely responsible in light of the fact that it performs different operations than the parent company.
Taxation Regime
This aspect recalls a difference that has to be taken into consideration when talking about fiscal regime provisions in Italy: on the one hand, in case the company holding a branch or a subsidiary in Italy belongs to an EU Member, then it will have to comply with EU law. On the other hand, if the company belongs to an Extra-EU country, usually a bilateral agreement between Italy and the parental company’s country finds application, in order to avoid the instauration of a double taxation regime.
At a more-in depth analysis, a subsidiary company realizing profits in Italy has to comply with the Current Italian Tax Regime by paying IRES (Imposta Reddito Società) at the rate of 24% and IRAP (Imposta Regionale Attività Produttive) at the rate of 8%. As far as the branch’s position is concerned, it is fundamental to consider that its income has to be included in the parental company’s budget but the branch in question has to pay an income in relation to the profit made to the Italian Tax Authorities
A recently disputed issue in both doctrine and jurisprudence focuses on the potential risk of imposing on an Extra-EU subsidiary profit a double payment, in light of the fact that such profit will converge into the parental company and therefore be charged one more time after having complied with Italian Regulations.
In order to prevent these kind of issues, a reasonable strategy could be implemented by examining the specific rules set under the multiple Bilateral Treaties ratified between Italy and several Extra-EU States.
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