Italian Supreme Court ratifies the value of the OECD Commentary, including the laterversions, in the practical interpretation of Italian double tax treaties.

Maurizio Di Salvo
Tax Lawyer, CPA, TEP– BLCI International Milan

Angela Cipriani
Tax Lawyer – BLCI International Milan

In its recent case – law, starting from the leading case n. 36679 on 14 December 2022, the Italian Supreme Court confirms the relevance of the OECD Commentary in the interpretation of the DCT’s entered by Italy, adding that the later versions of the OECD Commentary can be used by the judges to interpret the older double tax treaties.

More in details, the decision deals with a case of an employee of two Swiss tax resident companies that were active in the textile sector. The Italian tax office (Agenzia delle Entrate) served on the Swiss Companies an assessment for corporate tax and regional tax purposes, alleging that the companies had an agency permanent establishment (“PE”) in Italy under article 162, para. 6 of Italian Income Tax Code and article 5, para. 43 of the double tax treaty between Italy and Switzerland.  According to the Italian Revenue Agency, there was an agency PE because of the activities performed in Italy by the employee, who had routinely negotiated contracts in the name of the two Swiss companies with Italian-based clients.

After the first and the second degree before the Tax Courts, both in favor of the taxpayer, the Supreme Court – applied by the Tax Office – analyzes the relation between article 162, para. 67, of the Italian consolidated Income Text and article 5, par. 4 of the Italy – Switzerland Treaty: the analysis was necessary because, under Italian law, the domestic definition of PE applies, unless a more favorable (narrower) definition is provided by the relevant tax treaty.

Because of this similarity, in the Supreme Court’s view, the treaty provision and the domestic provision could both be interpreted with the support of the OECD Model and the Commentary. Moreover, the Court argues that the interpreter is not prevented from referring to later version of the OECD Commentary, when some differences exist between later version of the OECD Model and the relevant treaty.

On the basis of the recourse of the Commentary, the Supreme Court draws its conclusions, according to which an agency PE in Italy may exist where a Swiss company has a dependent agent in Italy with the power to conclude contracts, although the dependent agent must exercise such power under the directions of the non-resident company, or where the dependent agent does not have the authority to conclude
contracts but negotiates all elements and terms of contracts in a way binding on the enterprise (par. 33).

The decision on 14 December 2022 will then affect the application of the PE concept under most of Italy’s old double tax treaties currently in force, where such “de facto” power to conclude contracts, as specified in par. 32.1 of the Commentary, could be relevant and consequently challenged by the Italian tax office.

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