Cessation of the Permanent Establishment

 

The higher values inherent in the permanent establishment are deemed to be realised, resulting in the taxation of latent capital gains:

• upon the cessation of the permanent establishment, including cases where the related assets are transferred to the head office;

• in the event of a transfer of the permanent establishment to third parties.

In both situations, the taxation of the latent capital gains is confirmed by Article 13(2) of the OECD Model Tax Convention, pursuant to which the State in which the permanent establishment is situated is entitled to exercise its taxing rights over such gains.

Different conclusions must, however, be drawn in cases where the permanent establishment is contributed to a company resident in Italy, as such a transaction should take place on a tax-neutral basis, with continuity of values.