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Trading overseas: How to set up business in Italy

Trading overseas: How to set up business in Italy
Francesca Bottari
Francesca Bottari
Head of Tax
Cesca Accounting
 

Posted: Mon 30th Nov 2020

In today's global economy, British small and medium-sized businesses may have good reasons to consider entering an overseas market.

Reasons to go international

These can be to increase businesses' trading opportunities, such as increasing demand for products, decreasing economic volatility in their home market, and developing new customers. The different entry strategies depend on the targeted markets and on the offer. You can opt to open an operation overseas to identify and exploit your potentialities, but with the Brexit transition deadline looming, irrespective of the agreement reached with the EU, UK businesses need to consider that having a business overseas can be a good reason not only to expand, but also to be compliant with GDPR.

One of the points to be considered is that GDPR imposes a general prohibition on transfers of personal data to third countries, and this restriction would apply to transfers from the EU to the UK after Brexit. Non-EU businesses subject to GDPR* are required to appoint a representative in the EU. Post-Brexit, UK businesses subject to GDPR will be subject to this obligation.

Businesses can use commercial service providers in exchange for a fee. However, because representatives can be liable for the failures of the party they represent, it can be challenging to negotiate liability provisions in arrangements with GDPR representatives. So, it can be the better solution to settle your business in the EU rather than appoint providers as your EU representative.

If you choose Italy

With its modern infrastructure, easy access from regional UK airports and long-standing trade, Italy provides significant trade opportunities for UK businesses. To open an operation in accordance with Italian rules, enterprises can choose from various solutions:

  • A representative office

  • Their own branch

  • A locally registered subsidiary company

  • A joint venture

When doing business in another country, you have to consider tax implications and understand local culture and norms. Choose the solution that will allow you to comply with local regulations while minimising your tax liability.

Consider first that your company's liability to UK Corporation Tax (CT) depends upon whether your company is UK-resident. The general rules state that a UK-resident company is chargeable to UK CT on all of its profits on a worldwide basis. A non-UK-resident company is chargeable to UK CT if it carries on trading through a UK permanent establishment, or via deals based on UK land.

Thus, since profits of a non-UK company may not be chargeable to UK CT, the general and common-sense rule is to choose to carry out operations in a country with a low tax rate.

Understand corporate, employment and tax law in Italy, and don't forget that the UK and Italy have signed a double taxation convention, which sets out the rules about the country you pay tax in and the relief you can apply for.

A representative office

This is a good low-cost opportunity offered by Italian legislation. It means a fixed place of business of a foreign company engaged only and exclusively in marketing and promotional activities, or scientific or market research, or other information-gathering activities (see the OECD Model Tax Convention to avoid double taxation and prevent tax evasion re: the Italian Revenue Act).

In other words, a representative office in Italy plays an auxiliary or preparatory role for the foreign company to enter the Italian market; said company may not conduct production-related or commercial activities. This option minimises Italian taxes and bureaucratic burden. The establishment of a mere representative office in fact needs only to be registered at the Italian Company Registry and to appoint a representative. Rep Office will obtain a tax identification number but it is not liable for Italian Corporation Tax, not even IVA registration (VAT).

A branch

This gives you the flexibility to control your operation, expand and plan for long-term sales. A local office staffed by your employees reduces your need to travel and greatly improves your coverage of the remote office.

It is not a separate legal entity, but a foreign unit of the mother company; thus, it does not enjoy organisational and decision-making autonomy. The parent company must register the branch by providing apostilled and certified copies of certificates of incorporation and of board resolution.

A branch enables the company to operate in Italy with a more streamlined, cost-effective structure than if a full subsidiary (i.e. an Italian company) were established. Head office is responsible for the obligations and financial situation of the branch. This can prove to be a disadvantage in the event of financial difficulties.

Branches are deemed permanent establishments for tax purposes in Italy. They are liable to IVA (VAT), National Corporation Tax (IRES) and Regional Income Tax (IRAP). IRES is a proportional tax with a single rate of 24%. The rate of IRAP is 3.9%.

A subsidiary

This is a completely independent body. Unlike a branch, the parent company sets up and owns the subsidiary, but the subsidiary carries out its business activity directly and it is liable for all its debts.

Although branches and subsidiaries are taxed identically in Italy, many foreign companies prefer to set up a subsidiary.

An Italian subsidiary is an officially incorporated body; formed and registered as a limited liability company-srl or a joint stock company-SpA. SMEs opt very often for the first; larger and medium-sized companies for the latter.

The profits of overseas subsidiaries may be subject to UK corporation tax under the controlled foreign company (CFC) rules. Several exemptions and reliefs are available which will need to be considered carefully and claimed on the corporate tax return.

A joint venture

This final option sees you partner with an Italian business to set up a new activity, with ownership shared between you. You will benefit from your partner's local knowledge and reputation and share the risk.

While the tips highlighted above should stand you in good stead, you should plan to carry out further, in-depth research before beginning to trade in overseas markets. Fortunately, there are plenty of resources available to help business navigate international trade, for example UK Trade & Investment (UKTI), which offers a range of services for UK exporters, including a flexible business tool called the Overseas Market Introduction Service (OMIS). The British Chambers of Commerce (BCC) also offers export training services. The Italian Ministry of Economic Development, meanwhile, offers a database of business proposals and contact information Italian.

GDPR applies to all businesses that provide goods and services to people in the European Union. If your business processes or holds the personal data of any person residing in the EU, you're bound by GDPR - regardless of your location.

 
Francesca Bottari
Francesca Bottari
Head of Tax
Cesca Accounting
 
I am an ACA and a Certified Italian Accountant ODCEC. with a broad range of personal tax, corporate and business tax experience and knowledge of both compliance and advisory aspects. I have built a significance experience dealing with my profession as tax specialist of UK and Italian tax matters and university UK taxation lecturer.  I am providing services of Business developing, accounting, tax ad hoc advisory and tax returns to entrepreneurs and individuals. Cesca Accounting and I, we are both TCFD supporterss ready to discuss with our clients about how to tackle the implications of climate change.
 

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