A foreign company may have no office, branch or subsidiary in Italy and still create an Italian taxable presence. In some circumstances, all it takes is one employee working regularly from an Italian home.
The situation often begins informally. An employee asks to move to Milan, Rome, Tuscany or another Italian location while continuing to work for the same foreign employer. The company approves the request because the role is remote and assumes that nothing has changed: there are no Italian premises, no local legal entity and perhaps no Italian customers.
From an Italian compliance perspective, however, the employee's physical location matters. The move may create employment, social security, payroll and personal income tax obligations. Depending on what the employee actually does, it may also create a permanent establishment in Italy, allowing Italy to tax part of the foreign company's business profits.
Map the employee's real activities, authority, customers, working pattern and reason for being in Italy. ISY can coordinate the tax, payroll, employment and corporate analysis through one Italian team.
One employee in Italy can be more than a payroll issue
Four different questions arise when an employee works from Italy, and they should not be confused:
- Employment law: which mandatory Italian employment protections and remote-work rules apply?
- Social security and payroll: where must contributions, workplace insurance and employment taxes be managed?
- Employee taxation: where is the salary taxable and where is the employee tax resident?
- Corporate taxation: do the employee's activities create an Italian permanent establishment of the foreign employer?
A company may have Italian payroll or social security obligations without having a permanent establishment. Equally, outsourcing the payslip or appointing a social security representative does not decide the corporate tax question. Each test has its own legal basis and must be considered separately.
For the employment setup, see our guides on hiring employees in Italy without a local entity and the Italian Social Security Representative.
What is a permanent establishment in Italy?
A permanent establishment, commonly called a “PE”, is a taxable business presence of a foreign enterprise in another country. Under Italian domestic law and most Italian tax treaties, the analysis commonly begins with two main routes.
| Type of risk | Basic question | Remote-employee example |
|---|---|---|
| Fixed-place permanent establishment | Does the foreign company carry on business through a fixed place available to it in Italy? | The employee's Italian home functions in practice as a stable business location for the employer. |
| Dependent-agent permanent establishment | Does a person in Italy habitually conclude contracts, or play the principal role leading to contracts routinely approved by the foreign company? | An Italian-based sales manager negotiates the essential terms and regularly secures customers for the foreign company. |
The employee's home is relevant mainly to the fixed-place analysis. The employee's authority and commercial conduct are central to the dependent-agent analysis. A company should therefore avoid reducing the review to the number of days worked from home.
The applicable double tax treaty is essential. Treaties are not identical, and some retain older definitions while others reflect changes introduced through the OECD/G20 project on base erosion and profit shifting. Italian domestic rules must also be reviewed rather than assuming that a general international summary provides the final answer.
The new OECD guidance on cross-border home working
In November 2025, the OECD approved an important update to the Commentary on Article 5 of the Model Tax Convention. The update specifically addresses cross-border work from an employee's home, second home, holiday rental or another place that is not formally the employer's premises.
The guidance confirms a basic principle: the fact that an employee works from a home does not automatically make that home a place of business of the employer. Permanence, the actual working pattern, the nature of the activity and the commercial connection with the country must all be examined.
What the 50% working-time benchmark really means
Under the updated OECD Commentary, a home or similar place would generally not be regarded as a place of business of the enterprise where the individual works from it for less than 50% of total working time for that enterprise over the relevant twelve-month period, absent unusual facts indicating otherwise.
If the employee works from the Italian location for at least 50% of total working time, a permanent establishment still does not arise automatically. The analysis moves to the facts and circumstances, with particular attention to whether there is a commercial reason for the employee to perform those activities from Italy.
| Working pattern | General OECD Commentary approach | Important qualification |
|---|---|---|
| Less than 50% from the Italian home over the relevant twelve-month period | The home would generally not be considered a place of business of the employer. | Exceptional facts, agent activity or another Italian business location may still require review. |
| At least 50% from the Italian home | A detailed facts-and-circumstances analysis is required. | This does not automatically create a PE. Commercial reason, permanence, activities and treaty wording matter. |
| Short, isolated stay | The location may lack the required permanence. | Recurring stays over several years may be considered together. |
The 50% benchmark should not be described as a universal Italian statutory safe harbour. It appears in the OECD Commentary and assists treaty interpretation; its relevance in a real case depends on the applicable convention, domestic law and the specific period under review. Actual conduct is more important than wording inserted into a remote-work policy that is not followed in practice.
The “commercial reason” test
A commercial reason may exist where the employee's physical presence in Italy facilitates the foreign company's business. Examples include regular interaction with Italian customers or suppliers, developing a local customer base, identifying business opportunities, managing supplier arrangements, performing on-site services or accessing business expertise located in Italy.
By contrast, a commercial reason would not normally exist merely because the company permits the employee to live in Italy to retain that individual, or because home working reduces office costs. Occasional contact with an Italian client is also different from a role designed to serve or develop the Italian market.
The practical question is not simply “Where does the employee prefer to live?” It is “Does the employee's presence in Italy facilitate the business of the foreign company?”
The official 2025 OECD Update to the Model Tax Convention provides detailed examples. The Italian Revenue Agency has also addressed remote-working tax issues and the interaction with permanent establishment principles in its Circular on remote working and cross-border workers.
When the Italian permanent establishment risk becomes significant
No single factor decides every case. The following indicators, however, justify a detailed review before the arrangement starts or continues.
- The employee works from Italy continuously or according to a stable, recurring pattern.
- The foreign company recruited the employee specifically to cover Italy or Southern Europe.
- The employee develops the Italian market or regularly meets Italian customers.
- The employee negotiates prices, commercial terms or other essential contract conditions.
- The employee concludes contracts or plays the principal role leading to their conclusion.
- The employee manages important Italian suppliers, distributors or business partners.
- The employee's Italian address appears on business cards, the website, contracts or customer communications.
- The employer pays for, equips or presents the Italian home office as an operating base.
- The role requires a business location, but no alternative office is provided.
- The employee is a country manager, senior executive or the primary person conducting the relevant business.
Why sales and contract authority require a separate review
A home-office analysis is not enough for a sales employee. Even if the Italian home is not considered a fixed place of business, a dependent-agent permanent establishment may arise where the employee habitually concludes contracts or plays the principal role leading to contracts that the foreign enterprise routinely finalises without material change.
Formal signing power is therefore not the only issue. A policy stating that all contracts are signed abroad may provide little protection if the Italian-based employee identifies the customer, negotiates the essential terms and effectively secures the agreement before headquarters performs a routine approval.
Situations where the home-office risk is generally lower
Risk may be lower where the move to Italy is entirely employee-driven and the Italian location has no commercial connection with the employer's business. Relevant circumstances may include:
- the employee chose Italy solely for personal or family reasons;
- the employer does not require the work to be performed from Italy;
- the employee performs an internal support role with no Italian market responsibilities;
- there are no regular meetings with Italian customers, suppliers or business partners;
- the employee has no authority to negotiate or conclude contracts;
- the Italian address is not represented as an office or business location;
- the arrangement is genuinely short and non-recurring; and
- the company documents and monitors the agreed working pattern.
Lower risk does not mean no compliance. The employee may still become taxable in Italy, and the company may still need to address social security, workplace insurance, employment law and payroll. Immigration and residence requirements may also apply to non-EU nationals.
Does an Employer of Record eliminate permanent establishment risk?
An Employer of Record, or EOR, may be useful in appropriate market-entry or temporary hiring scenarios. It can provide a local employment structure and manage employment-related formalities. It should not, however, be marketed or treated as an automatic solution to every Italian corporate tax issue.
The tax analysis continues to depend on substance: who directs the worker, whose business is performed, whether the person develops the Italian market, what authority the person exercises, whether contracts are secured in Italy and whether the foreign enterprise has a place or agent through which it conducts business.
An EOR arrangement may change relevant facts, but the service contract itself cannot guarantee the absence of a permanent establishment. The intended role should be reviewed before engagement and monitored if the employee's activities evolve.
| Issue | What an EOR may address | What still needs separate analysis |
|---|---|---|
| Employment | Local contract, payroll administration and employment formalities within the agreed model. | Actual direction, co-employment concerns, role changes and compliance with Italian mandatory rules. |
| Payroll and contributions | Payslip, withholding and contribution workflow under the local arrangement. | The foreign company's own registration or withholding exposure, depending on the structure. |
| Permanent establishment | The structure may affect relevant facts. | Fixed-place, dependent-agent, contract and business-presence analysis cannot be assumed away. |
| VAT | Usually outside the core employment function. | Italian VAT registration or fixed-establishment questions require a separate review. |
Three practical examples
Example 1 — Software developer who moves to Italy for personal reasons
A German software company allows an experienced developer to move to Florence for family reasons. The developer works from home, has no Italian customers, performs internal product-development tasks, has no contract authority and would perform the same role from Germany if not living in Italy.
The home-office PE risk may be lower because the Italian presence is personal rather than commercially driven. Nevertheless, the company must still assess Italian employment law, income tax, social security, insurance and payroll obligations. It should also document the reason for the move and monitor changes in duties.
Example 2 — Sales manager building the Italian market
A US software company hires a sales manager based in Milan to identify Italian clients, attend meetings, negotiate pricing and guide contracts through approval by the US headquarters. The employee works mostly from an Italian home and presents Milan as the local point of contact.
This scenario carries a materially higher risk. The location may have a commercial reason and function as a stable base for developing the Italian market. The employee's role may also create dependent-agent concerns even if final signatures are applied in the United States. The company should assess whether a branch or Italian subsidiary is more appropriate before activity expands.
Example 3 — Finance manager serving the foreign group
A UK group permits a finance manager to live in Rome and work remotely. The manager supports the UK finance team, does not interact with Italian customers or suppliers, has no local market role and visits the UK office regularly. More than half of the work is performed from Rome.
Exceeding the OECD 50% benchmark does not automatically create a permanent establishment. The absence of a commercial reason for performing the role specifically from Italy may point away from treating the home as the company's place of business, subject to the full facts, treaty and domestic analysis. Payroll and employee tax obligations remain separate.
What happens if an Italian permanent establishment exists?
If the foreign enterprise is considered to have a permanent establishment in Italy, the consequences may extend well beyond registering an employee. Depending on the case, they can include:
- Italian corporate income tax on profits attributable to the permanent establishment;
- possible regional tax implications;
- tax registrations, accounting records and Italian corporate tax returns;
- transfer-pricing and profit-attribution analysis;
- withholding, payroll and social security coordination;
- a separate review of VAT obligations and whether a VAT fixed establishment exists;
- interest and penalties for earlier periods if the presence was not declared; and
- greater complexity in contracts, invoicing and group reporting.
A corporate income tax permanent establishment does not automatically constitute a VAT fixed establishment. The VAT test has different requirements and should be analysed separately. Likewise, the existence or absence of an Italian VAT number does not decide whether a corporate tax PE exists.
Remote-work risk checklist for foreign employers
Foreign companies should complete the following review before approving, extending or regularising an employee's work from Italy.
Confirm location, days, duties, authority, customers and the real reason for working from Italy.
Review the applicable double tax convention and Italian domestic permanent establishment rules.
Address payroll, social security, INAIL, tax withholding, contract and remote-work documentation.
Reassess if the role becomes commercial, authority expands or the working pattern becomes permanent.
| Area | Question to document | Why it matters |
|---|---|---|
| Location and time | Where will the employee work, for how long and with what recurring pattern? | Relevant to permanence, payroll, residence and the OECD working-time analysis. |
| Reason for Italy | Is the move personal, or does the company benefit commercially from the Italian location? | Central to the home-office commercial-reason analysis. |
| Duties | Are the activities internal, auxiliary, operational, customer-facing or revenue-generating? | The nature of the activity affects fixed-place and treaty exceptions. |
| Customers and suppliers | Will the employee meet, develop or manage persons located in Italy? | May demonstrate a business connection with Italy. |
| Contracts | Can the employee negotiate, conclude or effectively secure contracts? | May create dependent-agent PE risk independently of the home-office analysis. |
| Home office | Does the employer require, fund, equip or present the home as a business base? | Relevant to whether the location is available to the enterprise. |
| Employment setup | Who is the legal employer and how will Italian payroll and contributions be managed? | Employment and social security obligations must be compliant even without a PE. |
| VAT | Do the activities require Italian VAT registration or constitute a VAT fixed establishment? | VAT follows a separate legal test. |
| Governance | Who approves the arrangement and monitors days, duties and authority? | Actual conduct must remain consistent with the documented position. |
When to consider a branch or Italian subsidiary
A single employee does not always justify incorporating an Italian company. A local structure becomes more relevant where the business plans to develop the Italian market, hire several employees, invoice locally, maintain premises, hold inventory, enter contracts in Italy or create a durable operational presence.
A branch may provide a registered Italian presence of the foreign company without creating a separate legal person. An Italian subsidiary is a separate company and can offer clearer separation for local operations, contracts, staff and commercial development. The choice should reflect liability, tax, governance, banking, accounting and long-term business objectives—not only incorporation cost.
For a detailed comparison, see Branch vs Subsidiary in Italy. If an Italian company is appropriate, our guide on how to open a company in Italy explains the main steps.
How ISY supports foreign employers in Italy
ISY provides an integrated Italian point of contact for international companies managing remote employees, local hires and market-entry projects. The assessment can combine corporate tax, payroll, employment law, social security, accounting and company-formation expertise.
Depending on the facts, support may include a preliminary permanent establishment risk review, analysis of the employee's activities and authority, payroll and social security setup, employment and remote-work documentation, coordination with the foreign parent company, and evaluation of a branch or Italian subsidiary.
The objective is practical: identify the correct structure before the foreign company accumulates undeclared obligations or allows an employee's role to evolve beyond the original arrangement.
Continue Your Italian Employment & Market-Entry Journey
Permanent establishment should be assessed together with the employment model, payroll setup and the foreign company's wider business plans in Italy.
Hire Without an Entity
Understand when and how a foreign company may hire an employee in Italy without opening a subsidiary.
→ Read the Hiring GuidePayroll in Italy
Review the Italian monthly payroll cycle, employer obligations and recurring HR compliance.
→ Read the Payroll GuideBranch vs Subsidiary
Compare the main structures for a foreign company establishing a durable presence in Italy.
→ Compare the StructuresISY can review the employee's actual role and coordinate the permanent establishment, payroll, social security, employment and corporate setup required in Italy.
FAQ
Can one remote employee create a permanent establishment in Italy?
Potentially yes, but not automatically. The employee's activities, authority, working pattern, use of the Italian location, commercial reason for being in Italy and the applicable double tax treaty must all be considered.
Does working from Italy for more than 183 days create a permanent establishment?
Not automatically. The 183-day concept is often relevant to individual tax residence or employment-income treaty rules, but it is not a universal corporate permanent establishment threshold. Corporate PE requires its own analysis.
Does working from an Italian home for 50% of the time automatically create a PE?
No. The 2025 OECD Commentary uses 50% of total working time over a relevant twelve-month period as part of the home-office analysis. At or above that level, facts and circumstances—including the commercial reason for working from Italy—must be examined. It is not an automatic Italian statutory test.
Can a sales employee create a permanent establishment in Italy?
The risk can be significant where the employee develops the Italian market, meets customers, negotiates essential terms, concludes contracts or plays the principal role leading to contracts routinely approved abroad. Both fixed-place and dependent-agent rules may apply.
Does an Employer of Record eliminate permanent establishment risk?
No arrangement should be assumed to eliminate the risk automatically. An EOR can manage employment and payroll responsibilities, but the foreign company's actual activities, control, commercial presence and the worker's authority still require review.
Are payroll registration and permanent establishment the same?
No. A foreign employer may have employment, social security, INAIL, withholding or payroll obligations in Italy without having a corporate tax PE. The two analyses are connected but legally distinct.
Does a corporate tax PE automatically create a VAT fixed establishment?
Not necessarily. Corporate income tax and VAT apply different tests. The VAT position—including registration and fixed-establishment questions—must be assessed separately.
Is the risk lower if the employee moved to Italy for personal reasons?
It may be, particularly where the Italian location has no commercial connection with the employer's business and the employee has no Italian market or contract role. Payroll, employee tax, social security and employment obligations may still arise.
Can a remote-work agreement prevent a permanent establishment?
Good documentation is important but cannot override actual conduct. If the employee's real activity differs from the written policy, tax authorities will examine the facts. The arrangement should therefore be documented and monitored.
Should the foreign company open a branch or subsidiary?
It depends on the expected duration, number of employees, customer activity, contract model, invoicing, premises, liability and wider Italian business plan. A stable commercial operation often deserves a structured comparison between a branch and an Italian subsidiary.
Sources and scope. This article reflects the OECD's 2025 Update to the Model Tax Convention and general Italian tax, payroll and employment principles available at the publication date. OECD Commentary is interpretative guidance rather than a self-executing Italian statute. The applicable treaty, Italian domestic rules and the facts of each case must be reviewed. This article provides general information only and does not replace tax, legal, payroll, social security, immigration or VAT advice tailored to a specific company or employee.
Reviewed by Italian tax, payroll and employment law professionals
Reviewed the permanent establishment, treaty, corporate tax and foreign-company compliance aspects.
Reviewed the employment, remote-work, contractual authority and legal structuring aspects for foreign employers.
Reviewed the payroll, accounting, tax-registration and recurring operational compliance aspects.