Double taxation in Italy: What is it, and when does it apply?
Double taxation refers to those cases where two different countries are entitled to impose taxes on income produced within their territories by the same subject. On the one hand there is the country in which the income is produced, and on the other hand the state of residence for tax purposes.
The risk of double taxation is run in the following cases:
- If you live in a EU country but you work in another country;
- If you are posted abroad for a short period;
- If you live and look for a job abroad but you receive unemployment benefits from your country of origin;
- If you are a pensioner and live in a state other than that which provides the pension.
In the above mentioned cases, apart from being taxed by your country of residence, you can also be taxed by your country of origin.
In order to avoid double taxation, Italy has signed agreements with different countries. In particular, these are international agreements by which the contracting countries regulate their respective power to tax, in order to avoid the same income being taxed twice. The agreements are also aimed at preventing tax evasion or avoidance.
Double taxation in Italy: how to avoid it?
Tax residence is of fundamental importance in matters of Conventions against double taxation, since it determines the application of the international agreements and the power to tax of the involved countries.
By means of specific criteria for connecting a person to a state, it is possible to identify the country of residence of a taxpayer, that is in which state he/she has to pay taxes. Among the fundamental criteria for determining the state of residence for tax purposes there are:
- Permanent home;
- Centre of vital interests;
- Usual place of residence;
- Agreement between the competent authorities of both contracting countries.
In order to avoid any risk of double taxation, it is recommended to apply to the Italian Revenue Agency a certificate of residence for tax purposes, to be presented to the foreign country where income was produced during a given year. If, during the same year, in a foreign country different kinds of income have been produced, which are subject to the same Convention, a single certificate of residence for tax purposes will be issued.
In Italy, both physical and juridical persons can apply for a certificate of residence for tax purposes, that is, for example, limited companies, commercial and non-commercial entities, collective investments undertakings, and pension funds. In case of partnerships and other “fiscally transparent” entities, only members or beneficiaries who are resident in Italy can apply for a certificate of residence for tax purposes.
The risk of double taxation is faced by means of Conventions stipulated by two states (such as Switzerland or Germany), regarding the regulation of the power to tax of both states, by virtue of the principle of reciprocity.
Income taxes and, sometimes, elements of estate underlie these agreements.
In Italy, the risk of double taxation can be faced through different means:
- Exemption method (non-application of the tax), i.e. the state of residence of the person who has received the income, by virtue of the Convention, unilaterally recognizes tax exemption for some specific kinds of foreign-source income. This method can be applied in full or in progressive form.
- Credit method, i.e. the state of residence of the person who has received the income unilaterally grants a tax credit for the taxes charged in the source-state, better: in the state where the income was produced. Indeed, the tax credit method implies that the taxes paid abroad for income produced abroad can be deducted from domestic taxation.
- Deduction method, which is unilaterally applied by the different states and allows to consider the taxes paid in the source-state as deductible income from internationally produced income, but as taxable income in the state of residence.
- Reduction method, which allows to reduce to 50% all taxes due by physical persons on incomes from real properties located abroad or incomes from employment already taxed abroad.
Double taxation in Italy: when does the phenomenon of “double non-taxation” manifests itself?
The existence of several Agreements against double taxation of course is not good (for instance a US-Italy Tax Treaty, or an Italy-UK double taxation treaty), since it increases the risk of using them in order to avoid taxation by means of an “international double non-taxation” system, thus giving birth to the phenomenon of the so called “misuse of the treaties”.
The abusive practice involves that a person gets benefits from a Convention, without being the legitimate beneficiary, such as when a society based in a state where a treaty is in force granting special tax treatments for foreign income, transfers its profits to another entity (beneficial owner), located in another state.
The international community has devised different measures for preventing the abusive practice described above, which has become increasingly frequent.
Arnone&Sicomo Law Firm provides legal assistance in matters of international double taxation.
In matters of labour law, we provide assistance to foreign workers working in Italy or to Italian workers working abroad.
In particular, by means of a detailed analysis of specific cases, as well as of international agreeements between Italy and other countries, we give advice on how to fulfil their tax obligations in the country where they work or in their countries of residence for taxation purposes, thus avoiding incurring penalties
We give legal advice to foreign societies whishing to temporary post their workers to Italian societies and we fulfil on their behalf all tax obligation for the Italian Revenue Agency.
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