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Double taxation in Italy: overview

Double taxation refers to the situation in which two different states (i.e. the state in which the income was generated on the one hand and the country in which the taxable person has his tax residence) can levy tax on the income of the same person.

The risk of double taxation exists in the following cases:

  • the taxpayer lives in one EU country and works in another country;
  • the taxable person works abroad for a short period of time;
  • the taxpayer lives and seeks work abroad, but receives unemployment benefits from his country of origin;
  • the taxable person is a pensioner and lives in a different state from the one granting the pension.

In the above cases, the taxable person can be taxed not only from their country of residence, but also from their country of origin.

To avoid the risk of double taxation, Italy has double taxation treaties with different countries closed. In particular, these are international agreements that restrict the tax sovereignty of the contracting states in order to avoid the same income being taxed twice. The treaties also aim to prevent tax evasion or avoidance.

Double taxation in Italy: avoid double taxation

With regard to double taxation agreements, the taxable residence of the taxable person is of fundamental importance as it determines the applicability of international agreements and the tax sovereignty of the contracting countries.

The following elements make it possible to determine the taxable domicile of a taxable person:

  • Permanent residence;
  • Place of vital interests of the tax subject;
  • Habitual residence;
  • Nationality;
  • Agreement between the competent authorities of both contracting countries.

To avoid double taxation, you can apply for a tax residence certificate apply for. This can be presented to the tax authorities of the state in which the income was generated in a certain year.

If you have earned different types of income in the same year that are subject to the same double taxation treaty, the competent authority will issue a single tax residence certificate.

In Italy, both natural and legal persons can apply for a tax certificate of residence, e.g. limited liability companies, commercial and non-commercial companies, collective investment schemes and pension funds. In the case of partnerships and other "tax-transparent" companies, only members or beneficiaries residing in Italy can apply for a tax certificate of residence.

In Italy, the risk of double taxation can be combated in different ways:

  • Exemption method or exemption method, i.e. due to the double taxation agreement, special types of foreign income are exempt from taxation in the country of residence.
  • Credit method, i.e. the tax payable in the country of residence will be reduced by the amount that had to be paid abroad. The tax paid abroad is therefore deducted from the domestic tax.
  • Deduction method or deduction procedure, i.e. the taxes paid abroad are deducted in the source country. In any case, they are considered taxable income in the country of residence.
  • Flat rate method, i.e. the foreign income or assets of a taxable person taxed abroad are reduced by 50%.

Double taxation in Italy: Double non-taxation

Because of the large number of international double taxation agreements (for example Italy has signed various double taxation agreements with Germany or with the USA and the United Kingdom), the risk is unfortunately increasing that these are used for tax avoidance: It is the phenomenon of so-called double non-taxation ".

The international community has developed various measures to prevent the abusive practice described above.

The law firm Arnone & Sicomo offers legal advice on questions of international double taxation.

In the field of labor law, we support foreign workers who work in Italy and Italian workers who work abroad.

Through a detailed analysis of the double taxation treaties between Italy and other countries, we advise you on your tax obligations in the country in which you work or in which you have your tax residence.

We help foreign entrepreneurs to meet their tax obligations in Italy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Tax Bites - May 2021
Reynolds Porter Chamberlain
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