The worldwide income principle is a fundamental principle of international tax law. It states that a person is generally liable for tax in their country of tax residence on their total worldwide income -regardless of the country in which the income is earned.
For individuals, this means that a taxpayer residing in Italy, for example, must report not only domestic but also foreign income on their tax return.
Whether the worldwide income principle applies depends crucially on the country in which a person is tax resident. In principle, only the country of residence taxes the entire worldwide income.
In Italy, a person is considered a tax resident if, for the majority of the tax year (more than 183 days), they meet at least one of the following criteria:
The fulfillment of just one of these criteria may be sufficient to establish unlimited tax liability in Italy.
In practice, it often happens that a person is considered a resident of two countries simultaneously under national law, for example, if they reside in Germany but work or have their center of life in Italy.
In such cases, the so-called tie-breaker rules of the double taxation treaty apply. These rules determine which country the person is to be assigned to for tax purposes.
The assignment is made in stages, typically based on the following criteria:
Only if these criteria do not allow for a clear determination is a coordination process initiated between the relevant tax authorities.
Example: Residence in Germany – Relocation to Italy
Mr. Müller is a German citizen and lives in Germany until June 30. Starting July 1, he moves to Italy, rents an apartment there, and works for an Italian company. His family remains in Germany for the time being.
Result: For the year in question, Mr. Müller may be considered a tax resident in both countries under national law. Germany based on his previous residence and Italy based on his new residence and employment.
In this case, the provisions of the double taxation treaty between Germany and Italy apply. The so-called tie-breaker rules are used to determine which country Mr. Müller is tax-resident in. The decisive factor here is, in particular, where the center of his life interests is located.
If the family remains in Germany and the closer personal and economic ties remain there, Germany may continue to be considered the country of residence. If, on the other hand, he relocates the center of his life to Italy, Italy becomes the country of residence.
The country designated as the country of residence in each case taxes the entire worldwide income. The other country may only tax income that is connected to its territory. Double taxation is avoided through the double taxation treaty.
Limited tax liability must be distinguished from the worldwide income principle. This applies when a person is not a resident of a country but earns income there.
In this case, the relevant state taxes only domestic income, such as income from local activities or from assets located there. Worldwide income, however, is not taxed.
Since multiple countries may simultaneously have grounds for taxation—particularly the country of residence and the country of employment—there is generally a risk of double taxation.
This is avoided through double taxation treaties. These treaties determine which country has the right to tax and how the country of residence must handle foreign income.
The worldwide income principle generally remains in effect, but is limited by the provisions of the respective double taxation treaty.
Example: Resident in Germany – Income from Italy
A person resident in Germany earns income from an activity in Italy.
Under the worldwide income principle, this income is initially taxable in Germany. At the same time, Italy, as the country of employment, may have the right to tax it.
In this case, the double taxation treaty between Germany and Italy determines which country may tax the wages. If Italy has the right to tax, Germany must avoid double taxation, for example by exempting the income subject to a progression clause.
This example shows that the worldwide income principle must always be considered in conjunction with double taxation treaties.
The 183-day rule is based on the worldwide income principle and applies it specifically to cross-border employment activities.
While the worldwide income principle stipulates that the country of residence generally taxes the entire income, the 183-day rule determines whether and under what conditions the country of employment is granted the right to tax.
Both concepts are therefore interrelated and should always be considered together in practice.
The worldwide income principle forms the basis of taxation in an international context. It ensures that the country of residence generally has access to a person’s total income. Double taxation treaties ensure that this does not result in actual double taxation and that taxing rights are clearly allocated between countries.
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