Double taxation of income occurs when two countries have the right to tax the income.
This results in a taxation conflict.
To protect taxpayers, double taxation agreements (DTAs) have been concluded. As a rule,
these protect against double taxation in transactions with other contracting states.
The template for this is provided by the OECD Model Tax Convention, which countries use
as a guide when concluding and drafting their bilateral double taxation agreements.
Double taxation agreements generally take precedence over domestic tax regulations.
In Italy, this is stipulated in Article 75 of Presidential Decree No. 600/1973
(DPR 600/1973). However, national tax law remains in force and is merely superseded by
the agreement, not replaced.
Insofar as domestic regulations are more favourable to the taxpayer, they may also be
applied in deviation from the double taxation agreement in accordance with Article 169
of the Italian Income Tax Code (TUIR).
Typical types of income in the DTA
Income from employment
In the case of employment, the taxation rights of the country of residence and the
country of employment often overlap.
However, most double taxation agreements stipulate that taxation is generally the
responsibility of the country of employment, i.e. the country in which the work is
actually performed. However, special exceptions may apply to short-term work assignments of
less than 183 days.
Company profits / self-employment
Under the system of double taxation agreements, company profits and income from
self-employment are generally taxed in the country of residence. The country of
employment only has a right of taxation if there is a permanent economic establishment
or a permanent establishment there.
Dividends, interest, royalties
Dividends, interest and royalties are capital income-related earnings arising from the
transfer of capital or the use of rights.
Double taxation agreements therefore regularly restrict the right of taxation of the
source country and assign the main right of taxation to the recipient's country of
residence.
Real estate
Income from immovable property, in particular from the letting, leasing or sale of real
estate, has a close territorial connection. Real estate is location-bound and cannot be
moved across borders.
Double taxation agreements therefore generally assign the right of taxation to the
country in which the real estate is located. The taxpayer's country of residence avoids
double taxation by exempting or crediting the tax levied in the country where the
property is located.
Artists and athletes
Under double taxation agreements, income earned by artists and athletes is generally
taxed in the country where they perform, regardless of the length of their stay.
The above lists are not exhaustive, but cover the types of income that are most relevant
in practice for companies in connection with their activities in Italy.
In principle, double taxation agreements do not treat income randomly, but follow a
clear economic logic: taxation takes place where a service is provided, assets are
located or capital is used.
Practical information on relief or exemption from withholding tax (DTA)
The tax relief provided for in double taxation agreements does not take effect
automatically in practice. Therefore, applications for exemption from withholding tax
must be submitted regularly or, if the tax has already been withheld, applications for
refunds must be submitted in the country of origin.
The nature and procedure of these processes are governed by the domestic law of the
respective source country and, in addition to the application for exemption or
reduction of withholding tax, usually require proof of tax residence and DTA
eligibility.