Due to the increasing globalization of economic activities, qualified knowledge of international tax law is of fundamental importance. Therefore, it is important for internationally operating companies to be able to count on a competent advisor in cross-border matters.

We advise our clients on cross-border issues in all areas of international tax law. This includes, inter alia, the application of withholding tax on dividends, interest and royalties, the definition and taxation of permanent establishments, problems in the application of double taxation treaties and issues relating to the tax residency of individuals.

Tax residency of individuals

According to Article 2 of the Italian Income Tax Code, individuals are tax resident or subject to unlimited tax liability in Italy provided that one of the following conditions is met for the greater part of the year (at least 183 days):

• Registration in the civil register of an Italian municipality
• Civil law residence in Italy
•  Civil law domicile in Italy

Italian tax residents are obliged to have their global income taxed in Italy, i.e. all income regardless of whether it has been earned in Italy or abroad.

Assuming that an individual is considered to have unlimited tax liability in Italy and at the same time has unlimited tax liability in another state, the double taxation treaty between Italy and the other state applies for the final determination of tax residency.

Whether an individual is subject to unlimited tax liability in Italy depends on various facts and must be examined on a case-by-case basis.

Permanent establishments:

The creation of permanent establishments in an international context is usually to be avoided so that no tax liability arises at home or abroad. In addition to the tax liability, there are further tax obligations such as the preparation of tax returns and the determination of the tax result of the permanent establishment.

The Italian Income Tax Code defines a so-called material permanent establishment as a fixed place of business through which the foreign company carries out all or part of its activities in Italy. The term “material permanent establishment” includes in particular:

• A head office
• A subsidiary
• An office
• A workshop
• A laboratory
• A construction site (provided it exists for at least 3 months – in most double taxation agreements the minimum period has been extended to 12 months).

The 2018 Stability Law transposed into Italian law the recast of Article 5 of the OECD Model for Permanent Establishments. Accordingly, to verify the existence of a so-called personal permanent establishment (also called representative permanent establishment) in Italy, it is no longer necessary that the employee/representative has the authority to represent the non-resident company by means of a power of attorney. It is sufficient if the representative plays a decisive role in the negotiations on behalf of the foreign company or carries out certain activities that lead to the conclusion of the contract.

On the other hand, the establishment of a permanent establishment according to the above criteria continues to be excluded in the case of an independent agent acting in the ordinary course of his business.

Withholding tax on dividends (Parent-Subsidiary Directive):

Dividends paid to shareholders who are not resident in Italy are generally subject to a withholding tax of 26% in Italy. If the shareholder is a company with its registered office in an EU member state and is subject to local corporate income tax, a reduced withholding tax rate of 1.2% applies in accordance with Art. 27, 3ter of DPR 600/73.

If, on the other hand, the requirements of the Parent-Subsidiary Directive (Directive 2011/96/EU) are met, the foreign dividend recipient can apply for a full withholding tax exemption, or the dividend recipient is entitled for a refund.

The aim of the Parent-Subsidiary Directive is to regulate the taxation of current profit distributions between the parent company and the subsidiary in such a way that the distributions can be made in a tax-neutral manner.

The recipient of the dividend must apply in writing to the Italian company for the application of the reduced withholding tax rate or for the non-application of the withholding tax and provide a certificate of residence from the foreign tax office.

Withholding tax on interest and royalty payments (Interest and Royalty Directive):

Interest payments distributed to shareholders not resident in Italy are generally subject to a withholding tax of 26% in Italy.

Under the double taxation agreements between Italy and third countries, the withholding tax rate on interest income can generally be significantly reduced. To benefit from the withholding tax reduction, it is necessary that the interest recipient is the beneficial owner of the interest income. The interest recipient must confirm this in writing to the Italian company in good time before the payment and submit a certificate of residence from the foreign tax office.

If, on the other hand, the conditions of the Interest and Royalties Directive (Directive 2003/49/CE) are met, the foreign dividend recipient can apply for a full withholding tax exemption, or the dividend recipient is entitled for a full refund.

Our goal is to avoid double taxation for our clients. Therefore, we support them in the early investigation of their cross-border activities to be able to react promptly to double taxation if necessary.