The Importance of Identifying Italian Source Income
The Italian tax Code contains a specific definition of Italian source income – or rather a list of types of income that are deemed under the Italian Tax Code to have an Italian source.
If you are tax resident in Italy for any tax year (under the test of tax residence in Art. 2 of the Code), you will be liable to Italian income tax on worldwide income under Italian rules and subject to the operation of an applicable double tax treaty.
If you are not tax resident in Italy for any year, you are, as a general rule, liable to Italian income taxes on income that falls within the definition of Italian source income pursuant to Article 23 of the Code.
Article 23 of the Italian Tax Code
This is a fairly literal translation of art 23 of the Code:
1. For the purposes of the application of the tax with respect to non-residents, the following are considered to be produced in the territory of the State and hence Italian source income.
(a) income from land situated in Italy;
(b) income from capital (investment income) paid by the Italian State, by Italian tax residents or by non tax residents who have a fixed base or permanent establishment in Italy excluding interest and other income on bank and post office deposit and current accounts;
(c) income derived from employment or deemed to be income from employment where the relevant services are rendered from Italian soil;
d) income from self-employment derived from activities exercised on Italian soil;
e) income from business activities exercised in the territory of the State through a permanent establishment;
(f) miscellaneous income derived from activities pursued within the territory of the State and from property situated within the territory of the State, including capital gains deriving from the transfer for valuable consideration of shares in Italian resident companies, with the exception of:
1) capital gains deriving from the disposal for consideration of qualified shareholdings in Italian resident companies traded on regulated markets;
2) capital gains deriving from the sale for valuable consideration or redemption of securities not representing commodities and mass certificates (securities such as bonds and other debt instruments offer to the public at large) traded on regulated markets, as well as from the sale or withdrawal of foreign currencies deriving from deposit and current accounts;
(3) income deriving from a series of financial contracts (derivatives) concluded on regulated markets;
g) income from Italian partnerships, joint ventures and profit sharing arrangements attributed to non residents partners or members.
1-bis. Income or gains deriving from the transfer for valuable consideration of a share or shares in non-resident companies and entities, where more than half of the value of which is derived, at any time during the three hundred and sixty-five days before the transfer, refers, directly or indirectly, to immovable property situated in Italy, shall be deemed to be Italian source income, except for a transfer of securities traded on a regulated market.
2. Notwithstanding the above the following shall also be deemed to constitute Italian source income, if paid by the State, by persons residing in the territory of the State or by an permanent establishment of a non-resident:
(a) pensions, allowances treated as such and certain severance indemnities
b) income assimilated to income from employment
c) remuneration for the use of intellectual property, industrial patents and trade marks as well as processes, formulas and information relating to experience acquired in the industrial, commercial or scientific field;
d) fees paid to non-resident enterprises, companies or bodies for artistic or professional services rendered on their behalf in the territory of the State.
How is the income taxed?
The tax due in the hands of a non resident will depend on the general rules applicable to the type of income. Income and gains will need to be reported in an annual tax return (with the application of interest and steep penalties for failure to report), unless the relevant income is subject to a definitive withholding tax made by the payer.
In many cases the tax treatment can be affected by an applicable double tax treaty which can operate to
- exempt certain types of income from the charge to tax in the hands of someone who is tax resident in the treaty partner country;
- reduce the rate of withholding tax or tax via a return.
In all case the terms of the relevant treaty need to be checked to ensure that the treaty actually applies in the specific circumstances.
Conclusion
As can be seen from the above, the definition of Italian source income is a technical one and professional advice may be required. It can also be seen that the Italian legislator is seeking to tax, in broad terms the following:
- income from, and gains on sale of, real estate located in Italy;
- income from employment, self employment and business activities where the relevant services are provided from, or where the activity is conducted on Italian soil;
- most type of income from Italian investments with the exception of certain income and gains deriving from government bonds and securities which are traded on regulated markets;
- pension income and severance pay paid by Italian tax residents;
- royalty income paid by Italian tax residents;
- gains on sale of shares of real estate investment companies where the real estate is located in Italy.
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