Tax to be Withheld on Payments to Non Residents
Italy has an extensive series of rules requiring Italian tax resident businesses and professionals to make withholding of tax on certain payments of various types of income, both where the recipient is tax resident in Italy and non tax resident.
Italy has an extensive network of double taxation treaties that may reduce or eliminate withholding taxes on cross-border payments to non Italian tax residents. Also under the EU Parent-Subsidiary and Interest-Royalties Directives, qualifying payments between associated (as defined) EU entities may be exempt from withholding tax, subject to minimum shareholding and holding period requirements and other conditions.
The table below shows first a summary of Italy’s domestic withholding tax rules i.e. the rates at which persons who are required to deduct tax at source (generally businesses and professionals) must calculated the tax to be so deducted. Tax withheld from payment must generally be paid to the Italian Exchequer by the middle of the calendar month following the month in which payment is made.
Domestic rates of withholding can be reduced or exempted by operation of a double tax treaty per the third table below. In any case a check needs to be performed in all particular cases to verify e.g.:
- that a double tax treaty does apply – this is especially so where the recipient is a tax transparent entity, such as a a partnership, trust or other hybrid entity or where the recipient is a tax exempt entity (e.g. a pension, mutual or investment fund);
- that the benefit of the treaty or an EU directive applies in the circumstances – e.g. with reference to anti tax avoidance or anti treaty shopping rules;
- that the arrangements or relationship between payer and payee justify the reduced treaty rate.
- domestic tax legislation applies if more favourable for the taxpayer compared to the Treaty.
Procedures for Obtaining Withholding Tax Reduction or Exemption
- a certificate or certificates, covering relevant periods, issued by the foreign tax agency stating the the recipient is tax resident in that jurisdiction
- a form of self certification detailing entitlement to reduction/exemption confirmation that all the relevant conditions are met.
Reclaim of Tax Over-Withheld
Domestic Rules - 1
Dividends, Interest and Royalties
| Paid to tax residents in | Dividends | Interest | Royalties |
|---|---|---|---|
| Non-treaty countries | 1.2/15/26 | 26 | 30 |
Notes
Dividends
Generally a 26% withholding tax applies to payments of dividends to Italian tax resident individuals and non residents under Italian domestic rules, but:
- there are transitional rules dividends received by holders of ‘substantial’ shareholdings (i.e. holding more than 20% of voting rights or 25% of the share capital, 2% or 5% in case of listed companies) applicable to dividends paid from profits accrued up to the end of 2017, with particular effective rates of withholding tax. The rate applicable to ‘non-substantial” shareholdings is always 26%.
- pursuant to EU Directives payments of dividends, interest, and royalties made by an Italian company to an EU resident group company (immediate parent) can be exempt from withholding tax. subject to conditions (see below).
- non-resident recipients of dividends paid by an Italian company persons may have the right to obtain reimbursement for up to 11/26 of tax withheld at domestic rates, subject to providing evidence that the relevant income is subject to tax in the country of residence. That makes an effective rate of withholding, in case of successful refund claim of 15%.
Interest
Domestic rules for withholding on interest are complex. An obligation to withhold arises for payments made by most financial intermediaries and corporate borrowers.
Royalties
The domestic rate applies for certain type of royalties on 75% (possibly lower for the under 35’s) of the gross amount of the royalty paid. Treaty ceilings may apply on the gross amount of the royalty paid.
Domestic Rules - 2
Other Income
| Paid to tax residents in | Income From Employment | Income From Self-Employment | Amounts payable for the use of industrial or commercial plant and equipment |
|---|---|---|---|
| Non-treaty countries | Scale Rates | 30 | 30 |
Income From Employment
If you are employed by an Italian business, the business will withhold tax at source at normal scale rates of income taxes, regardless of whether you are tax resident in Italy or not.
Scope of Exemption
Exemption from Italian tax may be available under the terms of an Italian DTA. Many of Italy’s DTA’s make provision for taxation only in the country of residence unless the employment is exercised in the other state. Where the employment is exercised is a question on which professional advice as there is wide scope for double taxation as the two tax agencies take a different view. In cases of double taxation the country of residence should offer credit for tax paid in Italy, but this, too needs to be checked. Special rules may apply to categories of worker in certain sectors – e.g. air crew and sea farers.
Income From Self Employment
In general Italy’s DTA’s provide exemption from Italian tax for income from self employment where the contractor has no “fixed base” or “taxable presence” on Italian soil from which the business pr professional activity is carried on and which relates to the income generating activity. The definition of “fixed base” or “taxable presence” is a technical one and will include as office, studio or commercial premises. In certain circumstances, it can include the availability of office space or premises made available by the Italian client. Freelance sub contractors are advised to resolve the question of Italian tax on fees prior to entering into contractual arrangements with an Italian client. Where exemption from Italian tax is confirmed to be available under a specific DTA the contractual arrangements should contain an expression provision that withholding of tax will not be made on fees, subject to the contractor providing the adequate supporting documentation and there being no change to Italian law.
VAT
Note that a self employed contractor working for an Italian contractor may be under obligation to register for, and charge Italian VAT on their supplies. Specific advice should be sought but in general the self employed offering real estate related services, architects, engineers, event management, construction and real estate refurbishment type services may be required to register for VAT. The VAT position may be an element, although not necessarily a determining one, in the analysis of whether the contractor has a fixed base or not.
Payment For the Use of Equipment (equipment leasing/rental etc.)
Italy classifies the payments made by way of consideration for the use of industrial/commercial (or scientific) plant & equipment under domestic law usually royalties (canoni) under Italian domestic rules. This means that payments to non-residents are generally subject to 30% withholding tax (typically on the gross amount paid)
As can be seen in the table below many Italian treaties provide zero and reduced rates for royalties but each treaty needs to be check to verify whether equipment rentals are included in the the definition of “royalties” for the purposes of the treaty.
Some of Italy’s more recent treaties specifically exclude exclude equipment rentals from the definition of royalties and provide that such payments are to be treated as business profits. Hence they are only taxable in Italy (and hence liable to withholding of tax on payment if the recipient has or is deemed to have a permanent establishment (PE) in Italy. A specific check is required.
EU Directives
| Paid to Qualifying EU Residents | Dividends | Interest | Royalties |
|---|---|---|---|
| Corporate Recipients | 0 | 0 | 0 |
Dividends
EU Parent-Subsidiary Directive – Direttiva Madre-Figli(Directive 2011/96/EU)
This directive aims to eliminate double taxation on distributions of after tax profits by an Italian subsidiary company to its parent company which is tax resident in another EU Member State.
Scope of Exemption
Italian companies paying dividends to qualifying EU parent companies may apply a full exemption from withholding tax, provided the conditions below are met.
Conditions for Exemption
Corporate form: Both the Italian subsidiary and the EU parent must be companies listed in the directive’s annex (typically limited liability companies or equivalents).
Tax residency: The parent company must be resident in another EU Member State and subject to corporate income tax there.
Minimum holding: The parent must hold at least 10 per cent of the capital of the Italian subsidiary.
Holding period: The shareholding must be maintained for an uninterrupted period of at least 12 months.
Beneficial ownership: The parent company must be the beneficial owner of the dividends.
Interest and Royalties
Direttiva Interessi e Canoni (Directive 2003/49/EC)
This directive provides for the exemption from withholding tax on interest and royalty payments made between associated companies in different EU Member States.
Scope of Exemption
Italian resident companies or permanent establishments in Italy may pay interest or royalties to parent companies in other EU Member States without applying withholding tax, subject to the following conditions.
Conditions for Exemption
Corporate form: Both payer and recipient must be companies listed in the directive’s annex.
Tax residency: The recipient must be resident in another EU Member State and subject to corporate income tax there.
Minimum holding: The recipient must hold at least 25 per cent of the voting rights directly in the Italian payer, or vice versa, or both must be held by a third EU company with at least 25 per cent in each.
Holding period: The qualifying shareholding must be maintained for at least 12 months.
Beneficial ownership: The recipient must be the beneficial owner of the interest or royalties.
These directives are implemented in Italy through Legislative Decrees 136/1993 and 143/2005, respectively.
DTA Maximum Rates of Withholding under Treaty
| Amounts Paid to Tax Residents of: | Dividends | Interest | Royalties |
|---|---|---|---|
| Albania | 10 | 0/5 | 5 |
| Algeria | 15 | 0/15 | 5/15 |
| Argentina | 15 | 0/20 | 10/18 |
| Armenia | 5/10 | 0/10 | 7 |
| Australia | 15 | 0/10 | 10 |
| Austria | 15 | 0/10 | 0/10 |
| Azerbaijan | 10 | 0/10 | 5/10 |
| Bangladesh | 10/15 | 0/10/15 | 10 |
| Barbados | 5/15 | 0/5 | 5 |
| Belarus | 5/15 | 0/8 | 6 |
| Belgium | 15 | 0/15 | 5 |
| Bosnia and Herzegovina | 10 | 10 | 10 |
| Brazil | 15 | 0/15 | 15/25 |
| Bulgaria | 10 | 0 | 5 |
| Canada | 5/15 | 0/10 | 0/5/10 |
| Chile | 5/10 | 4/5/10 | 2/10 |
| China | 10 | 0/10 | 10 |
| Congo | 8/15 | 0 | 10 |
| Croatia | 15 | 0/10 | 5 |
| Cyprus | 0/15 | 10 | 0 |
| Czech Republic | 15 | n/a | 0/5 |
| Denmark | 0/15 | 0/10 | 0/5 |
| Ecuador | 15 | 0/10 | 5 |
| Egypt | N/A | 0/25 | 15 |
| Estonia | 5/15 | 0/10 | 0/5/10 |
| Ethiopia | 10 | 0/10 | 20 |
| Finland | 10/15 | 0/15 | 0/5 |
| France | 5/15 | 0/10 | 0/5 |
| Georgia | 5/10 | 0 | 0 |
| Germany | 10/15 | 0/10 | 0/5 |
| Ghana | 5/15 | 10 | 10 |
| Greece | 15 | 0/10 | 0/5 |
| Hong Kong | 10 | 0/12.5 | 15 |
| Hungary | 10 | 0 | 0 |
| Iceland | 5/15 | 0 | 5 |
| India | 15/25 | 0/15 | 20 |
| Indonesia | 10/15 | 0/10 | 10/15 |
| Ireland | 15 | 10 | 0 |
| Israel | 10/15 | 10 | 0/10 |
| Ivory Coast | 15/18 | 0/15 | 10 |
| Japan | 10/15 | 10 | 10 |
| Jordan | 10 | 0/10 | 10 |
| Kazakhstan | 5/15 | 0/10 | 10 |
| Kyrgyzstan | 15 | 0 | 0 |
| Kuwait | 0/5 | 0 | 10 |
| Latvia | 5/15 | 0/10 | 5/10 |
| Lebanon | 5/15 | 0 | 0 |
| Lithuania | 5/15 | 0/10 | 5/10 |
| Luxembourg | 15 | 0/10 | 10 |
| Macedonia | 5/15 | 0/10 | 0 |
| Malaysia | 10 | 0/15 | 0/15 |
| Malta | 15 | 0/10 | 0/10 |
| Mauritius | 5/15 | 0 | 15 |
| Mexico | 15 | 0/15 | 0/15 |
| Moldova | 5/15 | 5 | 5 |
| Mongolia | 5/15 | 0/10 | 5 |
| Montenegro | 10 | 10 | 10 |
| Morocco | 10/15 | 0/10 | 5/10 |
| Mozambique | 15 | 0/10 | 10 |
| Netherlands | 5/10/15 | 0/10 | 5 |
| New Zealand | 15 | 0/10 | 10 |
| Norway | 15 | 0/15 | 5 |
| Oman | 5/10 | 0/5 | 10 |
| Pakistan | 15/25 | 0/30 | 30 |
| Panama | 5/10 | 5/10 | 10 |
| Philippines | 15 | 0/10/15 | 25 |
| Poland | 10 | 0/10 | 10 |
| Portugal | 15 | 0/15 | 12 |
| Qatar | 5/15 | 0/5 | 5 |
| Romania | 0/5 | 0/5 | 5 |
| Russia | 5/10 | 10 | 0 |
| San Marino | 0/15 | 0/13 | 0/10 |
| San Marino | 0/15 | 0/13 | 0/10 |
| Saudi Arabia | 5/10 | 0/5 | 10 |
| Senegal | 15 | 0/15 | 15 |
| Serbia | 10 | 10 | 10 |
| Singapore | 10 | 0/12.5 | 15/20 |
| Slovak Republic | 15 | n/a | 0/5 |
| Slovenia | 5/15 | 0/10 | 5 |
| South Africa | 5/15 | 0/10 | 6 |
| South Korea | 10/15 | 0/10 | 10 |
| Spain | 15 | 0/12 | 4/8 |
| Sri Lanka | 15 | 0/10 | 10/15 |
| Sweden | 10/15 | 0/15 | 5 |
| Switzerland | 15 | 12.5 | 5 |
| Syria | 5/10 | 0/10 | 18 |
| Taiwan | 10 | 10 | 10 |
| Tajikistan | 15 | 0 | 0 |
| Tanzania | 10 | 15 | 15 |
| Thailand | 15/20 | 0/10 | 5/15 |
| Trinidad and Tobago | 0/10/20 | 10 | 0/5 |
| Tunisia | 15 | 0/12 | 5/12/16 |
| Turkey | 15 | 15 | 10 |
| Turkmenistan | 15 | 0 | 0 |
| Uganda | 15 | 0/15 | 10 |
| Ukraine | 5/15 | 0/10 | 7 |
| United Arab Emirates | 5/15 | 0 | 10 |
| United Kingdom | 5/15 | 0/10 | 8 |
| United States | 5/15 | 0/10 | 0/5/8 |
| Uruguay | 5/15 | 0/10 | 10 |
| Uzbekistan | 10 | 0/5 | 5 |
| Venezuela | 10 | 0/10 | 7/10 |
| Vietnam | 5/10/15 | 0/10 | 7.5/10 |
| Zambia | 5/15 | 0/10 | 10 |
Source: Italy Finance Ministry
Some Examples of How Withholding Tax Works
An Italian company pays a dividend of 10,000 to its 100% shareholder resident in the Netherlands. Under Italian domestic law the Italian company must withhold 2,600 of tax, paying the net amount of 7,400 to the NL company and 2,600 to the Italian tax authorities the following month.
However if the conditions for the EU Parent/Subsidiary Directive are met, and the NL company provides evidence of the same the Italian company may be able to proceed the dividends withholding of tax.
And Italian company has borrowed funds from an associated company in the Czechia which acts as group Treasury Center. The EU Interest – Royalty directive does not apply as the shares in the Italian company are not owned directly by the Czechia company, or vice versa, and neither company is held directly by a single third company. The maximum withholding rate on interest payments will be set by the Italy-Czechia Treaty, if applicable.
Arnold is a freelance IT consultant registered for VAT in the UK. They engage with an Italian group of companies to provide services relating to the group’s website. The total fee is 12,000 payable in three tranches. The initial 4,000 is for work performed in the UK in tax year 1. On payment the Italian company will withhold tax of 1,200 (30% of 4,000) as Arnold did not in place the paper work to support a claim for exemption from Italian tax under the Treaty at the time of engagement, he needs to make a claim for refund from the Italian Tax Agency and wait.
Arnold transfers to Italy where he spends the following year working at the premises of his client managing a small team of developers (hired by the client). It is likely that the Italian Tax agency would take the view in these circumstances that Arnold is working through a fixed base in Italy. This means Arnold needs to register for Italian VAT, comply with Italian accounting, tax and electronic invoicing rules paying taxes and social security via an Italian annual tax return.
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