Notes on the legislation on tax credits for income produced abroad and on the application of the OECD Model Convention on Income and Capital

Index:

1. Introduction – 2. Juridical and economic double taxation – 3. Brief remarks on the elimination of juridical double taxation in the OECD Model – 4. Typical aspects of foreign tax credit with a view to national taxation – 5. Certification of taxes paid abroad – 6. Conclusion

 

1. Introduction
Article 2 of the Decree of the President of the Italian Republic no 917/1986 (“Tuir”) lays down, for individuals residing in Italy, the so-called “principle of levying taxes on income wherever such income is produced” (worldwide taxation principle) and hence anyone having some form of relationship with the territory of the State is called upon to “contribute to public expenses”, in accordance with and subject to the Law. For this reason:
  • residents are under the obligation of paying taxes also for income they produce abroad;
  • while non-residents are to pay taxes only on income produced in Italy.
In an international context, these provisions generate issues of double taxation deriving from a conflict of jurisdictional attribution between two different States when both, on the basis of their respective domestic legislation, claim the right to levy taxes on specific categories of income.
The holders of the tax levying right may be both the country of residence of the individual and the source country where the income is produced.
The domestic provisions laid down in article 2 (2) of the Tuir state that the term residents indicates the natural persons who for most of the taxation period:
  • are registered in the Register of residents in Italy i;
  • have their domicile (defined in accordance with Art. 43 (1) of the Civil Code as «the place where he/she [namely “the natural person”] conducts most of his/her business and has most of his/her interests ») in the territory of the State;
  • have their residence (defined in accordance with Art. 43, (2) of the Civil Code as «the place where the person usually lives») in the territory of the State.
A person is fiscally resident in Italy where even only one of the above conditions is fulfilled.
On the other hand, fiscal residence for bodies other than natural persons is governed by Art. 5 (2), letter d) of the Tuir ii for partnerships, and by Art. 73, (5-bis) of the Tuir iii for companies. In both cases the criteria for establishing personal involvement are to be sought at:
  • “head office”;
  • “administrative office”;
  • “business activity”.
Conventional legislation generally tends to identify the fiscal residence of an individual on the basis of the requirements established in Art. 4 (1) of the OECD Model with specific reference to:
  • “domicile”;
  • “residence”;
  • “place of management”;
  • “any other criterion of a similar nature”.
In the case in which, on the basis of the above-mentioned criteria, an individual has his/her residence in both States, the Conventional regulations lay down further criteria in Art. 4 (2) for defining the residence in one of the Contracting States, which include (according to the order laid out below):
  • “permanent home available”;
  • “State with which his personal and economic relations are closer” or “centre of vital interests;
  • “State in which he has an habitual abode”
  • “State of which he is a national”
If, after checking the above-mentioned criteria it were still difficult to define a person’s place of residence, «the competent authorities [of the Contracting States…] shall settle the question by mutual agreement».
Finally for persons other than individuals, in the case in which on the basis of the criteria highlighted in paragraph 1, the company is considered as being a resident of both Contracting States, in accordance with paragraph 4 of Art. 4 of the OECD Model, the “place of effective management” shall be the residence of the business.