Italy: New interpretations of recurring cross-border tax issues

With a series of recently published rulings, the Italian Tax Authorities have provided some helpful interpretations of recurring cross-border tax issues.

Split-year clause in Italian Double Tax Treaties

In Ruling 17.1.2023 No. 54, the Italian Tax Authorities returned to the application of the concept of the “split year” in cases where a residence conflict has arisen. The case concerned a transfer of an employee from Switzerland to Italy, but the conclusions reached by the Italian Tax Authorities may be of particular interest also in transfers from and to Germany.

In fact, under Italian rules, the residence of individuals is ordinarily assessed on a calendar year basis, as the domestic tax law does not provide for the concept of a “split year”. Such a concept, however, is provided by the Double Tax Treaties signed by Italy with Switzerland and Germany. The Italian Tax Authorities confirmed that, in the case of a residence conflict with one of these two countries, the “split-year” clause of the respective treaties is fully applicable. This means that, for example, in the case of a transfer from Switzerland or Germany to Italy in the first half of the year, the individual becomes a tax resident in Italy only from the date of transfer of the domicile and not for the entire year. This clearly simplifies the tax compliance for the individual in the year of transfer to Italy, as generally only Italian-sourced income produced after the transfer would be taxable in Italy.

Cross-border tax treatment of Italian source pensions

Ruling 17.1.2023 No. 53, concerned the debated tax treatment of Italian-sourced pensions paid to non-resident individuals. The case determined the taxation of a pension paid by the Italian state to a resident in France who had carried out work in Italy.

The critical point of these cases has always been the interpretation of the pension provisions of most of the tax treaties signed by Italy, which, in exception to the general principle of taxation of pensions in the only state of residence of the perceiver, provide that “pensions and other amounts paid under the social security legislation of a state may be taxed in that state”.

This means that pensions are taxable also in the state of source (Italy in this case) if they are considered to be a social security service provided by the state. The reach of this provision is relevant and suggests a careful analysis of treaty provisions in the case of Italian-sourced pension recipients who are willing to relocate outside Italy or in the case of holders of a foreign pension who are willing to transfer to Italy

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