Avoiding international double taxation

Every Italian citizen knows how expensive it is to pay taxes, even having to do it in two different countries could be really excessive. But there are many situations that generate problems of a fiscal nature, forcing to pay taxes both in Italy and in the foreign countrywhere an income has been produced.

Because of the high level of unemployment, also because of the recent financial crisis, there are more and more workers fleeing abroad in search of work. To this must also be added a growing increase in trade and economic relations between different States, which often generate conflicts at the level of fiscal authorities.

In all these cases in which a person, or a company, generate income outside his / her country of residence, there is talk of double taxation . Let's see in detail what it is and how to avoid having to pay taxes simultaneously in two different countries.

What is double taxation

The word itself says, it covers all the cases in which a tax payer is forced to pay taxes in two different countries. Generally, a double taxation takes place every time a person's state of residence applies a personal tax criterion, while the country ( State of the source ) where the individual performs work, applies a credit so to speak real. This means that, for example, the employee with residence in Italy who moves for a period abroad, generates an income that will be subjected to double taxation .

Normally double taxation is divided between legal and economic :

  • Legal imposition : occurs when an income, under the same taxpayer, is subject to the tax levy by the State of residence and the source State.
  • Economic taxation : occurs when more than one subject is taxed in relation to the same income. This is the case with corporate income tax when profits are distributed as dividends. These proceeds are included in the income of the member who will be subject to double taxation.

Conventions against double taxation

To date there is no international law that regularizes or prohibits double taxation. For this reason many countries of the European Community and non-EU countries have undertaken a close collaboration to try to limit or solve the problem. A series of bilateral agreements and conventions have been signed to relieve the taxpayer from double taxation and to regulate tax authority among the same States.

Naturally, Italy has also entered into a series of agreements with numerous countries to establish how to share the power of taxation between two contracting States. Depending on the type of income , these agreements establish when the two countries can take both a tax (concurrent taxation) or when the tax is exclusive of only one state. In principle it can be established that taxation takes place in the country of residence of the person receiving foreign income .

Tax residence and Aire

How to understand if a subject is required to pay taxes in two different countries? Apart from the conventions, the basic concept is represented by fiscal residence . Often there is a confusion between a country's residence and a tax residence, which are two completely different things.

At the tax level, what makes text is tax residence. Italian law also applies the so-called principle of world taxation ( World Wide Taxation Principle ). In practice, an Italian citizen is required to pay in Italy taxes on income generated abroad . The taxes paid in the country where the income is generated, can then be deducted from those paid in Italy. This is a general rule that applies to all citizens residing in Italy who work abroad and are not members of Aire.

A person is considered fiscally resident in Italy if:

  • he actually has a domicile in our country;
  • he moved abroad to countries with facilitated taxation;
  • is registered in the municipal registry office and resides in Italy for at least 183 days a year.

If a citizen decides to move abroad for a period of more than 12 months, he is obliged to register with the Register of Italian Residents Abroad (Aire). This request can be made in a consular office located in the territory and must take place within 90 days of the transfer.

It is good to clarify that being registered with Aire is a necessary condition but it is not the only one to be able to have a tax residence abroad. It is often the serious mistake of thinking that having residence outside of Italy is sufficient to no longer have any obligations towards the Italian tax system.