ITALY Law and Practice Contributed by: Giuliano Foglia, Foglia & Partners
with active utilities that is regularly used on weekends or during leisure time). According to the civil law notion of residence, an individual is considered resident in Italy if he has his habitual abode therein, meaning that he has a place at his disposal where he remains and/or returns with a certain degree of stability and continuity, with the intent to live in that place permanently. Lastly, with effect from 1 January 2024, a new criterion based solely on physical presence in the State’s ter - ritory has been introduced. In this respect, the pres - ence in the Italian territory, even for fractions of the day, amounts to presence in Italy for the entire day. As clarified in Circular Letter No 20/2024, particular situations where the presence in Italy is merely tem - porary or incidental can be evaluated to exclude tax residence in Italy (eg, an airport transfer in Italy in the course of a trip from and to foreign countries). Italian tax law does not contain a domestic split-year provision. A similar clause is included only in the DTCs Individuals who are tax residents in Italy are subject to tax on their worldwide income at progressive tax rates (the maximum rate is 43% on taxable income exceeding EUR50,000). Possible double taxation arising from taxes levied in the foreign source State could be mitigated with the application of a credit for taxes paid abroad. Accord - ing to Article 165 of the ITC, taxes paid abroad can be credited, provided that the following conditions are cumulatively met: • income on which foreign taxes have been paid is considered a foreign-sourced income (see 2.4 Taxation of Non-Resident Individuals ); • income on which foreign taxes have been paid is included in the taxable income for the purposes of Italian income taxes; • foreign taxes have been effectively and finally paid abroad. with Germany, Panama and Switzerland. 2.3 Taxation of Resident Individuals
If the above conditions are fulfilled, the tax credit that can be offset against net taxes due would be subject to the following limitations: • it can be considered only up to the portion of Ital - ian taxes due corresponding to the ratio between foreign-sourced income and overall income; and • in any case, up to the amount of net tax due in Italy. In addition to the provisions of Article 165 of the ITC, the tax credit provisions of the applicable DTCs also apply. As interpreted by the Italian Supreme Court of Cassation in its recent case law, if the content of the two provisions differs, the conventional one (if more favourable to the taxpayer, as it generally is) should prevail. An interesting example of that is the interpretation of the qualifying condition regarding the inclusion of for - eign income in taxable income for Italian income tax purposes. This condition implies that, where an item of income is subject in Italy to final withholding tax or to substitute tax (eg, dividends received by Ital - ian resident individuals), it is not included in taxable income and cannot benefit from the tax credit under domestic rules. Decision No 25698/2022 of the Italian Supreme Court of Cassation addressed the taxpayer’s entitlement to a foreign tax credit on dividends received. The Court held that this entitlement exists if the relevant double taxation convention contains a clause providing that a tax credit should be granted when income is manda - torily subject to withholding or substitute tax – in such cases, the convention’s provisions on tax credits pre - vail over the domestic rules in Article 165 of the ITC. This applies specifically when the taxpayer does not have the option to include the income in the personal income tax base. 2.4 Taxation of Non-Resident Individuals Non-resident individuals are taxed in Italy only on income that is considered to have an Italian source. Specific rules determine which types of income are regarded as sourced in Italy.
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