The subjection to the taxation of fees paid to non-resident individuals for self-employment

The subjection to the taxation of fees paid to non-resident individuals for self-employment and the ability to make use of international conventions on double taxation.

 1. Notions of territoriality social security number, and obligations of the withholding agent

Article 2 of Presidential Decree no. 917/86 (Consolidated Law on Income Tax) will be subject to natural persons, residents and non-residents, in the Italy and residents identified as people who for most of the year are recorded in the register as resident or alternatively are a resident of the State and are domiciled within the meaning of the Italian Civil Code.

The reference to most of the tax period is conventionally interpreted as a reference to the address in the Italian territory for a period commencing from the date by 183 days of stay, equal to half plus one of the days that make up the year, and having also called the home the identifying feature of the residence for tax purposes underlines the intention of the legislature to want to consider how important the stay is physically to the territory of the Republic of Italy.

The next article 3 of Presidential Decree identifies as the basis of assessment for non-residents total income produced in the State. The income is listed in Article 20 of the Decree, which considers products in the State, in addition to the income from land and capital:

1. c) the compensation of employees paid in Italy;
2. d) the self-employment income derived from activities performed in the Italy;
3. e) the business income derived from activities performed in Italy through a permanent establishment;
4. f) income from the various activities carried out in the Italian territory  and assets that are located in the same territory, as well as gains from the disposal for consideration of shares in companies resident in Italy.

The following paragraph 2 of Art. 3, however, raises an exception to the territoriality principle set out in the preceding paragraph:

“Regardless of the conditions referred to in subparagraphs c), d), e) and f) of paragraph 1, it shall be judged products of the State, if paid by the State:

 The fees for the use of intellectual property, industrial patents and trademarks, as well as processes, formulas and information relating to experience acquired in the industrial, commercial or scientific experience”

 From a reading of paragraphs 1 and 2 of Article 20, it is therefore evident that the self-employment income, in addition to the business, are subject to taxation only if produced in Italy, or if derived from activities performed in the State, except, however, certain types of income (including income from coordinated and continuous collaborations) and fees for the sale or exploitation of intellectual property, which are subject to taxation if paid by any entity, whether public or private, residing in Italy.

In summary then, for self-employment income, except for transfer payments of royalties and income similar to those of employees, taxation shall apply only if the income is paid for work performed in the Italy.

Conversely, for the mentioned transfers of copyright, it is considered income produced in Italy if paid by public or private entities or anyone having a permanent establishment in the State.

 2. Application of taxation

For the charges to be coordinated and continuous, paragraph 1 of Article 24 of Presidential Decree n. 600/73 says:

“1-ter. On the taxable amount of income similar to those of employees, paid to non-residents, there must be made a withholding tax to the extent of 30 percent”.

 The tax to be applied to compensation for self-employment is governed by paragraphs 1 and 2 of Article 25 of the same Presidential Decree n. 600/73:

“1. The subjects that correspond to persons resident in the territory of Italy fees of any description including in the form of profit sharing, for self-employed work, although not regularly carried out, must operate upon payment a withholding tax of 20 per cent by way of payment of the tax on personal income tax payable by percipient”

 “2. Subject to the last paragraph of this article, if the fees and other amounts referred to in the previous paragraph are paid to non-residents, it must be made a withholding tax to the extent of 30 per cent, also for performance carried through undertakings. It does not include payment for work services rendered abroad and those paid to permanent establishments in Italy of non-residents. “

Therefore, it is made the final withholding tax to the extent of 30 per cent on compensation for coordinated and continuous collaborative relationships for self-employment carried out by non-residents; such withholding is to be considered final, and therefore, should not be shown in any tax return.

In fact, not being the subject present for most of the year in the territory of the state, a prerequisite for being identified as a resident for tax purposes in Italy, he will not be responsible for submitting the tax return in Italy.

3. Non-resident in Italy

Non-resident in Italy (Italian or foreign citizens) are required to pay the contribution if they are required to file the tax return in Italy.

Returning in Article 25 paragraph 2 of the Decree n. 600/73, it is necessary to emphasize that it shall be subject to a tax of 30 per cent and fees related to services provided in the enterprise system, notwithstanding the general principle of non-subjection to withholding of such income received by resident individuals.

Therefore, on the occasion of services performed by non-resident enterprises, we must keep in mind the 30 percent tax obligation execution of withholding, and is easy to understand the reason for this rule: not being present for more than 183 days in the Italian territory, and therefore not being subject to income tax in Italy, the non-resident company has not established that it had not been subject to the withholding tax title and should leave Italian territory without being subject to any tax.

The same paragraph 2 excludes the retention of both the self-employed work carried out abroad (for lack of the territoriality principle) and the remuneration paid to permanent establishments in Italy of non-resident entities, in which case the company becomes a fact fledged tax resident in the State.

4. Tax identification

For all acts that accompany the formulation of employment and subsequent payments of compensation to non-residents, there is no requirement to indicate the number of the Italian tax code, except in those cases where the same code is not already attributed.

That provision is contained in Article 6 of Presidential Decree n. 605/73, which provides that the obligation to indicate the tax number for non-residents who do not already hold one, is not necessary with the indication of personal data (name, first name, place and date of birth, sex, domicile abroad).

However, the one who pays the fees to such persons, who as a substitute tax must declare this remuneration and any deductions made during the declaration of income, must be in possession of a foreign tax code (or tax identification number) of a non-resident taxpayer, who in turn includes, on the model of declaration, the personal data and for the foreign address of the recipient.

This requirement was introduced because in this way the Italian Tax Authority is able to communicate to the foreign state in which the beneficiary is domiciled for tax purposes the amount of compensation paid and taxation made or not and the purpose of the procedures required for the avoidance of double taxation on income.

5. Agreements to avoid double taxation on income

In order to prevent double taxation on income, both those produced abroad by Italians and those produced in the country by non-residents, Italy has signed bilateral agreements with many foreign countries.

For non-residents who say they wish to avail themselves of this Convention between the State where they are residents for tax purposes and the Italian Republic if it exists and if it has been ratified by both Houses, the substitute tax will not apply to tax withholding or title or as an advance on the compensation that it provides.

He who pays the sums, however, is required to ensure the effective tax residence and the existence of the Convention between the two countries.

In a decision, the Italian Foreign Minister stated that “with respect to persons resident in countries with which were signed and are in force international agreements to avoid double taxation, the direct application of the more favorable treatment resulting from the provisions related to it shall take place under the responsibility of the one who pays, after obtaining the required documents (certificate of residence in the foreign country; tax authority certificate of the country of non-resident stating that the subject is therein subjected to taxation, non-existent in Italy a fixed base, etc.). “

The contents of this page should not be taken as an authoritative statement of Italian law and practice. Neither the author nor the publisher are responsible for the results of actions taken on the basis of information contained in this summary, nor for any errors or omissions. This text is not intended to render legal, accounting or tax advice. Readers are encouraged to seek professional advice concerning specific matters before making any decision.