Italy-UK Double Taxation Avoidance (2024)

Thetreaty for the avoidance of double taxationbetweenItaly and the United Kingdom (UK)was signed in 1988. The provisions of theagreementbecame applicable starting with 1990 and the document is available for both natural persons and legal entities that aretax residentsof the both contracting states. With regards to theenforcement of the treaty, the following are available:

• • thetreaty for the avoidance of double taxationbetweenItaly and UKwas signed in Pallanza on 21st of October 1988;
• • theagreementbecame applicable starting with 31st of December 1990;
• • in theUK, thetreatybecame applicable starting with 1st of January 1991 (for thepetroleum tax);
• • the validity of its provisions with regards to thecorporate taxin the UKstarted at 1st of April 1991;
• • inItaly, the document was ratified by the Law no.329 of 5 November 1990.

The basictaxesthat are the subject of thedouble taxation treatysigned by the two countries are the following:in theUK– the income, the corporate, the capital gains and the petroleum revenuetaxesandinItaly,thepersonal and corporate incomes taxesand the localincome tax.

Theconventionalso applies to any similartaxes levied in Italyand theUnited Kingdom. Considering theagreementcovers thetaxation of companies, thefirst articles of the conventionalso establish whichUKandItalian companieswill benefit from these provisions. Thedouble taxation agreementrefers to the following companies: associated enterprises and permanent establishments. For detailed information about all thetaxes covered by the treaty, you may askourItalian lawyers.

Fiscal domicile according to the Italy-UK double tax treaty

The first articles of thedouble taxation treaty between Italyand the United Kingdomestablish the fiscal domicile ofresidentsin order to determine wheretaxesare collected. An individual or company isliable to pay taxesin the country of residence, respectively of incorporation or place of management in case of companies.

With respect to individuals residing in both countries, the fiscal domicile is determined as it follows: theindividual will be taxedin the country he/she has a permanent home, in the country being the center of vital interests, the individual will be taxed in the country he/she has anhabitual place of living, if the center of vital interests cannot be determined, or in the individual’s national country.

What is a permanent establishment under the Italy-UK treaty?

One of the terms defined by thetreaty for the avoidance of double taxationsigned byItaly and the UKrefers to permanent establishments. This term is of great importance as it defines theplace oftaxationof a business.Article 5 of the treatydefines a permanent establishment as a place in which various business activities are developed, which can be charged with thetaxesavailable in one of the two jurisdictions.

Thus, the term takes into consideration a place of management, abranch office, a factory, an office, a workshop, mines and similar establishments that are set up with the purpose of exploiting natural resources, but it also refers to construction sites where the operations are carried out on a continuous basis for a period longer than one year.

A permanent establishment set up inItaly or the UKdoes not refer to the following: locations that are used for the storage of merchandise belonging to a company, the maintenance of stock of goods kept in a location for storage, display or delivery, the maintenance of goods that will be processed by another company and others, which can be presented byour team of Italian lawyers.

What is the structure of the Italy-UK double tax treaty?

Thetreatysigned by the two countries follows theOECDmodel, which is created based on seven main ideas: the scope for which thetreaty is signed, the general definitions referring to the nature of thetaxable entities, thetaxation of incomeobtained by corporate entities and various types of natural persons, thetaxation of capital, the main methods used for theavoidance of double taxation, special provisions referring to the respectivetreatyand the final provisions (referring to the entry into force of the document and to its termination).

What is the tax system applicable for independent personal services?

Thetreaty for the avoidance of double taxationstipulates the manner in which thetaxation of independent personal servicescan be done in the two contracting states. This is regulated under the Article 14 of the document, which can be detailed byour team of Italian lawyers. As a general rule, the income that is obtained by a person engaged in independent personal services will betaxedin the country where the person is atax resident.

However, if the provision of services is done in the other contracting state, the person will betaxedthere, but only for the profits obtained in the respective state. Independent personal services can refer to a wide range of economic activities that can be developed by natural persons and they can refer to the services provided bylawyers, accountants, architects, engineers, artists, persons developing scientific or educational services and others.

What are the tax provisions referring to shipping and air transportation?

Companies involved in shipping or air transportation activities inItaly and UKcan also benefit from theprovisions of the treaty;our law firm in Italycan present the legislation addressed to these business operations and, in respect to theirtaxation, it is necessary to know that profits obtained by such companies will always betaxedin the country where they have set up their effective management.

What are the tax considerations for royalties in Italy and UK?

Article 12 of the double tax treatysigned byItaly and the UKprovides the legal framework for thetaxation of royalties.Our team of Italian lawyerscan present more details on thegeneral tax systemrelated to royalties available inItaly.

When we refer to royalties that arise in a contracting state that have to be paid to the resident of the other contracting state, it is necessary to know that thetaxationwill be done in the latter state. Thetaxationcan also be done in the country where the royalties arise, but only in specific conditions, which can be presented byour law firm in Italy.

Taxation of dividends under the Italy-UK double tax agreement

Thetaxation of the dividends in Italy and in the UKcan be applied following the next system: at a 5% tax rate, if the beneficial owner holds at least 10% of the share capital in the company paying the dividends and at 15% in all other cases. Theelimination of double taxationwill be done through atax creditin theUnited Kingdomand as atax exemption in Italy. For additional information about thedouble taxation agreement with the UK,you may alsocontactourlaw firm in Italy.