ITALY - Double taxation for self-employed individuals who opt for the new flat-rate tax regime
The Italian Tax Authorities provided clarification on the tax treatment of foreign tax credits in the case of self-employment income being subject to the new flat tax in Italy whilst also being taxed abroad.
The last Italian Budget Law in 2019 introduced a special tax regime which can be adopted by self-employed individuals with an annual income lower than 65,000 Euros. This regime provides for the application of a unique tax rate of 15% instead of the ordinary progressive tax rates (from 23% to 43%).
However, where a self-employed individual under this regime is tax resident in Italy and also carries out some professional activities abroad, their income may be subject to double taxation.
The Italian tax Authorities, in response to a tax ruling submitted by an Italian self-employed individual who was taxed abroad, clarified the tax treatment in this particular case and how to avoid double taxation.
First of all, reference must be made to the OECD Tax Treaty which states that self-employment income is subject to concurrent taxation: both in the country where the activity is performed and also in the country where the self-employed individual is tax resident, according to the domestic tax rules set out in each country.
In the case of double taxation, Italian tax law provides the possibility to claim a foreign tax credit (FTC) for taxes paid abroad, in order to offset the double taxation.
However, the Italian Tax Authorities have clarified that, in this specific case, it was not possible to utilise a FTC as any income subject to substitute taxation (instead of the ordinary one) cannot benefit from the application of a FTC.
Consequently, a self-employed Italian tax resident who has opted for the application of the new regime cannot offset a FTC where this income is also taxed abroad. This will result in double taxation.
The only way to avoid double taxation is for the self-employed individual to choose ordinary taxation rather than the new flat rate tax regime. In this scenario, a FTC will be available.