In judgment No. 994 of January 10 2024 (the Decision), the Italian Supreme Court ruled on a case involving sums paid where there was an early interruption of the job relationship between an employee and an Italian company that relocated to Turkey and then to the United Arab Emirates, where he was tax resident when receiving the amounts.
The Italian Revenue Agency denied the reimbursement of the withholding taxes levied by the Italian employer on the amounts because the taxpayer had not:
Proved that the amounts received were actually subject to taxation in the source country; or
Provided a tax certificate relating to the convention against double taxation, attesting to be a tax resident and hence liable to tax therein.
The Italian Supreme Court (confirming the lower-degree’s decisions) rejected the Italian Revenue Agency’s claims, arguing the following:
A natural person does not need to be actually subject to individual income tax to qualify for tax residency under a tax treaty (the Italy–UAE double tax treaty, in the case at hand). Indeed, the status of tax resident for the purposes of the aforementioned tax treaty is achieved by a person resident in the UAE, notwithstanding that the UAE does not levy individual income tax on employment income sourced therein.
The failure by the individual to produce a tax certificate proving his residency in the UAE does not preclude tax treaty benefits if there are alternative pieces of evidence.
A voluntary redundancy incentive (incentivo all’esodo), differing from severance pay (trattamento di fine rapporto), does not accrue during a job relationship, but rather it has an immediate and settlement nature, acting as remuneration for the early termination of an employment contract. As such, irrespective of how the voluntary redundancy incentive is quantified, it shall be taxed where the recipient is resident at the payment date.
Analysis of the case
With regard to the first conclusion (a natural person does not need to be actually subject to individual income tax to qualify for tax residency under a tax treaty), the Decision is in line with the case law of the Court of Cassation (ex multis judgments No. 30779/2023, No. 35284/2023, No. 10548/2023, No. 8580/2023, No. 18237/2021, and No. 13848/2021).
According to the judges, it could no longer be disputed that the reimbursement of Italian taxes requires the ‘theoretical’ liability to tax of the individual, irrespective of the other country having exercised the relevant taxing right by imposing an individual income tax. Moreover, the mere potential taxing right of the other contracting state is coherent with the purposes of bilateral conventions against double taxation, which are aimed at avoiding the overlapping of national tax systems (preventing taxpayers from bearing a higher tax burden on foreign-sourced income) and facilitating international business activity and investments.
Although Article 28(2) of the Italy–UAE double tax treaty expressly requires an “official certificate of the Contracting State of which the taxpayer is resident certifying the existence of the conditions required for being entitled to the application of the allowances provided for by this Convention”, the Supreme Court embraces a substance-over-form approach, affirming that the reimbursements should be granted even in the absence of a relevant tax certificate, if the taxpayer has provided different evidence of their tax residency abroad. In particular, the taxpayer had proved that:
He and his family had been cancelled from the register of Italian residents and enrolled in the register of Italians living abroad for many years;
He had regular home rental agreements in Dubai;
His children were attending international schools in Dubai and the United Kingdom; and
He had a UAE driving licence.
Furthermore, the conclusion reached in the Decision in relation to the qualification of a voluntary redundancy incentive means that, irrespective of how the incentive is quantified, it should be taxed where the recipient is resident at the payment date.
The OECD Model Tax Convention and Italian practice
The OECD Model Tax Convention on Income and on Capital (the OECD Model Tax Convention) does not include a clause or definition governing sums paid in the event of termination of employment, which are therefore subject to a different tax regime depending on whether the single contracting state ascribes to these amounts a remunerative or a pension nature.
In the first case (qualifying them as employment income), the sums are within the scope of Article 15 (or 19) of the OECD Model Tax Convention, which – in principle – sets forth the concurrent taxation of the source and residence countries. In cases of a pension nature, according to Article 18 (or 19) of the OECD Model Tax Convention, these amounts are subject to taxation only in the residence state of the recipient.
As far as Italy is concerned, apart from some treaties specifically regulating the taxation of termination payments (e.g., those concluded between Italy and the US, Canada, Hong Kong, Chile, Colombia, Panama, Saudi Arabia, and Qatar), the Italian tax authorities have generally qualified cross-border amounts paid in the event of interruption of a job relationship (including severance pay, voluntary redundancy incentives, and non-compete indemnities) as employment income falling within Article 15 of the OECD Model Tax Convention (see rulings No. 341/2008, No. 132/2018 and, more recently, No. 460/2020 and No. 343/2020). Such characterisation has been generally acknowledged in the Italian judicial practice (see decisions of the Italian Supreme Court No. 14476/2016 and No. 994/2024).
An isolated decision (Supreme Court ruling No. 13217 of April 27 2022) granted a refund of the withholding taxes levied by the Italian (former) employer on the sums paid in the case of early interruption of the job relationship on the grounds of Article 18 of the Italy–Slovak Republic double tax treaty and the amounts were acknowledged as taxable only in the residence state of the recipient. The qualification of severance payments as pensions was (quite surprisingly) not challenged by the Italian Revenue Agency or the judges.
