As of 29 October 2025, the new Bilateral Convention between Italy and Kosovo for the avoidance of double taxation on income and the prevention of tax evasion and avoidance has entered into force. The agreement, signed in Pristina on 22 June 2021 and ratified in Italy by Law No. 154 of 16 October 2025, forms part of Italy’s extensive network of international tax treaties and broadly reflects the OECD Model Tax Convention, albeit diverging from it in the structure of certain provisions.
With regard to the taxes covered, Article 2 of the Convention governs the exclusive or shared taxation rights over various categories of income, including dividends, royalties, interest, business profits, and income from dependent and independent personal services. Specifically, in Italy the Convention applies to the personal income tax (IRPEF), the corporate income tax (IRES), and the regional tax on productive activities (IRAP); in the Republic of Kosovo, it applies to the personal income tax and the corporate income tax.
In addition, the treaty clarifies the concept of tax residence and the relevant tie-breaker rules, mirroring the OECD Model. Moreover, in line with BEPS international standards, it defines the concept of permanent establishment and the criteria for its recognition, establishing a 12-month threshold for its establishment (Article 5).
Allocation of taxing rights
Consistent with the OECD Model, the Convention provides that income from immovable property is taxable in the State in which the property is situated (Article 6). Business profits, on the other hand, are taxable in the State of residence unless the activity carried out in the other State constitutes a permanent establishment (Article 7).
With regard to investment income, the Convention departs from the tax rates provided in the OECD Model and adopts higher rates, aligning more closely with the UN Model, which is generally considered more appropriate in relations with developing countries. In particular:
- Dividends: maximum withholding tax of 5% where the shareholding is at least 25%; 15% in all other cases;
- Interest: 10% withholding tax;
- Royalties: 10% withholding tax.
Concerning the taxation of individuals, the Convention largely adheres to the OECD Model. In particular:
- Income from dependent personal services is taxable in the State of source, subject to the 183-day rule, which allows exclusive taxation in the State of residence where the employee stays in the source State for a limited period and the additional conditions are satisfied;
- Directors’ fees are taxable in the State in which the company paying the remuneration is resident;
- Income from independent personal services is taxable in the State of source only to the extent attributable to a fixed base situated therein; in the absence of such a fixed base, taxing rights lie with the State of residence.
These rules are designed to prevent situations of overlapping taxation and to ensure an equitable allocation of taxing rights between the two States.
Measures for the elimination of double taxation and protection clauses
Among the mechanisms established for the elimination of double taxation, the Convention provides, as a primary measure, the granting of a foreign tax credit to any taxpayer who has suffered taxation inconsistent with the treaty (Article 22).
In Italy:
- Italian taxpayers receiving income taxable in Kosovo must include such income in the Italian tax base. They are, however, entitled to a foreign tax credit, limited to the amount of the corresponding Italian tax.
In Kosovo:
- Tax residents of Kosovo deriving income taxable in Italy are entitled to credit the tax paid in Italy against their Kosovan tax liability, within the limit of the tax due in Kosovo on the same income.
Should disputes arise that cannot be resolved through this mechanism, the tax administrations may initiate the Mutual Agreement Procedure (MAP) under Article 24, which fosters enhanced cooperation between the competent authorities of the two States, including through direct communication. Where no agreement is reached, recourse to mandatory arbitration is provided.
Another key principle established by the Convention is the non-discrimination principle under Article 23, which prohibits the application of different or more burdensome tax treatment to nationals of the other Contracting State in the State of source.
Finally, Article 28 introduces an anti-abuse clause, consistent with BEPS Action 6, incorporating the Principal Purpose Test (PPT). This provision denies treaty benefits where it is reasonable to conclude that one of the principal purposes of an arrangement or transaction was to obtain such benefits.
