With Ruling No. 199/2025, the Italian Tax Authorities (hereinafter, the “Agency” or “Revenue Agency”) reissued their earlier Ruling No. 81/2025, providing a different hermeneutic solution to the taxation and withholding obligations related to bonuses granted under an incentive plan, in a case of beneficiary’s change of tax residence.
The question examined by the ruling originates from a German company operating in Italy through a permanent establishment, belonging to a multinational group.
In 2021, certain key employees were included in a “Long Term Cash Bonus Plan,” whereby, at the end of each vesting period, they would be awarded a bonus. Amongst them, there was an employee who carried out his work in the United Kingdom during the vesting period under the German employer, who had terminated this employment relationship and resumed (from the 18th december 2023) its functions within the Italian permanent establishment (the Applicant), thus qualifying as a tax resident in Italy theresince.
The central question raised by the German company concerned whether the Italian withholding agent should apply withholding tax on bonuses when the employee had become an Italian tax resident and the compensation was paid in Italy despite being earned abroad.
The relevant domestic provisions considered included:
- Article 2 TUIR – defining tax residence;
- Article 23 TUIR – on taxation of non-residents;
- Article 51 TUIR – on employment income;
- Article 23 of DPR No. 600/1973 (now Article 33 of Legislative Decree No. 33/2025) – on withholding on employment income.
In the Applicant’s initial interpretation, it was argued that, due to double taxation between the UK and Italy, the employee could avail himself of the foreign tax credit under Article 165(1) TUIR for taxes paid abroad.
In its first ruling on the matter, the Agency considered it necessary to distinguish the regime applicable to the various tax periods:
- 2024 bonus: if paid by the UK employer for work performed before termination in the UK, it was to be taxed exclusively in the UK, with only a reporting obligation in Italy for the portion attributable to work performed in Italy;
- 2025–2026 bonuses: pro-rata taxation was envisaged based on periods worked in each country;
- 2027 bonus: fully taxable in Italy, as it was earned entirely in Italy.
Referring to the Italian legal framework, and in particular to Article 51 of the TUIR, the Tax Administration held that bonuses paid to employees under incentive plans constitute employment income and are therefore subject to taxation, in accordance with the relevant provisions, in the year of actual receipt.
In light of the primacy of international treaty law over domestic ordinary legislation, it is necessary to analyse the 1988 Double Taxation Convention between Italy and the United Kingdom (based on the OECD Model). Article 15 of the Italy-UK Treaty establishes, as a general rule, the exclusive taxing right of the State of residence of the taxpayer when this coincides with the source State, and, as an exception, concurrent taxation by both States when the two do not coincide.
The Commentary to Article 15(1) of the OECD Model Tax Convention clarifies that, in determining the taxing rights of the source State, the relevant factor is not the timing of income receipt but the connection between the activity performed and the State concerned.
More in detail, paragraph 2.4 provides that for any remuneration paid after termination of the employment relationship, the source State shall be considered to be the one in which the work was effectively performed. Accordingly, taxation should have been limited exclusively to sums demonstrably connected with Italian territory.
Under the Agency’s initial opinion, for all withholdings unduly made by the Italian permanent establishment, the taxpayer could have filed a refund claim pursuant to Article 38 of Presidential Decree No. 602/1973.
However, with a hermeneutic U-turn, the Tax Agency a few months later amended its proposed solution to the interpretative issue at hand.
In its updated analysis of the domestic and international framework, the Agency now refers also to paragraph 2.3 of the OECD Commentary on Article 15, which emphasises “the connection between remuneration, however defined, and the performance of the work activity,” irrespective of the actual timing of income receipt by the employee. The burden of eliminating any double taxation thus falls on the State of residence.
Unlike the previous position, therefore, it is now affirmed that Italy, as the State of residence, has the right to tax remuneration received in the tax years in which the individual is tax resident in Italy.
Consequently, the Italian permanent establishment is required to apply withholding tax both on bonuses paid by the foreign company and on those paid by the Italian establishment itself, with the employee retaining the right to claim a foreign tax credit under Article 165 TUIR for income produced abroad.
Furthermore, it is also posited that should the Italian permanent establishment, following the guidance of Ruling No. 81/2025, have failed to withhold tax on remuneration relating to work performed in the United Kingdom, it should now proceed to make such withholdings and fulfil the related payment and certification obligations.
However, no penalties or interest shall apply, in accordance with Article 10 of the Statuto del Contribuente (Law No. 212/2000).
