By Davide Anghileri, University of Lausanne
The Italian revenue agency on 28 May clarified that under the Italian patent box regime the foreign tax (e.g., withholding) can be credited only in proportion to the amount of the foreign income (e.g., from royalties) which is subject to tax, namely, net of the patent box tax incentive.
The case, principle of law n. 15/2019, concerns the correct determination of the Italian foreign tax credit for payment of royalties from a US resident licensee to an Italian resident licensor that elected Italy’s patent box regime.
In particular, the Italian company asks if it should calculate the Italian tax credit for income produced abroad based on the double tax treaty between Italy and the United States, without applying the limitation set out in article 165, paragraph 10 of the Italian tax code (TUIR).
The Italian law states that “in the event that the income produced abroad partially contributes to the formation of the total income, the foreign tax must also be reduced accordingly.” The treaty does not contain a similar provision.
The Italian revenue agency replied that both the double tax treaty and the TUIR apply the credit method under which the State of residence calculates its tax on the basis of the taxpayer’s total income, including the income from the other State, and then allows a deduction from its own tax for the tax paid in the other State.
Therefore, the addition of income produced abroad to total Italian taxable income necessary requisite for the subsequent deduction from the Italian tax of the tax paid abroad within the limits of the maximum deduction, the revenue agency said.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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