April 2019
The Italian Tax Authorities recently made a tax ruling relating to the tax treatment of severance payments paid to self-employed individuals.
The basis of severance payments is considered self-employment income and is consequently subject to separate taxation (different from ordinary income subject to ordinary tax brackets).
If this income is delivered by the Italian State or Italian Pension Institution resident in Italy, it is considered as produced in Italy and therefore subject to taxation in Italy.
In summary, based on the Italian tax law, taxation is levied in the country of residence of the payer and not in the country where the self-employed individual is a tax resident.
However, if there is a double tax treaty following the Model OECD, art. 14 “Independent personal services”, such income is taxed as follows:
Furthermore, the Italian Tax Authorities clarified that tax residency of the taxpayer must be determined with reference to their entire working life.
In this regard, the taxation of severance payments for self-employed individuals is the same as taxation of severance payments for employees.
This is due to the fact that the severance allowance is accrued year by year.
Consequently, such income must be taxed exclusively in Italy for the years in which the retiree was an Italian tax resident, and both in Italy and in the other State for the years in which the retiree was a tax resident in the other State but had a fixed base in Italy.
In the latter case, double taxation can be eliminated by applying art. 22 of the EU double tax treaties following the Model OECD treaty (foreign tax credit).
In cases where severance payments are subject to taxation both in Italy and in the country of residence, the taxpayer is required to submit an Italian tax return (section RM) in order to declare such income on which a withholding tax of 20% must be applied.
Gianluca Marini
gianluca.marini@bdo.it
Gianluca Foligno
gianluca.foligno@bdo.it