International mobility of employees: the Italian Tax Authority revises its interpretation of the provisions of the tax treaties

With its tax ruling no. 199/2025, the Italian Tax Authority corrects its interpretation of Article 15 of the OECD Model Tax Convention and affirms the taxing rights of Italy, the country of residence, based on the cash basis criterion.

The case

The applicant, a German company with a permanent establishment in Italy, is part of a multinational group that has promoted, starting in 2021, a Long Term Cash Bonus incentive plan (Plan) dedicated to its key employees.

The Plan entitles beneficiaries to receive cash payments (Bonus) from 2024, as set out in a specific contract.

The Bonus matures according to a three-year scheme (Vesting Period): for the payment scheduled in 2024, the Vesting Period is represented by the three-year period 2021-2023; for the payment scheduled in 2025, the Vesting Period is represented by the three-year period 2022-2024, and so on.

Finally, the Bonus is subject to the maintenance of the employment relationship throughout the Vesting Period.

One of the beneficiaries is an employee of a UK company of the group who, during the first Vesting Period (three-year period 2021-2023), worked in the same country, where he is also tax resident.

The applicant asks about the taxation of bonuses paid or to be paid to the employee according to the following schedule:

  • Bonus paid in 2024 (vesting period 2021-2023) by the UK company, former employer;
  • Bonus paid in 2025 (Vesting Period 2022-2024) by the permanent establishment;
  • Bonus paid in 2026 (Vesting Period 2023-2025) by the permanent establishment;
  • Bonus paid in 2027 (Vesting Period 2024-2026) by the permanent establishment.

The tax ruling

In its analysis, the Italian Tax Authority (ITA) focuses on the effects of the worldwide taxation principle and the principle of comprehensive taxation of employment income, affirming Italy's full taxing rights under the condition that the beneficiary is a tax resident in Italy at the time of receiving the Bonus (cash basis criterion).

That said, it is necessary to analyse the provisions of Article 15 of the Italy-UK Tax Treaty.

In summary, Article 15 resolves potential conflicts between Italy and the United Kingdom by according, as a general rule, exclusive taxing rights to the State of residence (in this case, Italy). However, the same article provides for an exception for remuneration deriving from work performed in the source State (UK): in this case, taxing rights become concurrent.

According to the ITA, Bonus paid to the employee in the tax years 2024, 2025, 2026 and 2027, when he is (or will be) tax resident in Italy, must be subject to taxation in Italy. In addition, the portion of the Bonus accrued during the period in which the work is carried out in the UK is also subject to taxation in that country. Then Italy will be responsible for for the elimination of any double taxation.

Compared to its previous position, the ITA has moved away from the interpretation of Article 15 of the OECD Model Convention, which attributes decisive effect, for the purposes of recognising the taxing rights of the State of residence, to the criterion of income accrual based on the place where the work is carried out.

The adjustment made by the Agency is not contestable. However, In terms of method, the tax ruling leaves some doubts.

With regard to tax periods still subject to assessment, there could be consequences for taxpayers:

  • who have already received tax ruling based on the ITA's previous position;
  • who have relied on the previous position contained in the tax ruling.

A partial indication was provided by the ITA in the same tax ruling no. 199, which states that, in the case of conduct compliant with the previous position taken in tax ruling addressed to the same taxpayer, penalties and interest are not applicable.

However, this solution does not seem fully satisfied, as it does not take into account the position of taxpayers who relied on previous tax ruling, even though they were not directly addressed to them.

It would therefore be appropriate for the Agency to take a comprehensive position through a circular, in order to put a definitive end to the matter.