Refund of withholding tax on pensions: Italian Supreme Court confirms exclusive taxability in the state of residence

In its judgment No. 10308/2024, the Court of Cassation ruled that for the purposes of refund of withholding tax applied to italian source pension of a taxpayer resident, it is not necessary to prove actual taxation in the foreign country; the abstract taxability in that country being sufficient. According to the Court, the correct interpretation of Article 18 of the double taxation convention between Italy and Turkey in respect of pensions leads to the conclusion that the State of residence has exclusive competence to tax.

The case arose from an appeal lodged by an Italian citizen residing in Turkey, following the rejection of his application for reimbursement of the tax deducted at source by the IRPEF from the pension he received. The Tax Commission of Rome upheld the appeal, which was confirmed by the Court of Second Instance.

The tax authority appealed against this judgment in cassation, arguing that it was not sufficient for the claimant to prove that he was resident in a foreign country in order to obtain a refund of the withholding tax, but that he must also prove that the pension was actually taxed both in the country of payment and in the other country of residence. The Office therefore argued that there was no evidence of double taxation.

With regard to Article 18 of the Convention between Italy and Turkey, the Court observes that, on a proper interpretation of the domestic or treaty provisions on double taxation, actual tax liability in the other State is not required in order to obtain a refund in Italy, since abstract tax liability is sufficient, whether or not the power to tax has been exercised.

Moreover, as the Court rightly points out, the wording of the provision of the Convention, which uses the expression 'taxable only in that State', leads to the conclusion that, on an interpretation based on the proper meaning of the text, the Convention implies the exclusive attribution of the power to tax to the State of residence and excludes the other Contracting State (Italy) from taxation.

Finally, the judgment states that the only relevant criterion for the exclusion from Italian taxation of the pensions paid to the taxpayer is residence in Turkey and, in this respect, the territorial court, with an assessment of the facts that cannot be challenged in court, has verified that the person concerned is registered with the AIRE, is resident in Turkey and is regularly taxed there.

Consequently, the appeal was dismissed.

The Court once again reaffirmed the principle that, for the purposes of reimbursement of taxes paid in the source State, the taxpayer does not have to prove that he has actually been subject to tax in his State of residence, but rather that "abstract tax liability in that State, irrespective of whether or not the power to tax has been exercised", is sufficient.

Secondly, the judges returned to the correct interpretation of the provisions of the Convention. In fact, the presence in the text of Article 18 of the Convention of the expression 'taxable only in that State' should lead to the conclusion that, in matters of pensions, the Treaty confers exclusive taxing power on the State of residence alone, thus excluding Italy (in this case, the source State) from taxation.

In conclusion, the pensioner resident abroad who has been subject to the withholding tax levied by the Italian withholding agent may apply for a refund, on the understanding that it is always advisable to enclose with the application for a refund a certificate issued by the tax authorities of the foreign State certifying tax residence in accordance with Article 4 of the applicable international convention and liability to local income tax.