Inland Revenue: clarifications on the tax payments on wages received by workers seconded to China and returned to Italy due to the epidemiological emergency

16 August 2021

Answering question no. 458/2021, the Inland Revenue expressed its opinion on tax on remuneration paid to employees posted to China who, due to the Covid-19 health emergency, continued to smart work from Italy.

The facts

In its capacity as a withholding agent, the Company requested clarification from the Inland Revenue about the correct tax payments to be applied to its employees originally seconded to China who returned to Italy in January 2020 due to the Covid-19 epidemic. The applicant specified that the same employees continued to smart work for the exclusive benefit of the Chinese host company.

The applicant asked whether:

  1. the remuneration received for the days worked in Italy can be considered as income produced in Italy by non-residents and to be taxed locally for employees who spent less than 184 days in Italy during 2020 (leap year);
  2. the stay in Italy for more than 184 days during 2020 entails a change in the tax residence status of the workers concerned.

Based on the provisions issued by the OECD on the subject with a note dated 3 April 2020 and subsequently updated on 21 January 2021, the applicant suggested not to consider the income produced in Italy by the workers as Italian income. This can be done by not considering the impact of returning to the country when defining the workers’ tax residence. The OECD recognised that each jurisdiction might adopt its unique guidelines to avoid double taxation during health emergencies.

Inland Revenue guidelines

On the first point, the Inland Revenue ruled that the analysis guidelines from OECD Secretary had been  accepted by Italy based on administrative agreements interpreting the provisions contained in the Conventions to avoid double taxation with Austria, France and Switzerland. Based on those agreements, income is considered produced where the service would have been provided if the Covid-19 emergency had not happened.

The tax authority observed that it is necessary to refer to the Agreement between the Government of the Italian Republic and the Government of the People’s Republic of China signed on 31 October 1986 and ratified by Law no. 376/1989.

Based on the combined provisions of Article 15 of the above Italy-China Agreement and Art. 23 of the Consolidated Income Tax Law (TUIR), according to the Inland Revenue, those who have spent less than 183 (184 in a leap year) days in Italy are subject to taxation for income earned while working in Italy even though they are not resident.

Under the Convention, the resulting double taxation is resolved by recognising a tax credit by China, the country of employees’ tax residence.

On the second question, the Inland Revenue recalled that “for individual tax residence identification purposes, based on domestic law and without a regulatory provision which considers the COVID emergency, reference should be made to the criteria set out in Article 2 of the TUIR, which applies regardless of whether an individual’s stay in our country is dictated by the pandemic. Under Article 2, paragraph 2, of the TUIR, persons who for most of the tax period are registered in the registers of the resident population or have their domicile or residence in the country under the Civil Code are considered to be residents”.

On this point, the Inland Revenue confirmed the need to consider the days of physical presence in Italy and the conditions provided for by the treaty signed with China. The treaty mentions the “tie-breaker rules” in paragraph 2 to settle possible conflicts of residence between the contracting States. These rules give precedence to the “permanent residence” criterion followed, in hierarchical order, by the centre of vital interests, habitual residence and nationality.

The Inland Revenue agreed that to identify a smart worker tax residence following their return to Italy from where they were posted, without prejudice to any provisions in ad hoc bilateral agreements, reference should be made to Article 2 of the TUIR without considering the Covid-19 pandemic’s impact.

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