The effective taxation of income by the source State is unremarkable when to the latter is expressly granted an exclusive power to tax

Prepared by Carlo Romano and Maurizio Foti

The Supreme Court decisions no. 18237 and no. 18238 of  June 24, 2021, recognized the right to refund of two taxpayers who , after having declared and subjected to tax in Italy the fees from Emirates, received for some activities carried out in the United Arab Emirates, asked the Italian tax Authorities to for reimbursement of those fees pursuant to Article 19 par.1 letter a of the Italy-United Arab Emirates tax treaty, which confers exclusive power to tax to the State of the source (i.e. the UAE).

The case

Pursuant to the international technical agreement concluded between the Italian and Emirates Governments, some pilots were sent for several years to the United Arab Emirates (UAE) to provide training to the UAE Air Acrobatic Patrol. For this activity, the UAE, pursuant to the international technical agreement, paid the Italian instructor pilots monthly with flat-rate fees to cover all logistical expenses.

Therefore, after including the income from Emirates in the Italian tax base and paying in Italy the related taxes pursuant to Art. 51, para. 8 of Decree No 917/86 (TUIR), each pilot applied for a request of refund of these taxes. The pilots had sought the recognition of the exclusive power to tax of the UAE, as State of the source, in accordance with the art. 19, par. 1, letter a) of the Italy-United Arab Emirates tax treaty. The Tax Authority was not of the same opinion, arguing that the present case represented a hypothesis of secondment and, therefore, the taxation under the aforementioned provision of the Tuir was correct.

Both proceedings of first and second instance ended in the taxpayers’ favour and, therefore, the Tax Authority appealed before the Supreme Court. In particular, the Tax Authority argued that in the present case it was a secondment and, in any event, the absence of a personal income taxation in the UAE would have entailed an unfair exemption from income tax, despite the principle of “ability to pay” set forth by Art. 53 of the Italian Constitution.

The twin decisions of the Supreme Court

The Supreme Court, with the mentioned decisions, totally rejected the appeals lodged by the Tax Authority confirming, therefore, the right of taxpayers to be refunded for the individual income taxes paid (only prudently) in Italy on the fees produced in the UAE.

The judges first note the purpose of international treaty (i.e. to avoid double taxation) and – after pointing out that some of those provide for an exclusive power to tax while others allow a limited one – establish whether Article 19 of the Italy-UAE tax treaty stipulates that Italy may exercise its power to tax.

According to the Supreme Court, the lastly mentioned treaty rule provides for an exclusive power to tax on the State of the source (the UAE), as clearly conveyed by the text of Article 19 reading”… are taxable only in  the State… ” and, therefore, in the light of the interpretation criteria applicable to treaties pursuant to the Art. 31, para. 1, of the Vienna Treaty of 23 May 1969.

Furthermore, according to the Supreme Court, the text of the  rule in question (“they are taxable only in that State“) represents an exception included in Art. Article 23 of the same treaty (and heading “elimination of double taxation“) according to which “income earned in the other State by the person with a fiscal residence in Italy, is normally included in the taxable amount for the calculation of national income taxes (Supreme Court., decision no 1210/2020)“.

According to the Supreme Court, the international rule ” outweighs over the internal rule of art. 51 of the TUIR….and does not create, contrary to what is feared by the Tax Authority, any conflict with Art. 53 of Italian Constitution, since the latter is a rule devoid of specific content which grants to the lawmaker discretion in the imposition of taxes and in the identification of their implementing features”.

According to the judges, therefore, the present case cannot be governed by internal rules, prejudicing an international convention signed by the States. By means of such tax treaty, in the first place the Contracting States regulated and distributed the exercise of the power to tax.

Furthermore, according to the Supreme Court, in front of such a clear international, expression of the will of the Contracting States, it is irrelevant whether the State to which the power to tax is attributed exclusively (in this case the UAE, source State ) imposes any income tax on the disputed income.

In the light of these arguments, the judges – rejecting the Tax Authority’s appeal and confirming the taxpayers’ right to reimbursement – have come to the conclusion that ” the Italian State is not entitled to exercise its power to tax to the income produced in the EAU“.

Let’s Talk

For a deeper discussion, please contact:

Carlo Romano

PwC TLS Avvocati e Commercialisti


Maurizio Foti

PwC TLS Avvocati e Commercialisti

Senior Manager