Taxation on foreign income paid on a deferred basis: challenges and interpretative doubts

The case examined within the Response to Ruling No. 81/2025 concerns an employee of a German corporation with a permanent establishment in Italy, who was part of a long-term incentive plan (Long Term Cash Bonus Plan) aimed at rewarding performance through the recognition of a cash bonus, the amount of which depended on the results achieved during the previous three-year vesting period. The individual was qualified as a tax resident in Italy only from the 2024 onwards, whereas previously he resided and worked entirely in the United Kingdom. 

The question therefore arose as to whether the bonus accrued in relation to performance in the financial years from 2021 to 2023, and therefore deriving from work carried out entirely abroad, was subject to taxation in Italy as it was collected only in 2024, i.e. when the taxpayer had already transferred his tax residence to Italy. 

The Italian Revenue Agency's argument was consistent with the conclusions set out in previous rulings, such as Ruling No. 126/2023, emphasising a sense of continuity. Since the worker was resident abroad during the 2021-2023 vesting period in which the bonus accrued, the principle of taxing residents’ income regardless of its source (the worldwide taxation principle) cannot be applied solely because the individual transferred their tax residence to Italy at the time of financial settlement.

Furthermore, during the vesting period, the working activity had been carried out exclusively outside Italian territory. Hence, such employment income does not qualify as Italian-sourced pursuant to domestic norms (Art. 23 of Consolidated Income Tax Law). Consequently, Italy has no power to claim personal income tax on this bonus, as during the accrual period it was considered neither the residence State of the individual nor the source State of the income stream. Therefore, the Italian withholding tax already levied though the Italian permanent establishment, which was obliged to act as a withholding agent, could be recovered by submitting a refund application. 

However, the bonuses paid in subsequent tax periods, i.e., 2025, 2026, and 2027, relating to the three-year periods 2022-24, 2023-25, and 2024-26, respectively, remained taxable in Italy, as follows:

The tax treatment described above therefore reflects the prioritization of the accrual criterion over the residence-based criterion. In other words, the taxation of employment income, a category that includes bonuses and other similar forms of remuneration intended as incentives, must take place at the time of accrual and not at the time of deferred receipt of the income stream. 

The change of course by the tax authorities and the prevalence of residence at the time of receipt

The Italian Tax Authorities have completely revised the conclusions set out in the previous paragraph when responding to ruling request no. 199/2025. They currently argue that the taxability of employment income is determined exclusively based tax residence at the time of actual receipt. Therefore, all bonuses received by the individual from the 2024 tax period onwards are fully taxable in Italy, irrespective of any additional factual or legal considerations.

Since Article 15 of the Double Taxation Agreement between Italy and the United Kingdom establishes concurrent taxation in the source and residence country, any taxation levied in the United Kingdom will give rise to double taxation, which must be resolved in Italy through the attribution of a foreign tax credit pursuant to Article 165 of the Consolidated Income Tax Law.

In conclusion, according to the approach currently favoured by the financial administration, the absence of a connection with the Italian State during the three-year vesting period is irrelevant, as the requirements for the applicability of Italian taxation must be verified in the year in which the bonus is settled. 

Indeed, through Resolution No. 92/2009, the Revenue Agency had already developed this interpretation of domestic and supra-national provisions, although dealing with the granting of shares to employees as part of their remuneration. The actual allocation of the shares was scheduled at the end of a three-year vesting period, so that the person received them only three years after the date of the offer, with the obvious aim of retaining loyalty, since the acquisition of the shares was tied to the retaining the status of employee of the group. 

The value of the shares allocated was therefore assessed as being fully taxable in Italy, given that the allocation took place during a period in which the beneficiary had become a tax resident, without considering that the shares remunerated work performed in the United Kingdom during the vesting period. This approach based on residence at the time of collection does not conflict with the wording of the double taxation treaties. The OECD Commentary on Article 15 (paragraphs 12-12.4) clarifies that the choice of when to tax employment income, i.e., whether at the time of accrual or receipt, is left to the each contracting states, without prejudice to concurrent taxing rights. 

Nevertheless, in the author's opinion, choosing to tax income in the state of residence at the time of receipt does not adequately address the underlying facts. In substance, it is remuneration for work performed during the accrual period, when the taxpayer often had no connection with the Italian state. The residence-based approach is rigid and does not reflect the economic reality of the employment relationship.

Furthermore, the Italian tax authorities' shift from one criterion to another – which has already occurred twice in the past – is a significant source of uncertainty for taxpayers, especially given the often substantial amount of such forms of remuneration.​​