INTERNATIONAL AND EUROPEAN
TAXATION
Week 1
AGENDA:
- Tax sovereignty
- Source State vs Residence State
- Double taxation and double non-taxation
Tax sovereignty
- Is a fundamental component of a sovereign state
- Jurisdiction to tax -> State’s autonomous power to positively levy taxes on income or any
other economic elements
- capability to impose taxes and collect them
How broadly can a State assert its tax authority?
-> Sufficient "nexus" (connection) between the relevant country and the taxable person and/or
the taxable income -> economic allegiance
In practice:
1. nexus with the taxpayer: residence of the person (individual, company, entity) in the State
-> ex: a Italian resident is in Italy, the company and the income from outside
2. nexus with the taxable income; source of the income in the State -> ex: the residence is in
Italy, the Italian is outside the country
Residence
Two main principles to tax persons based on residence:
1. Worldwide principle
Persons are subject to tax by their country of residence on their worldwide income, ie. both
domestic and foreign source income
2. Territorial principle
Resident persons are subject to tax in respect of income derived from sources in their own
country of residence
1
, ➔ In practice, certain foreign-source incomes are exempted from taxation in the country of
residence
Example:
Company A is resident in State A
Business income from activities carried out both in
State A and State B
State A:
1) Worldwide system: taxation of Company A on
income sourced in both State A and State B
2) Territorial system: taxation of Company A only
on income sourced in State A
Necessary definitions:
* Worldwide and territorial systems
* Need to define the relevant concept of « residence»
* Need to establish where the income is sourced
Risk of double taxation or double non-taxation because of:
* Different taxation systems, plus
* Potential conflicts on «residence» and «source › at international level
Definition of «residence»:
1. Individuals
Largely depends on domestic legislation
Several factors are generally taken into account, including:
> Physical presence
> Habitual abode
> Family ties
> Economic ties
2
, 2. Companies
Two main doctrines:
1. Incorporation doctrine -> A company is resident in the State where it is originally created
2. Central administration doctrine -> Irrespective of the place of incorporation, a company
is resident in the State where its control or administration (or «management control»)
takes place – where the board of directors meet, where CO is based, take their decisions ,
day to day management
Different approaches on ‘residence’ may lead to double taxation as well as double non-
taxation
Incorporation doctrine (state A) and CAD (state B) –>
1. Company A is incorporated in state A but place of management is in state B, then we
have double taxation
2. Company A is incorporated in state B and has the place of management in state A, so no
taxes
3
, §
Definition of “source” of income:
- Each state had its own definition, depending on the nature of the various types of income
1. Income from immovable property is deemed to arise where the property is situated
2. Business income is generally taxed only in the state of residence of company A
3. Business income is generally taxed only is the state residence of company A unless it has
a ‘permanent establishment’ in the other state
Persons are subject to tax by the State where the income is (deemed to be) sourced,
regardless of the residence of the recipient
- Interest/Royalties: in the residence State of the payer
- Income from Employment in the State where the employment is exercised
- Income from Immovable property: in the State where the property is located
4
TAXATION
Week 1
AGENDA:
- Tax sovereignty
- Source State vs Residence State
- Double taxation and double non-taxation
Tax sovereignty
- Is a fundamental component of a sovereign state
- Jurisdiction to tax -> State’s autonomous power to positively levy taxes on income or any
other economic elements
- capability to impose taxes and collect them
How broadly can a State assert its tax authority?
-> Sufficient "nexus" (connection) between the relevant country and the taxable person and/or
the taxable income -> economic allegiance
In practice:
1. nexus with the taxpayer: residence of the person (individual, company, entity) in the State
-> ex: a Italian resident is in Italy, the company and the income from outside
2. nexus with the taxable income; source of the income in the State -> ex: the residence is in
Italy, the Italian is outside the country
Residence
Two main principles to tax persons based on residence:
1. Worldwide principle
Persons are subject to tax by their country of residence on their worldwide income, ie. both
domestic and foreign source income
2. Territorial principle
Resident persons are subject to tax in respect of income derived from sources in their own
country of residence
1
, ➔ In practice, certain foreign-source incomes are exempted from taxation in the country of
residence
Example:
Company A is resident in State A
Business income from activities carried out both in
State A and State B
State A:
1) Worldwide system: taxation of Company A on
income sourced in both State A and State B
2) Territorial system: taxation of Company A only
on income sourced in State A
Necessary definitions:
* Worldwide and territorial systems
* Need to define the relevant concept of « residence»
* Need to establish where the income is sourced
Risk of double taxation or double non-taxation because of:
* Different taxation systems, plus
* Potential conflicts on «residence» and «source › at international level
Definition of «residence»:
1. Individuals
Largely depends on domestic legislation
Several factors are generally taken into account, including:
> Physical presence
> Habitual abode
> Family ties
> Economic ties
2
, 2. Companies
Two main doctrines:
1. Incorporation doctrine -> A company is resident in the State where it is originally created
2. Central administration doctrine -> Irrespective of the place of incorporation, a company
is resident in the State where its control or administration (or «management control»)
takes place – where the board of directors meet, where CO is based, take their decisions ,
day to day management
Different approaches on ‘residence’ may lead to double taxation as well as double non-
taxation
Incorporation doctrine (state A) and CAD (state B) –>
1. Company A is incorporated in state A but place of management is in state B, then we
have double taxation
2. Company A is incorporated in state B and has the place of management in state A, so no
taxes
3
, §
Definition of “source” of income:
- Each state had its own definition, depending on the nature of the various types of income
1. Income from immovable property is deemed to arise where the property is situated
2. Business income is generally taxed only in the state of residence of company A
3. Business income is generally taxed only is the state residence of company A unless it has
a ‘permanent establishment’ in the other state
Persons are subject to tax by the State where the income is (deemed to be) sourced,
regardless of the residence of the recipient
- Interest/Royalties: in the residence State of the payer
- Income from Employment in the State where the employment is exercised
- Income from Immovable property: in the State where the property is located
4
