Recent Clarification On Determining Foreign Tax Credits On Foreign Employment Income

As Italian tax residents are subject to tax on their worldwide income, foreign-sourced employment income is included in an individual's income when calculating personal income tax. Foreign-sourced income may also be subject to tax in the relevant foreign jurisdiction.

In order to avoid double taxation, credit is given for foreign taxes when calculating Italian tax under the Italian Income Tax Code ("ITC"). The tax credit is generally reduced to the extent that foreign income is exempt from tax.

Some issues have arisen as to how the foreign tax credit is calculated in certain circumstances. For example, if certain conditions are met, foreign employment income is determined on the basis of a notional salary annually defined by a Decree of the Ministry of Labor (instead of the actual salary received).