ITALY: Ruling on tax treatment of payments from Italy to German resident profssional sportsmen

An Italian professional cycling club had concluded contracts with several German resident professional cyclists. Under the contracts (?contratti di collaborazione coordinate e continuative)? the cyclists were treated as self-employed workers. The Italian legislation contains a rule that payments by Italian resident employers to non-resident employees are according to Italian domestic law subject to a withholding tax of 30%.

Ruling No. 79/E of 16 June 2006 of the Italian tax authorities clarified that according to the Italian tax authorities:
– payments to the German resident cyclists were subject to the 30% withholding obligation, irrespective of the place where the services were rendered;
– however, by virtue Article 17 of the tax treaty that has been concluded between Germany and Italy, Italy has regarding German resident sportsmen only the right to tax the income earned with performances in Italy.

Hence the Italian tax authorities limited the application of the 30% withholding to the part of the income generated in Italy.

Practical questions that remain are inter alia how to determine the part of the income that is generated in Italy (e.g. on a days spent basis, or during Italian based performances (such as e.g. the Giro)), and how to deal with possibly tax deductible costs of the cyclists that are connected with their performances in Italy (the cyclists are for income tax purposes treated as self-employed workers).