The purpose of a double taxation agreement is to ensure that the same income is not taxed twice by different countries. In the case of Ireland and Italy, and as we will also see, it even affects capital gains made by Irish nationals resident in Italy for a period of time.

In these situations you will be subject to the tax rules of your country of residence, and for this reason double taxation treaties are signed to avoid double taxation.

In general, you should refer to the provisions of the Convention to find out which taxation powers correspond to each State and, where applicable, the measures applicable to mitigate double taxation. The conventions list certain types of income and provide, in respect of each of them, the taxing powers of each signatory State:

• In some cases, exclusive power for the country of residence of the taxpayer.
• In other cases, exclusive powers for the country of origin of the income.
• Finally, and only in some cases, shared power between the two countries, with both being able to tax the same income, but with the obligation, in general, for the country of residence of the taxpayer to take measures to avoid double taxation.

The treaty between Ireland and Italy, was signed on 11 June 1971 and applies to income and capital gains taxes levied by each of the contracting states. We provide a specific case study to give a more specific view of the implications of double taxation treaties, bearing in mind that the casuistry is large and each situation is different, so that in case of doubt it is necessary to turn either to the tax authorities of the country of residence or issuer of the payment, or to a tax advisor specialised in international taxation. The case presented is also a clear example of how it is convenient and necessary to seek professional advice in this type of case.

Case for the application of the Convention between Ireland and Italy. Kinsella case

This case was brought by Lorraine Kinsella, daughter-in-law of the founder of Ryanair. The case arose due to an alleged tax avoidance scheme that was put in place in respect of Kinsella's sale of Ryanair shares for a consideration of EUR 19 million (USD 27.7 million), however, Kinsella paid less than EUR 40,000 tax in Italy, where she was tax resident at the time of the sale of the shares.

Lorraine Kinsella won her case against the Irish Inland Revenue over the share sale and paid her tax in Italy at a lower rate than the Irish rate, as she claimed she was resident there when the shares were sold. The High Court agreed with its interpretation of the law contrary to the position of the Irish Revenue, which initially and under its interpretation considered that the capital gain was covered under the double taxation agreement, but eventually, in view of the size of the transaction, reversed itself and interpreted the Double Taxation Convention.

In this case, the Irish Revenue lost against the opinion of the judge who stated that the double taxation agreements signed between Italy and Ireland in 1971 should also apply to capital gains, thus creating a precedent and confirming that the Revenue can interpret the regulations in a different way to the interested party who finally went to court to assert the criterion of residence outside the country for a longer period than required and to prove his temporary residence in Italy.