As explained in the entry on bilateral agreements, the purpose of the agreement to avoid double taxation is to ensure that the same income is not taxed twice by different countries. In this case, we are going to analyse the agreement signed between Italy and Spain to avoid double taxation on income taxes.

This agreement focuses on two main groups: individuals and legal entities.

A legal person will be subject to this agreement when taxing personal income tax (imposta sul reddito delle persone fisiche). In this case, Italy and Spain have agreed that the place where the person is considered tax resident is where the tax must be paid.

In case you have paid income tax in a country other than the one where you are considered tax resident, the present agreement would apply, so you would have to pay the difference in the percentage to be paid in the different countries.

Example for individuals:

Pedro is a tax resident in Italy, however he has filed his tax return in Spain paying 24%. As he is considered an Italian tax resident, he will have to pay to Italy the difference between the percentage that he should pay in Italy for his income (25%) and the percentage that he has paid in Spain (24%). Therefore, Pedro will have to pay tax in Italy on the difference of 1%.

The individual should not be taxed in a country other than the country where their head office is located unless the company has a permanent establishment in another country. If the company has a permanent establishment, only the difference between the business profits made in the permanent establishment and the deductible expenses will be taxed in that country.

Example for legal entities:

Marker S.L is a Spanish company that has operated in Italy, however, it does not have a permanent establishment there, so it will not have to pay income tax for legal persons (imposta sul reddito delle persone giuridiche) in Italy.

On the other hand, Pencil S.L. is an Italian company with a permanent establishment in Spain. As it has a registered office in Spain, it will have to pay tax in Spain on the profits obtained in the Spanish market by applying the difference between the expenses derived from this permanent establishment (rent of the premises, etc.). Dividends obtained by holding shares in a company must be taxed in the place where the company is located.

However, if you are a tax resident in another country, your country of residence may be taxed up to an additional 15% on the profits obtained from the dividends.