Italy–UK Double Tax Treaty: A Practical Guide for Entrepreneurs

For anyone living in Italy while managing a UK company — or conversely, operating in the UK with Italian fiscal ties — the most common question is always the same: where do I pay tax? And more importantly: do I risk paying twice? The answer to both questions lies in the Double Tax Treaty between Italy and the United Kingdom, a bilateral agreement that governs the taxation of cross-border income and represents the most important legal instrument for anyone operating between the two countries.

What is a double tax treaty and why does it exist

Double taxation occurs when the same income is taxed by two different countries in the same fiscal period. This is a natural consequence of the fact that every state has the sovereign right to tax income produced on its territory or received by its residents — and these two criteria can overlap.

To prevent this mechanism from unduly penalising cross-border activity, Italy and the United Kingdom have signed a bilateral Double Tax Treaty (DTT), based on the OECD Model Convention. The treaty currently in force was signed in 1988 and has remained applicable following Brexit, as it is a bilateral agreement entirely independent of EU membership.

The treaty does not eliminate taxes: it establishes which of the two countries has the primary right to tax each category of income, and provides mechanisms to prevent the second country from taxing the same amount again.

Who the treaty applies to

The treaty applies to individuals and legal entities (companies) that are tax resident in one or both contracting states. Tax residency is the starting point: without establishing it correctly, it is not possible to apply the treaty effectively.

For individuals, tax residency is determined by criteria such as domicile, habitual abode, centre of vital interests and — as a last resort — nationality. For companies, the primary criterion is the place of effective management, not the formal registered address.

A person who is simultaneously tax resident in both countries is defined as dual resident: the treaty provides specific tie-breaker rules to determine which country takes precedence.

Key income categories and their treatment

The Italy–UK treaty governs each category of income in a specific way. The most relevant for entrepreneurs are as follows:

Business profits (Article 7)
The profits of a business are taxable exclusively in the country of residence of the company, unless it operates in the other country through a permanent establishment. If a permanent establishment exists, the profits attributable to it may also be taxed in the country where it is located. This is the most critical point for those managing a UK company from Italy: if the Italian tax authority determines that a permanent establishment exists in Italy, the UK company's profits may become taxable in Italy as well.

Dividends (Article 10)
Dividends paid by a UK company to a shareholder resident in Italy are subject to withholding tax in the United Kingdom, at a reduced rate of 5% if the recipient is a company holding at least 10% of the capital, or 15% in all other cases. In Italy, foreign dividends are then subject to standard taxation, with a credit recognised for the tax already paid in the United Kingdom.

Interest (Article 11)
Interest is taxable in the country of residence of the recipient. The source country may apply a maximum withholding rate of 10%. The beneficial owner resident in the other country may claim exemption or reduction of the withholding rate by presenting the appropriate form to the tax authority of the source country.

Royalties (Article 12)
Royalties — including payments for the use of trademarks, patents, software and other intellectual property — are taxable exclusively in the country of residence of the beneficial owner. This means that royalty payments from a UK company to a holder resident in Italy are not subject to withholding tax in the United Kingdom, provided the beneficial owner is genuinely resident in Italy and does not operate through a permanent establishment.

Employment income (Article 15)
Remuneration for employment is taxable in the country where the work is physically carried out. If an employee works in the UK but resides in Italy, the income is taxable in the UK. If the employee works remotely from Italy for a UK employer, taxation falls to Italy.

Pensions (Article 17)
Private pensions are taxable exclusively in the country of residence of the recipient. Government pensions (paid by governments or public bodies) follow a different rule: they are taxable in the country that pays them, unless the recipient is a resident and national of the other state.

How the treaty works in practice: the tax credit mechanism

The treaty provides two main methods for eliminating double taxation:

Exemption method: the country of residence exempts from taxation income already taxed in the other country. This method is applied to a limited extent under the Italy–UK treaty.

Tax credit method: the country of residence taxes the taxpayer's worldwide income but grants a credit equal to the tax paid in the other country, up to the amount of tax due on the same income in the residence country. This is the prevailing method under the Italy–UK treaty.

In practice: if an Italian entrepreneur receives dividends from a UK company on which a 15% withholding tax has been applied, they will declare the gross dividend in Italy but may deduct from Italian tax due the 15% already paid in the United Kingdom.

Procedure for claiming treaty benefits

To apply the reduced rates provided by the treaty — for example on dividend withholding tax — it is not sufficient simply to invoke the treaty: a formal procedure must be followed.

The income recipient must demonstrate their tax residency in the contracting state by means of a tax residency certificate issued by the competent authority (in Italy: the Agenzia delle Entrate; in the United Kingdom: HMRC). This certificate must be presented to the paying party before the withholding is applied, or used to claim a refund of excess withholding already deducted.

In the United Kingdom, the procedure for claiming treaty reductions on UK-source income is managed via forms in the DT series (e.g. DT-Individual for individuals resident abroad).

The treaty after Brexit

One of the most important points to clarify is that Brexit did not affect the validity of the Italy–UK Double Tax Treaty. The treaty is a bilateral agreement between two sovereign states, entirely independent of the United Kingdom's EU membership. It has remained fully in force since 1 January 2021 and continues to apply to all categories of income covered by its provisions.

What changed with Brexit relates to other areas: freedom of movement of persons, EU directives on intra-group dividends and interest (the Parent-Subsidiary Directive, the Interest and Royalties Directive), and VAT rules. In these areas the bilateral treaty provides no coverage and reference must be made to the domestic legislation of each country.

Common mistakes when applying the treaty

• Assuming the treaty completely eliminates tax in one of the two countries: it only establishes which country has the primary right to tax.
• Failing to obtain a tax residency certificate before receiving cross-border payments, thereby losing the right to reduced withholding rates.
• Confusing the tax residency of the company with that of the director: these are two independent determinations governed by different rules.
• Ignoring the risk of permanent establishment, which can make the profits of a formally UK-registered company taxable in Italy.
• Failing to update the structure following a change in personal residency, creating exposure to challenges covering prior periods.

FAQ

Is the Italy–UK Double Tax Treaty still valid after Brexit?
Yes. The Double Tax Treaty is a bilateral agreement independent of the European Union and has continued to apply in full since 1 January 2021. Brexit did not modify or suspend its effect in any way.

If I live in Italy and have a UK company, where do I pay tax on the profits?
It depends on where the company is effectively managed. If effective management takes place from Italy, the Italian tax authority may consider the company tax resident in Italy and tax its profits accordingly. A correct structure with genuine economic substance in the United Kingdom is essential to avoid this risk.

What is the withholding tax rate on dividends from a UK company to an Italian shareholder?
The treaty provides for a maximum withholding rate of 5% if the Italian shareholder is a company holding at least 10% of the UK company's capital, and 15% in all other cases. To benefit from these reduced rates, a tax residency certificate must be submitted to HMRC in advance.

Are royalties paid by a UK company to an Italian-resident owner subject to withholding tax?
No. Article 12 of the treaty provides that royalties are taxable exclusively in the country of residence of the beneficial owner. If the owner is tax resident in Italy, no withholding tax applies in the United Kingdom.

How do I obtain an Italian tax residency certificate to apply the treaty?
The tax residency certificate is requested from the Agenzia delle Entrate using the dedicated form. It is generally issued within 30 days of the request and certifies tax residency in Italy under the convention with the specified foreign country.