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).

In cases where the foreign tax credit is determined by reference to notional salary, the standard practice was to reduce the taxes paid abroad on the basis of the ratio between (i) the income actually taxed in Italy in accordance with Article 51 (8-bis) ITC, and (ii) the foreign income subject to tax abroad.

The Italian tax authorities have recently clarified, in Ruling no. 48/E of July 8, 2013, that in connection with item (ii) above, the amount of foreign income subject to foreign tax must be determined in accordance with the ITC rules, as opposed to the relevant foreign tax rules. This calculation may often result in a lower foreign tax credit than if the credit was calculated by reference to the actual foreign tax paid.

Individuals should therefore review any foreign tax credits claimed for years still subject to tax assessment, in accordance with the statute of limitations, in order to avoid possible penalties.

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