Italy's Supreme Court, in Ordinance No. 16134 of 25 May 2026, held that relief from double taxation under the Italy–Germany income and capital tax treaty cannot be withheld merely because a taxpayer failed to file an Italian return or disclose foreign-source income, establishing that international treaty obligations take precedence over restrictive domestic law.
Italy’s Supreme Court, in Ordinance No. 16134 of 25 May 2026, held that relief from double taxation under the Italy–Germany income and capital tax treaty cannot be refused solely because the taxpayer failed to file an Italian tax return or omitted the relevant foreign income from the return submitted.
Ordinance No. 16134 establishes a significant legal precedent regarding the intersection of international tax treaties and domestic formal requirements. The Court ruled that relief from double taxation under the Italy-Germany income and capital tax treaty cannot be denied simply because a taxpayer failed to file an Italian tax return or report foreign-source income.
While lower courts initially disagreed on whether an official tax return was a mandatory prerequisite for avoiding double taxation, the Supreme Court ultimately ruled in favour of the taxpayer. The Court established a significant legal principle asserting that international treaties, specifically the Italy-Germany Convention, override restrictive domestic statutes.
Consequently, the right to deduct taxes paid abroad remains valid even if the income was not originally reported, as domestic law cannot undermine the superior authority of international agreements designed to prevent unfair fiscal burdens.
Case background and the dispute
The case involved an Italian resident taxpayer who received German-source income during the 2007 and 2008 tax years. This income included:
- Dividends distributed by two German companies.
- Income from real estate located in Germany.
- Interest accrued on a foreign bank account.
The Italian Revenue Agency issued assessment notices to recover taxes on this income. They denied the taxpayer’s request to credit the taxes already paid in Germany, citing Article 165, paragraph 8, of the Italian Income Tax Code (TUIR). This domestic provision stipulates that a foreign tax credit is not available if the taxpayer fails to file a return or fails to disclose the foreign income in a filed return. The lower Tax Court in Bolzano initially upheld the Agency’s position, deeming the filing of a return an “essential” requirement to benefit from the credit.
Conflict between treaty and domestic law
The Supreme Court reversed this decision by analysing the hierarchy of legal sources. It focused on Article 24 of the Italy-Germany Tax Treaty (ratified by Law No. 459/1992), which aims to eliminate double taxation. Under Article 24(2)(a), Italy is permitted to include German-source income in its tax base, but it must deduct the income tax paid in Germany. This deduction is limited only by the requirement that it cannot exceed the portion of Italian tax attributable to that specific foreign income.
The Supreme Court’s legal reasoning
Italy’s court determined that ratified international tax treaties take precedence over incompatible domestic tax law, relying on Articles 10 and 117 of the Italian Constitution.
Under the “More Favourable” rule in Article 169 TUIR, taxpayers benefit from whichever provision—treaty or domestic—offers greater tax relief.
The Court emphasised that the treaty’s obligation to prevent double taxation is unconditional and cannot be restricted by Italy’s unilateral imposition of formal requirements, such as return-filing mandates.
This ruling aligns with previous Court decisions (Orders No. 24160 and 24205 of 2024) confirming that treaty-based tax credits remain valid even when domestic reporting obligations are unmet.
The Supreme Court concluded that domestic rules (Art. 165, paragraph 8, TUIR) cannot legitimately limit the effective power of international treaty norms. Consequently, the Court allowed the taxpayer’s appeal, quashed the previous judgment, and remanded the case to the Tax Court of Justice of Bolzano for a new examination based on these principles.
