Foreign tax credit and late tax return

Can the credit for foreign taxes in case of late return be offset? In this article, we will find out if the taxpayer can use the credit for taxes paid abroad in case of late return.

To avoid double taxation of income received abroad, our tax system allows the taxpayer to take advantage of a credit for foreign taxes.

This is a rule introduced to deduct the taxation suffered in the country of tax residence, as the income received has already been taxed at source.  The credit for taxes paid abroad, together with the exemption mechanism, represents the two main mechanisms by which modern tax systems avoid double taxation o income.

In the article below, however, I want to focus on a related and crucial aspect. I refer to the entitlement of the tax credit in case you the taxpayer didn’t file the Italian tax return in time, or in case the taxpayer has not disclosed the foreign income sources in the tax return.


Credit for foreign taxes: comparison of national and conventional regulations

With the term “income earned abroad,” the national tax system adopts the so-called “mirror” reading criterion.

This is a criterion according to which:

“income is considered to be produced abroad based on the same connecting criteria set out in Article 23 of Presidential Decree 917/86 to identify income produced in Italy”.

Mirror reading criterion

According to Article 23 of the OECD Model Convention onDouble Taxation, the tax credit is recognized:

“if a resident of a Contracting State owns income (…) which following the provisions of this Convention may be taxed in the other Contracting State“.

Article 23 OECD Model Convention on Double Taxation

The treaty provision does not refer to income “arising abroad.” Instead, it relates to income taxable in the other Contracting State ‘following the provisions of this Convention.’ This means that the State of residence is not obliged to levy taxes that are incompatible with the Convention.

On the other hand, the State of residence is obliged to recognize the claim:

Even in cases where a given income, although taxed abroad, is not considered to have been produced abroad under domestic law.”

The Agreements also provide a quantitative limit on the recognition of credit, which:

“may not exceed that part of the income tax (…), calculated before the deduction is granted, which is attributable to the income (…) taxable in that other State‘.

The crucial aspect of international legislation is that it does not provide any formal requirements to benefit from the deduction.

The conventional legislation sets the same quantitative limit as that provided by Article 165, paragraph 1, of Presidential Decree 917/86. This is because the ratio of the rule is to avoid double taxation.


Credit for foreign taxes in case of late return

The national legislation is quite severe with those who fail to indicate foreign income in the declaration.

In Resolution No. 10/1429 of 5 November 1976, the Revenue Agency provided essential clarifications on the subject.

Regarding the possibility of carrying forward business losses not indicated by the taxpayer in the tax return, it states that

(…) compensation does not operate ope legis but must be requested by the taxpayer in the declaration“.

Resolution No 10/1429 of 5 November 1976

This rule has a clear operational value but cannot, in any case, lead to non-recognition of the
Carry-over should have been explicitly provided for by the legislator.

In the intervention mentioned above, the Agency stated that the omitted indication in the declaration or an omitted declaration could not in itself lead to the forfeiture of a deduction. In this case, a loss if this has not been expressly provided for by the legislator.


Supreme court ruling and tax credit in case of late return

These principles have not always been accepted by the Court of Cassation, which has expressed that:

although tax returns normally constitute declarations of knowledge, and can therefore be modified and amended in the presence of errors which expose the taxpayer to the payment of higher taxes than those due, nevertheless when the legislature makes the grant of a tax benefit conditional on a precise manifestation of will on the part of the taxpayer, to be made directly in the declaration by filling in a form prepared by the Treasury, the declaration assumes for that part the value of a deed of negotiation, as such retractable even in the event of an error, unless the taxpayer demonstrates that it was known or knowable to the administration.”

This approach by the Supreme Court should be revisited in light of more recent rulings.



The only requirements are the finality of the foreign taxes and the quantitative limit. The deduction cannot exceed the portion of Italian tax proportionally attributable to the items mentioned above of income.

Therefore, from a combination of the conventional regulations and Article 169 of Presidential Decree no. 917/86, which states that in case of conflict between domestic and international rules, the law more favorable to the taxpayer should be applied, therefore the foreign tax credit is recognizable.

In the light of the above, we can state that the late filing income or the possible failure to complete the framework of the Italian declaration should be only subject to late filing fines.

The late return does not lead to the disallowance of credit for taxes paid abroad because if it were so, the taxpayer would not be taxed on his ability to pay, and there would be an undue enrichment by the Treasury.

In practice, this is often not the case. In the assessments of the Revenue Agency in case of failure to submit the declaration in case of income received from foreign sources, the Agency never includes the credit for foreign taxes. Therefore, it is up to the taxpayer to invite the Agency to have the recognition by providing them with documentation proving the existence of the credit.

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