Italy: New Developments In Italian Taxation Of Image Rights

Artists, sportspersons and entrepreneurs should be aware of the latest ruling in Italy regarding the Italian taxation of income from the exploitation of image rights.

The new guidelines shed some light on this controversial and sensitive area of international taxation, adding to existing case law and OECD commentary, which up until now has only been addressed in major tax assessments and related litigations.

The Italian ruling

The Italian tax authorities were asked by an Italian film maker (company) whether the remuneration paid to a Spanish resident actress for her performances carried out in Italy were subject to Italian income tax (through the standard 30% final withholding tax).

The remuneration contractually agreed between the artist and the film maker were divided into two portions: (i) 60% as remuneration for the professional service rendered as actress and (ii) 40% as remuneration for the exploitation of image rights.

The applicant asked whether the remuneration for the exploitation of image rights qualify as royalty income under the Spanish-Italy tax treaty, with a view to applying the Italian withholding tax at reduced rates.

The Italian tax authorities carried out a three-step analysis:

1. such income was considered as "closely connected" to the artistic performance carried out in the Italian territory,
2. under the Spain-Italy double tax treaty, the income was qualified as professional income (fully taxed in Italy) rather than royalty income (taxed in Italy at reduced rates).
3. such income was considered as "closely connected" to the artistic performance carried out in the Italian territory,
4. under the Spain-Italy double tax treaty, the income was qualified as professional income (fully taxed in Italy) rather than royalty income (taxed in Italy at reduced rates).

In an unprecedented move, the Italian tax authorities officially identified income being "closely connected" to artistic or professional performance as based on the principles provided for by the OECD commentary to article 17 of the model convention for the avoidance of double taxation.

The OECD's "close connection"

Generally, an income closely connected to the artistic/professional performance is fully taxable in the State of performance, under article 17 of the double tax treaty. In the absence of such a close connection, relevant payments could be covered by other articles of the treaty, with a possible reduction or exclusion of the source State taxation.

The OECD upholds that a "close connection" is generally established where it cannot reasonably be considered that the income would have existed without the performance of these activities.

Such connection may be related to the timing of the income-generating event (e.g. a payment received by a professional golfer for an interview held during a tournament) or to the nature of the consideration for the payment of the income (e.g. a payment made to a star tennis player for the use of his picture on posters advertising a tournament in which he will participate).

In a nutshell, it goes without saying that "close connection" remains one of the key criteria driving negotiation and international tax planning of artists and sports stars. On this critical aspect, the ruling emphasises the following elements to identify the "close connection":

• the exploitation of the artist's image is not referable to activities other than the artistic performance carried out in Italy, and
• there is not a creative process whose result is autonomously remunerated.

Allocation of income

Another crucial and common aspect of international taxation of sponsoring/endorsement incomes is the criteria of allocation of income among several States of the performance.

States do not often have provisions clearly addressing the portion of non-resident international sportspersons' income which is deemed as sourced within their respective territories. The main criteria are provided by the official tax authority guidelines or by domestic jurisprudence.
For instance in a French tax litigation involving a French tennis champion resident in Switzerland, the tax court held that the sponsoring/endorsement income taxable in France should be determined by reference to the estimated time spent on French soil by the tennis player, with particular regard to the "exposure to the public and media" in fulfilling the relevant sponsoring/endorsement agreements.

As for Italy, a lack of clear guidelines means that scholars, practitioners and stars' agents still debate on the most appropriate criteria to correctly apportion sponging/endorsement incomes internationally. That debate may include examples such as the place from which the image rights were transferred, or the place where the shooting takes place etc.

In this context, the Italian ruling contributes to the debate by requiring a factual analysis focused on where the performances effectively take place, rather than where the image rights are effectively exploited. Furthermore, the ruling reads that the applicant's method of dividing the remuneration (60% for the artistic performance and 40% for the exploitation of image rights) suggests that the transfer of image rights is ancillary and instrumental to artistic performance, hence the overall income is to be considered as sourced in Italy.

Moving forward

These new guidelines arguably provide new important elements to the general analysis of the typical sponsoring/endorsement agreement having international reach and notch up the main leading cases on this topic such as golf stars Goosen and Garcia vs US IRS, tennis champions Agassi vs UK HMRC and Gasquet vs French tax administration (etc.).

Although the ruling does not address the case of sponsoring/endorsement incomes derived by employees (such as soccer players) alongside their professional activity, it will certainly play an important role in negotiating sponsoring/endorsement agreements and reviewing existing ones.

What is more, celebrities and sport stars considering a relocation to Italy under the "new residents tax regime" (providing for a full tax exemption on incomes sourced outside of Italy) of the inbound workers regime (providing for a reduction from 50% to 30% of the taxable base of incomes deriving from working activities mainly carried out in Italy) may indeed count on another important piece of interpretation from the tax authorities to outline the tax risks and opportunities for their international performances.