In this note, the author examines a recent ruling issued by the Italian Tax Authorities regarding the tax treatment of income received by non-resident musicians in respect of payments made by an Italian Foundation for performances to be held abroad while the orchestra rehearsals take place in Italy.
Summary: 1. How taxation of international performing musicians in Art. 17 of the OECD Model works – 2. Domestic law on the taxation of non-resident musicians – 3. The domestic tax treatment of payments made to orchestras 4. Ruling No. 354/2020 of the Italian Revenue Agency
1. How taxation of international performing musicians in Art. 17 of the OECD Model works
Cross-border taxation of international performing entertainers has frequently attracted the attention of tax authorities, since artists enjoy high mobility and income earned in different States could easily escape taxation. Like most countries, Italy generally levies a withholding tax on performance fees paid to non-resident entertainers, regardless of their employment status and irrespective of whether the income from their activities accrues to other persons.
The OECD devoted a special clause to taxation of entertainers – such as musicians – in Art. 17 of the OECD Model and its Commentary, giving primary taxation rights to the State where the performance takes place while granting secondary taxation rights to entertainers’ state of residence. Italy’s tax policy provides that its treaty network on Art. 17 generally follows the OECD Model, which reads as follows:
1. Notwithstanding the provisions of Article 15, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from that resident’s personal activities as such exercised in the other Contracting State, may be taxed in that other State.
2. Where income in respect of personal activities exercised by an entertainer or a sportsperson acting as such accrues not to the entertainer or sportsperson but to another person, that income may, notwithstanding the provisions of Article 15, be taxed in the Contracting State in which the activities of the entertainer or sportsperson are exercised.
Allocation of taxation rights under Art. 17(1) represents a deviation from the usual tax rules governed by Art. 7 (Business income) and 15 (Employment income) of the OECD Model: it gives primary taxation rights to the State where the performance takes place, preserving secondary taxation rights to the entertainer’s State of residence. Accordingly, the residence State does not give up its right to tax entirely. Such exceptional rule also takes place if the income derives directly or indirectly from a performance by an artist, even if the payment in respect of that specific performance is made to a “middleman” (such as their empresarios or agent) instead of directly to the artist.
The same rationale regulates Art.17(2) whenever any income in respect of personal activities exercised by the entertainer accrues to other persons (e.g., an intermediary entity) and not directly to the artist. In these circumstances, the allocation rule stipulates a look-through approach to prevent tax avoidance by means of legal entities interposed with the aim of reducing the performance State’s taxation rights.
It can be concluded that Art. 17 of the OECD Model generally applies whenever (i) a person qualifies as an entertainer, (ii) such person is resident of a Contracting State and (iii) performs in the other Contracting State.
From a general standpoint, the OECD Model (and its Commentary) does not contain a clear definition of the term “entertainer” for tax treaty purposes but provides only an illustrative list that serves as general guidance in the interpretation of whether a person, such as “a theatre, motion picture, radio or television artiste, or a musician” is performing as an entertainer. Therefore, the meaning of the term “entertainer” must still be considered as an autonomous tax treaty term with an indefinite legal concept. Nonetheless, it can be concluded that Art. 17 of the OECD Model targets income from activities qualified by an entertaining nature as well as generally conducted in public, including one-time performances and without any distinction between professionals and amateurs.
Additionally, musicians must be resident of a Contracting State. The concept of residence, as used in tax treaty law, is typically based on the domestic concept of residence applied by the Contracting States to cover the various forms of personal attachment to a State, insofar as this gives rise to a comprehensive taxation (i.e. “full liability to tax”). However, there might be situations where the person could be considered dual resident under the laws of two States. In such cases, the OECD Model has provided tie-breaker rules (substantially replicated in all bilateral tax treaties) according to which a taxpayer (natural person) should be deemed to be resident in the Contracting State in which:
- he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be resident only in the State with which his personal and economic relations are closer, this being understood as the centre of vital interests;
- if the State in which he has his centre of vital interests cannot be determined, or if he has no permanent home available to him in either State, he shall be deemed to be resident only in the State in which he has an habitual abode;
- if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only in the State of which he is a national;
- if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement procedure laid down in Art. 25 of the OECD Model.
And last but not least, the performance of musicians must be physically exercised in the other Contracting State, in order to allow this State to tax the income arising therefrom.
Another point of interest is whether income derived by entertainers falls within the scope of the special rule contained in Art. 17 of the OECD Model or under another distributive rule. The Commentary does not provide a definition of what constitutes income related to entertaining performances, nevertheless it clarifies that Art. 17 would not apply whenever there is no “close connection” between the income and the performance of activities in the other Contracting State. From the perspective of the Commentary, such nexus (i) will generally be found to exist where it cannot reasonably be considered that the income would have been derived in the absence of the performance of these activities and (ii) can be ascertained in connection to the timing of the income generating event or to the nature of the consideration for the payment of the income.
In the case at hand, such “close connection” can be verified since, without the artistic performance in the Festival, the two musicians would not have received any compensation from the Foundation.
2. Domestic law on the taxation of non-resident musicians
Non-resident individuals, such as musicians, are only subject to taxation in Italy with respect to domestic sourced income. Hence, due to the limitations of the territoriality principle, income received by non-resident musicians is taxed according to the following rules: income from employment is deemed to be Italian sourced if the employment activity is performed in Italy (according to Art. 23(1)(c) of the Income Tax Act, also “TUIR”), while income from self-employment is deemed to arise in Italy if the relevant professional activity is carried-out therein (according to Art. 23(1)(d) of the TUIR).
In the first case, income received by musicians for performances carried-out in Italy is subject to withholding tax (Art. 23 of the Presidential Decree No. 600, from 29 September 1983, also “Decree No. 600”) by the employer, as a prepayment of individual income tax (also “IRPEF”). Income from employment includes salaries and compensations, whether in cash or in kind, paid to the employee in the framework of the contractual relationship. The withholding tax is computed with the following ordinary progressive income tax rates: 23 % up to Eur 15.000; 27% from Eur 15.001 to 28.000; 38% from 28.001 to 55.000; 41% from 55.001 to 75.000 and 43% over Eur 75.001. If the employer is not a withholding agent, the employee is required to file the Italian Tax Return for the purposes of taxing income derived from performances carried-out in Italy. If the double tax convention signed between Italy and the musician’s residence country follows the OECD Model in Art. 17(1), the withholding tax applied in Italy is not subject to any limitation in domestic tax rate (i.e. 30%). Eventually, the tax paid in Italy will be credited against the worldwide income tax due in the residence State.
In the second case, income derived by self-employed musicians for performances carried-out in Italy is subject to final withholding tax at 30% (Art. 25(2) of Decree No. 600). However, if the payer does not qualify as a withholding agent in Italy, the musician is required to file the Italian Tax Return for the purposes of taxing income received for performances carried-out in Italy. Again, if the double tax convention signed between Italy and the musician’s residence country follows the OECD Model in Art. 17(1), the withholding tax applied in Italy is not subject to any limitation in domestic tax rate (i.e. 30%) and the tax paid will be credited against the worldwide income tax due by the musicians in their residence State (note: the general principle of taxation of entertainers can be read also at the following link dealing with sportspersons, applying the same rules).
3. The domestic tax treatment of payments made to orchestras
There is no special treatment in case of resident entities hiring an orchestra to perform certain activities in Italy, therefore a 30% final withholding tax is generally applied (Art. 25(2) of Decree No. 600). Although the taxation is based on the standard rules, the main point of discussion is to determine whether the person liable to tax in Italy is the orchestra (for example, structured as an entity) for which the musician is working or the individual.
Thus, since domestic tax law does not provide any special treatment, reference should be made to the official position expressed by the Italian Revenue Agency. To the best of the author’s knowledge, the only available reference is Resolution No. 56 of May 3rd, 2005. The case dealt with payments made to orchestras and other entities residents in France. The taxpayer submitted to the authorities the following: (i) whether the withholding tax should have been applied to the orchestra/entity (Art. 23(2)(d) of the TUIR) or to each individual musician (Art. 23(1)(c) and (d) of the TUIR), and (ii) how to avoid economic double taxation, since the orchestra/entity would have been taxed in Italy on the portion of business income referred to activities held therein while the musicians would have been taxed in France on the same income received in the form of salaries and remunerations for performances carried-out in Italy.
The tax authorities have determined that it is irrelevant if the 30% withholding tax is charged to the orchestra/entity or to the individuals, as Art. 25(2) of Decree No. 600 is indiscriminately applied to both parties in case of withholding agents tax residents in Italy. The only exception refers to a situation in which a self-employment activity is performed outside the Italian territory or the non-resident payer is not operating in Italy through a permanent establishment. The ruling continued by stating that the application of the withholding tax to the French orchestra/entity and the subsequent taxation in France of the income received by the individual musicians does not lead to double taxation, since the orchestra/entity can deduct in France the sums paid to the musicians from its tax base and consequently would be taxed on the net income, while the withholding tax suffered in Italy would be credited against the gross tax calculated in France.
4. Ruling No. 354/2020 of the Italian Revenue Agency
In the present case, the taxpayer is an Italian Foundation (also the “Foundation” or the “taxpayer”) established for non-commercial purposes to support certain artistic and cultural activities. One of the main international events through which the Foundation pursues its scope is a Film Festival (also the “Festival”) that had to be held abroad on March 2020 but that, due to the pandemic caused by the Coronavirus, was postponed.
In preparation of the new edition of the Festival, the Foundation intends to engage two international musicians, one resident in Germany and the other in Switzerland, countries with which Italy signed Double Tax Conventions that provide Art. 17 in line with the OECD Model. Both artists will sign a contract with the Foundation establishing that, for the period indicated therein, they will rehearse in Italy and will perform subsequently in the two concerts during the Festival. Thus, the right to receive a compensation will arise from the performance of the musicians, under which terms they will not receive any remuneration for rehearsals in Italy (even in case of “general” rehearsals open to the public upon entry fees) or in case the concerts are cancelled in the event of force majeure. From the contractual provisions, it emerges that the artists are substantially hired to perform personal services abroad but at the same time they are also obliged to carry-out rehearsals in Italy, for which nothing is provided in terms of further compensation or even reimbursement of expenses.
Accordingly, the taxpayer required the Italian Revenue Agency to confirm if the income from performances paid to the musicians should be entirely taxable in the State of performance, exempting the Foundation from any tax obligation in Italy as withholding agent.
The tax authorities noted how in general the activity of musicians does not require only the participation in recitals, operas, ballets and other events but also the completion of preparatory orchestra rehearsals. In this sense, such activities cannot be considered autonomously from the main artistic performance but, rather, auxiliaries (as evidenced by the fact that musicians will not be remunerated for time spent on rehearsal in Italy but only upon personal performances in the Festival). Thus, they have concluded that, since the main artistic performance will be entirely carried-out outside Italy (in the Contracting State where the Festival will take place), income derived from musicians’ activities will not be relevant for domestic purposes and therefore not be subject to taxation in Italy (nor, consequently, the Foundation is required to act as withholding agent). The conclusion reached by the Italian Revenue Agency is in line with the position expressed by the OECD Commentary on Art. 17, where it states that rehearsals are part of the normal activities of entertainers. If an entertainer is remunerated for time spent on rehearsal in a State, the relevant remuneration, as well as remuneration for time spent travelling in that State for the purposes of rehearsals, would be covered by Art. 17, and this would apply regardless of whether or not such rehearsal is related to specific public performances taking place in that State. Therefore, it stems that whenever there is no remuneration for time spent on rehearsals, Art.17 can only be applied the extent that a “close connection” between the artistic performance (of which the rehearsal is preparatory) and the income received for activities exercised in that other State exists.
In principle, the tax authorities maintained the same view contained in Resolution No.79/E of June 16th, 2006, in a case dealing with remuneration from training activities paid to professional cyclists performing around the world. In such case, the taxpayer (an Italian cycling team) required the Italian Revenue Agency to confirm whether the withholding taxes had to be applied in relation to the number of performance days that cyclists spent in each State where the professional activity was carried-out. On this point, the Commentary on Art. 17 of the OECD Model proposes a stringent interpretation, making it clear how not only performance days are relevant in the allocation of income but also the days spent in the different States for employment-related activities, such as travel, training, race or public appearances.
Therefore, the method proposed by the OECD Model is just one out of two possibilities available to allocate income deriving from performances held in different countries. In tax practice, the most common mechanism of apportionment is the “games played” method, which takes into consideration an “event-based” approach seeking to attribute the relevant income on the number of public performances played in every single State. Alternatively, following the proposal of the OECD, the “duty days” method could be used, which considers in the actual number of days that a musician spent in the various States for public performances as well as for preparation activities and rehearsals, allocating proportionally the income among States. The former method is determined by multiplying the overall income for a ratio calculated on the number of public performance days in each State divided by the overall number of public performance days in the given year, while the latter is determined by multiplying the relevant income with a fraction between the number of duty days spent in the source state divided by the overall duty days.
The general practice in Italy relies on the “games played” method, as confirmed by the Italian Revenue Agency in the mentioned Resolution No.79/E, where the tax authorities concluded for the apportionment of the pro-quota remuneration paid to the cyclists on the basis of the exclusive number of days spent in each State where they carried-out the sporting performances.
 Paragraph 3 OECD Model: Commentary on Article 17 (2017).
 For a comprehensive analysis regarding the definitions of “artiste” and “entertainer” for tax treaty purposes see D. Molenaar, Taxation of international performing artistes, IBFD, 2005, at sec. 3.13.
 In this sense, see A. Cordewener, Tax treaty issues related to qualification, allocation and apportionment of income derived by entertainers and sportspersons, IBFD 2016, at sec. 6.2.1.
 Paragraph 6 OECD Model: Commentary on Article 17 (2017), according to which “the Article also applies to income from other activities which are usually regarded as of an entertainment character, such as those deriving from billiards and snooker, chess and bridge tournaments”. In the opinion of A. Cordewener, supra n. 3, “the performance must predominantly serve to entertain the audience (…); the existence of other purposes does not per se preclude such entertainment in this context, as long as other purposes remain subordinate to such entertainment”.
 Even if the OECD clarified that “noted that the words ‘performance’ and ‘public performances’ do not appear in Article 17”. See OECD Committee on Fiscal Affairs, Issues related to Art. 17 of the Model Tax Convention (26 June 2014), paragraph 29, available at https://www.oecd.org/tax/treaties/report-article%2017-model-tax-convention.pdf. Actually, it worth noting that paragraph 9.3 of the Commentary on Article 17 (2017), last period, makes reference to “public performances”.
 Paragraph 9.1 OECD Model: Commentary on Article 17 (2017), according to which “The reference to an entertainer or sportsperson includes anyone who acts as such, even for a single event”.
 Paragraph 9.1 OECD Model: Commentary on Article 17 (2017), according to which “Thus, Article 17 can apply to an amateur who wins a monetary sports price or a person who is not an actor but who gets a fee for a once-in-lifetime appearance in a television commercial or movie”.
 Paragraph 9 OECD Model: Commentary on Article 17 (2017).
 Paragraph 9.1, OECD Model: Commentary on Article 17 (2017).
 Paragraph 9.3, example 2, OECD Model: Commentary on Article 17 (2017).
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