Anyone living between Italy and Brazil — or earning income in both countries — genuinely risks paying tax twice on the same income. To prevent this, a bilateral double taxation treaty has been in force between the two countries since 1981. Understanding how it works is essential for anyone with a tax connection to both systems.
What is a double taxation treaty
It’s an international treaty that establishes which of the two countries has the primary right to tax a given type of income, preventing the same amount from being fully taxed in both Italy and Brazil. It doesn’t remove the obligation to declare income in both countries, but it regulates how to avoid substantial double taxation.
Which income the Italy-Brazil treaty covers
The treaty specifically governs several categories of income:
- Employment income — generally taxed in the country where the work is performed
- Self-employment and business income — linked to the existence of a “permanent establishment”
- Dividends, interest and royalties — subject to maximum rates agreed between the two countries
- Real estate income — taxed in the country where the property is located
- Pensions — with specific rules depending on whether they are public or private
Note: each income category has its own rules within the treaty. Applying the wrong rule to a category of income is one of the most common — and most costly — mistakes made by those who manage their situation without specialized assistance.
The tax credit method
Italy applies the tax credit method: income earned abroad is declared in Italy, but the tax already paid in Brazil is deducted from the tax due in Italy, up to the amount of Italian tax corresponding to that income.
Practical example: an Italian tax resident receives dividends from an investment in Brazil, where local withholding tax is applied. On their Italian tax return, that withholding can be credited against the IRPEF due on the same income, preventing it from being fully taxed twice.
Tax residency: the starting point of every analysis
Before applying any rule of the treaty, you need to establish with certainty where you are tax resident. Tax residency doesn’t always coincide with citizenship or with where you spend most of your time: it depends on precise criteria (registration with the population registry, centre of vital interests, physical presence) that must be verified case by case, especially for those who have just relocated or maintain active ties to both countries.
Why reading the treaty isn’t enough
The treaty text sets out the general principles, but its practical application depends on the domestic law of both countries, the most recent regulatory updates, and the specific nature of each type of income. Two apparently similar situations can require different tax treatment.
Do you have income, investments or a business involving both Italy and Brazil? Contact us for an analysis of your specific situation. We work in English, Italian, Portuguese and Spanish.