Italian Supreme Court rules that income received by fashion models falls outside the scope of article 17 OECD MC

Di Paolo Arginelli -

Cassazione_ n. 21865-2018

With its order n. 21865/2018, the Italian Supreme Court settled a case concerning whether Italy might tax (direct or indirect) payments made to models for activities carried out in Italy in connection with the shooting of a commercial. The Supreme Court confirmed the decision of the Tax Court of Appeal of Milan (decision no. 36/32/10, of 24 February 2010), holding that such payments fall outside the scope of article 17 of the relevant Italian tax treaties (which generally follow the OECD MC), which apply only to income derived by non-resident persons as artistes (entertainers) and sportspersons. The payments made to the models were instead characterized as income from (non-artistic) independent personal services for the purpose of applying the Italian tax treaties. As such, and notwithstanding the fact that they were regarded as Italian source income under article 23 of the Italian Income Tax Code, those payments escaped taxation in Italy, as the relevant article of the Italian tax treaties (article 14) generally allows source taxation only insofar as the taxpayer has a fixed base regularly available to him/her for the purpose of performing his/her activities in Italy. On the contrary, under article 17 of the Italian tax treaties, income derived by non-resident persons from the performance of activities of an entertainment character may be taxed in Italy even in the absence of such a fixed base, provided that the relevant activities are actually carried out in Italy.

According to the Court of Appeal, in order to perform in a fashion show or photo-video shooting a model does not have to carry out any activity of an artistic or entertaining character, which excludes the applicability of article 17 of the Italian tax treaties to the income derived from it. The Supreme Court, in upholding the decision of the lower Court, concluded that the assessment of the character of the activities performed by the models was a matter of facts, which could not be reviewed by the Supreme Court as it was thoroughly assessed by the Court of Appeal on the basis of the evidence available.

The decision is welcomed, as it follows a number of conflicting decisions issued by lower courts (both of first and second instance) on the subject matter. Decisions rendered in favor of the taxpayers (i.e. exempting the income from taxation in Italy) rely on the argument that the services provided by models are typically fungible services (e.g. Tax Court of Appeal of Florence, decision no. 1672 of 11 September 2014; Tax Court of Florence, decision no. 247 of 15 February 2016), or highlight that those services lack of an entertainment character (e.g. Tax Court of Milan, decision no. 343/42/07 of 4 March 2008; Tax Court of Appeal of Milan, decision no. 36/32/10, of 24 February 2010; Tax Court of Milan, decision no. 218 of 13 January 2014; Tax Court of Milan, decision no. 5775/46/15 of 12 June 2015). Other decisions upheld the position of the tax authorities, based on the argument that models usually play a key role in fashion shows, which are events of a entertaining nature (e.g. Tax Court of Milan, decision no. 311/21/13, of 4 December 2013; Tax Court of Appeal of Milan, decision no. 647/2015 of 25 February 2015).

In addition, the order of the Supreme Court leads to a result that clearly departs from its only – to the author’s best knowledge – previous decision on the subject matter (decision no. 17955 of 19 October 2012), where the Court found, although with exclusive reference to a domestic law provision – article 23(2) of the Italian Income Tax Code – that fashion shows (as well as the main activities put in place in order to carry out them) should be generally regarded as events of an artistic character.

The end result, in this case, is in line with Commentary on article 17 of the OECD MC (as modified in 2014), according to which that article “does not extend to […] a model performing as such (e.g. a model presenting clothes during a fashion show or photo session) rather than as an entertainer” (section 3 of the 2017 Commentary on article 17 OECD MC; while Italy did not enter any observation in respect of this section of the Commentary, other member – Turkey, section 15 of the Commentary on article 17 OECD MC – and non-member States– Argentina, Brazil, Malaysia and India, sections 3, 3.1 and 6 of the Non-OECD Economies’ Positions on the OECD MC – did). However, the order of the Supreme Court does not definitely resolve the issue of the characterization of the activities performed by models active in the fashion industry, as it regards that issue as a matter of facts and entirely relies on the fact finding and assessment of the Court of Appeal. The order, indeed, appears to leave room for the characterization of those activities as performances of an artistic nature, depending on the facts of the case. This, somehow, echoes the wording of the OECD Commentary, which states that, between clear-cut cases “there is a grey area where it is necessary to review the overall balance of the activities of the person concerned” (section 3 of the 2017 Commentary on article 17 OECD MC; see, to a similar extent, Italian Ministry of Finance, Ruling no. 12/191 of 16 June 1980).

In such cases, one should assess whether the person performing the relevant activities addresses an audience with a performance of an entertaining character (see D. Molenaar, Taxation of International Performing Artistes, IBFD, 2007, section 2.6; J. Roeleveld and K. Tetłak, Article 17: Entertainers and Sportspersons, in Global Tax Treaty Commentaries, IBFD, section; see also, to a similar extent, Italian Tax Authorities, Ruling no. 15/E of 15 January 1996). The requirement that the activity carried out is essentially of an entertaining character was also clarified by the OECD in 2014, through the replacement in the English title of article 17 of the MC of the term “artiste” by “entertainer”, a change that ensured that the title reflected more accurately the contents of article 17 (see, in this respect, J. Sasseville, The 2014 Changes to Article 17 of the OECD Model Tax Convention, in G. Maisto (ed.), Taxation of Entertainers and Sportspersons Performing Abroad, IBFD, 2016, section As Cordewener puts it, “the performance must predominantly serve to entertain the audience (i.e., its distraction, relaxation, amusement or pleasure); the existence of other purposes (e.g., information, education or advertisement) does not per se preclude such entertainment in this context, so long as such other purposes remain subordinate to such entertainment” (A. Cordewener, Article 17, in E. Reimer and A. Rust (eds.), Klaus Vogel on Double Taxation Conventions, Kluwer, 2015, p. 1322, 32). The drawback of this approach is that it allows quite some leeway to the tax authorities and courts of the source State for the purpose of characterizing the activities performed by non-resident models (see, for instance, HMRC Guidance, Pay tax on payments to foreign performers, 8 Dec. 2014, according to which no withholding tax needs to be deducted from payments made “to a catwalk model at an event”, but only insofar as this event is “not open to the paying public”; see also Austria Administrative Supreme Court, 30 June 2015, case 2013/15/0266, where the Court characterized the performance of Paris Hilton, presenting a drink on a stage during an open-air party, as a performance of an entertaining character). This, in turn, can lead to unresolved conflicts of qualification with the State of residence and, thus, to unrelieved double taxation.

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