The Italian tax authority (ITA) ruling (13/2025) concerned an Italian company that provided IT services to a company resident in Egypt. Payments for the services (Service Fees) were subject to a final withholding tax (WHT) in Egypt of 20%, which the Italian company initially requested the Egyptian tax authority (ETA) to refund. The company later asked the ITA whether Italy should grant it the foreign tax credit envisaged under the tax treaty between Italy and Egypt (DTT) in relation to the WHT.

The Italian company’s requests to both authorities were based (at least in part) on the uncertainty created by the wording of Article 22(1) of the DTT, which has a peculiar “other income” provision that deviates from both the OECD and the UN models. Like the models, the DTT grants the residence State exclusive taxing rights on any “other income”, except for management fees. However, unlike other tax treaties such as the one between Italy and Tanzania, the DTT does not explicitly state that management fees may be taxed in both Contracting States.

The interpretation of Art. 22 of the DTT

The peculiar wording of the provision has always led to different interpretations between the two countries. 

Art. 22(1) of the DTT states as follows: “Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention except management fees shall be taxable only in that State” (emphasis added).

Based on a preliminary interpretation, the exclusion of management fees appears to imply that the income is covered by Art. 7 (business profits); thus, when a permanent establishment is lacking, the source State cannot tax the income. However, this interpretation is not convincing because, if management fees could be classified as business profits by both contracting States, there would be no need to include an exception in Art. 22 – Art. 7 would suffice. 

Another interpretation is that the Contracting States (i.e., Italy and Egypt) agreed to exclude management fees from: the other distributive rules of the DTT (especially from the business profits article), and the scope of the catch-all distributive rule in Art. 22(1). Consequently, as the DTT allows unlimited source taxation on management fees, the residence State must grant the tax credit under Art. 23. This interpretation is also supported by paragraphs 10 and 11 of the Commentary to Art. 21 of the OECD Model.

Egypt’s position as the State of source

Before further examining Egypt’s interpretation of the DTT, it is worth noting that Art. 56 of the Egyptian Income Tax Law deals with WHT applicable on payments from companies resident in Egypt to non-residents. Certain “amounts” paid from an Egyptian source to a non-resident entity are subject to a final WHT in Egypt of 20%. The “amounts” in question include “service charges”. 

Egyptian tax legislation and the ETA’s publications do not define the notion of “service charges”, but the ETA considers the Service Fees to be “service charges” to which the final WHT in Egypt of 20% applies.

As to the ETA’s interpretation of the DTT, when the Italian company sought the ETA’s position on the treatment of Service Fees under the DTT, the ETA referred to the “other income” article that introduced the notion of “management fees”. For further clarity, Art. 22(3) of the DTT defines the “exceptional” management fees as follows: 

For the purposes of this Article the term "management fees" means payments of any kind to any person, other than to an employee of the person making the payments, for, or in respect of, the provision of industrial or commercial advice, or management or technical services, or similar services or facilities, or hire of plant or equipment, but it does not include payments for independent personal services mentioned in Article 14. (Our emphasis)

Based on the ETA’s DTT interpretation, the definition of “management fees” is quite broad and covers various forms of service charges that are undefined and undealt with in other articles of the DTT. In the Italian company’s case, the ETA concluded that the Service Fees fall within the notion of “management fees”; consequently, Egypt – as the source State – has unlimited rights to tax the Service Fees as management fees under the DTT.

Italy’s position as the State of residence

The ITA did not explicitly confirm that the Service Fees fall under the definition of “management fees” under Art. 22(3) of the DTT (as the applicant did not provide sufficient information to allow that analysis) but did focus on the interpretation of the distributive rule under Art. 22(1). The ITA confirmed that although management fees fall outside the scope of the catch-all distributive rule under Art. 22(1), they are subject to unlimited source taxation. Therefore, because the 20% WHT was applied in accordance with the DTT, Italy must grant the foreign tax credit under Art. 23(2) of the DTT.  

Conclusion

When determining Egyptian taxing rights in cases other than the IT services, taxpayers may argue against the ETA’s broad interpretation of “management fees” and request that Art. 7 of the DTT addressing business profits be applied. In these cases, the ETA should not classify those income sourced in Egypt as “management fees” but rather as “business profits”. Examples include: an Italian company’s supply of a software as a service to an Egyptian company, and an Italian company’s transfer of full IP to an Egyptian company. However, the qualification of the income made by Egypt is not per se valid for Italy.

Therefore, to assess the DTT’s impact on service charges sourced in Egypt and paid to an Italian company, taxpayers must: review thoroughly their contractual clauses that describe the subject matter, and seek both the ETA’s and ITA’s position on whether the service charges constitute “management fees” or “business profits”. Only in case taxes are imposed in Egypt “in accordance with the provisions of this Convention”, Italy is, then, required to grant the foreign tax credit under Art. 23 of the DTT.