FEDERICO DI CESARE
On December 18th, 2023, the Italian Council of Ministers approved, in a definitive way, the legislative decree implementing the tax reform on international taxation. One of the new provisions of the decree entails the review of the notion of tax residence applicable to individuals, companies and other legal entities. The new definition shall finally align the domestic tax rules with most recent international practices and double tax treaties.
- CURRENT LEGAL FRAMEWORK.
The current provisions – Articles 2 and 73 of the Income Tax Code governing, respectively, the tax residence for individuals, companies and other legal entities – provide for the application of the “worldwide principle” for resident persons and the “source taxation” for non-residents.
The linking criteria used to trigger the tax residence of individuals are the following:
- the enrolment in the Registry Office of Italian resident population (formal requirement);
- the civil domicile in Italy (i.e., the taxpayer’s principal place of business and interests; material requirement);
- the civil residence in Italy (i.e., the place where the individual has the habitual home; material requirement).
Consequence: if one of the above conditions is met, the individual qualifies as tax resident for Italian tax purposes.
On the other way, the linking criteria used to trigger the tax residence of corporations/legal entities are the following:
- the registered office (interpreted in a formal meaning as the place indicated by the legal entity in its bylaws; formal requirement);
- the administrative seat (i.e., the place where the management activity is actually carried out);
- the main object/purpose (i.e. the place where the legal entity carries out the essential activity to realise its primary purposes or where its economic activity takes place).
Also in this case, all of the above three alternative conditions shall be verified in Italy for the majority of the tax period (i.e., 183 days in the financial period).
Attention: special rules are provided to attract the tax residence of individuals transferring their tax residence to Italy from non-cooperative countries (including e.g., Liechtenstein and Monaco) and trusts, foundations and similar vehicles (e.g., trusts having settlors/beneficiaries non-tax resident in Italy or with properties abroad).
Please note that Switzerland will be repealed from the list of non-cooperative countries starting from January 1st, 2024 and thus it shall be considered as “non-cooperative” for fiscal year 2023.
- THE ENVISAGED (AND DESIRED) REFORM.
The tax reform aligns the domestic tax rules with updated international practices and most recent OECD approach with double tax treaties.
With respect to the notion of tax residence of individuals, the tax reform amends the definition of domicile making reference to a more substantial criterion, whereby the “domicile” is the place where the taxpayer’s personal and family relationships are primarily developed.
Comment: love shall count more than money for income taxes?
The physical (and ongoing) presence in Italy will be a key factor to trigger the Italian tax residence.
The formal criterion connected with the enrolment in the Registry Office and the reference to the civil residence shall not be repealed, even if the taxpayer shall now be allowed to provide proof to the contrary.
No modifications also apply to the relevant timeframe (183 days), that now considers also fraction of days.
As regards the notion of tax residence of corporations/legal entities, the tax reform eliminates the reference to both main object and administrative seat criteria that have given rise to several audits and disputes in the last decades.
Two new criteria shall be introduced to be verified for the majority of the tax period (183 days):
- the “place of effective management” criterion (material requirement), already contained in the double tax treaties signed by Italy, and to be interpreted accordingly.
- the “principal ordinary management” criterion (material requirement) in case there is no management but anyway there is a “strong” establishment of the legal entity in Italy.
No modifications apply to the application and interpretation of the registered office’s formal requirement.