Tax residence

The Increasing transboundary movement of people challenges a traditional keystone of fiscal regulations, progressively eroding the territorial and static work-model upon which these have been developed, in particular from the viewpoint of the identification of the tax residence of natural and legal persons, the discipline of which is provided by articles 2,3, 23 and 73 of Italian Tax Consolidated Text (TUIR).

Fiscal residence in Italy

Article 3 of TUIR indicates two different taxation regimes which depend on whether the taxpayer is a resident or a non-resident:

• Resident taxpayers are subject to the so-called Worldwide Taxation Principle, according to which all incomes of any types, regardless of the place in which they have risen, are taxable in Italy.
• Non-resident taxpayer’s incomes, on the contrary, are taxable, according to principle of territoriality, only insofar as they are earned within the country (Article 23 TUIR).

It is thus crucial to determine whether and upon what conditions a person (natural or legal) can be deemed to be resident in Italy. The relevant definitions are set by Article 2 TUIR (resident and non-resident individuals) recently amended in 2023 (in force since 1st January 2024) by Legislative Decree No. 209/2023 introducing a new definition of tax residence more coherent with the international legal framework (cf. Judgment No.  20041/2024).

The Italian Revenue Agency’s Circular No. 20/E of 2024 has thus found it necessary to provide an authoritative interpretation of the new tax residence definition to be adopted by its territorial offices.

More specifically, with reference to individuals, the Italian Legislator has replaced the previous criterion (which was related to the Italian Civil Code) with a more substantive one (derived from the international conventions and practice). Hence, to be considered as a resident in Italy, it is necessary to satisfy (at least) one of the four conditions below:

1. tax residence in the territory of the State pursuant to Article 43 of  Italian Civil Code;
2. domicile pursuant to the definition provided by the same Article 2(2) TUIR;
3. the new criterion of physical presence in the State;
4. registration at the National Registry of Resident Population (ANPR), thus attributing a relative presumption to the formal element of the registration

for most of the tax period, i.e. for at least 183 days (184 days in leap years), which coincides in Italy with the solar year. For these provisions to apply it must be noted that the period covering 183 or 184 days one shall not be consecutive. More in detail,

• domicile (supra, lett. a) means the place where the person’s personal and family relationships are pivoted. Whereas older practice inferred the notion of domicile from Article 43(1) Civil Code, the amended Article 2(2) TUIR has introduced an autonomous notion of domicile exclusively to tax residence (i.e. it operates as a lex specialis. See in this sense Judgment No. 26638/2017).

In the same sense, Circular 20/E provides that the relevant notion of domicile should not be interpreted as a strict literal and formal reference to Article 43, but rather a broader –substantial– reference to  any ‘personal and family relationship’, including both the typical, formally recognised, relationships (e.g. marital status or civil partnership) and personal relationships equally marked by a character of stability connected to the territory of the State (for example, in the case of cohabiting couples). Similarly, a consolidated nexus between the taxpayer and the State can be globally inferred from other –individually irrelevant- elements, such as the annual membership of a cultural or sports club.

• The registration at the ANPR. Whereas under the previous version of Article 2(2) TUIR there was an absolute presumption relative to the genuineness of the registration at the National Registry of Resident Population (ANPR) (which could not be rebutted by contesting the absence of habitual abode or domicile in the territory of the foreign State) save for the cases expressly provided under international treaty law (the so-called tie-breaker rules dictated by any double taxation conventions in force between Italy and the relevant country), the current discipline reverts the burden of proof, allowing the taxpayer to offer counterfactual evidence. Consequently, persons registered in the resident population registry office for the greater part of the tax period continue to be considered resident for tax purposes in Italy, unless they are able to prove that registration in the registry office does not correspond to actual residence in the Italian State (caveat:as discussed below, ad hoc rules apply to residence in the so-called tax heavens).

To do so, taxpayers must provide tangible pieces of evidence that for the majority of the duration of the tax period, they have not had neither their civil law residence, neither the domicile nor they have been physically in Italy.

Article 2(2-bis) provides a peculiar regime with regard to Italian citizens who cancelled themselves from the residents lists to move into more-favourably taxed states identified by the Decree of the Ministry of Economy and Finance (4th may 1999) who are presumed to be fiscally resident in Italy unless they can prove the contrary (see ex multis, Judgment No. 19843/2024).

In the aftershock of the Covid-19 epidemic, smart (or remote) working has sharply risen, particularly in those sectors which do not require the physical presence of workers to perform their duties. This fracture between the location of the worker and the place in which his operations take place, significantly reverberate on the relevant fiscal jurisdiction:  if Mr X from state A operates in state B from his home in state A, who should be allowed to levy taxes upon him, State A or State B?

According to the new rules, the worker’s stay in Italy for 183 (or 184, in leap years) days determines, itself, the residence in our Country for tax purposes. It should be noted that, in the event that the worker from home has established his/her residence for tax purposes in the territory of the State, he/she will have to subject to taxation in Italy all his/her income, wherever produced, and not only income deriving from his/her work activity (see Article 3, paragraph 1, of TUIR). This is without prejudice to the possible application of provisions contained in the Double Taxation Conventions entered into by Italy which provide for a different allocation of the taxing rights between our Country and the other contracting State with respect to the specific income produced by the taxpayer.

With respect to the second category (i.e. smart workers from abroad), it is understood that natural persons shall be resident in Italy for tax purposes while working remotely from a foreign country, where they are physically present for 183 days a year (184 in case of leap years), in  case they meet for most of the tax period at least one of the other three connecting criteria identified by the new Article 2, paragraph 2, of TUIR, i.e. they maintain their residence under the civil code or domicile in Italy, or are enrolled in the resident population registry (for more details on this last criterion, please refer to the following paragraph).

As previously mentioned, the new domestic legislation must, however, be coordinated and comply with supranational legislation, and in particular with the provisions of the Double Taxation Conventions entered into by Italy with various foreign countries. While it is not possible to provide a comprehensive overview of each individual treaty on the matter, in the next paragraph the OECD Model Tax Convention will be illustrated referring, when necessary, to specific bilateral conventions.

OECD Model Tax Convention

With regard to natural persons, Article 4(1) OECD MTC merely refers to the domestic legislation of each Contracting State, and consequently it does not provide an international definition of tax residency. Indeed, according to the provision: “[f]or the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature” – international practice on Article 4 states that the provision is aimed on the one hand at defining the meaning of the term “resident of a Contracting State”, and on the other hand at solving cases of double residence.

The are two typical cases of conflict that are identified:

1. conflicts between two residences
2. conflicts between residence and source or situs.

Generally, conventions for the avoidance of double taxation do not normally set standards which the domestic provisions on “residence” have to fulfill “in order that claims for full tax liability can be accepted between the Contracting States”. In cases of conflicts, these cannot be solved by reference to the concept of residence adopted by each Contracting State, therefore special provisions must be established in the Convention to determine which one of the two concepts of residence has to prevail (cf.  Judgment No. 2878/2024).

With specific reference to individuals, the definition provided in Paragraph 1 of Article 4 is aimed at “covering various forms of personal attachment to a State which, in the domestic taxation laws, form the basis of a comprehensive taxation”.

The subsequent Paragraph 2 covers cases where, according to Paragraph 1, an individual is a resident of both Contracting States and provides the so-called tie breaker rules, established to give preference to the individual’s attachment to one State or the other:

1.  permanent residence criterion
2. the centre of vital interests
3. habitual residence
4. taxpayer’s nationality

In particular, the four rules grant preference to the Contracting State in which the individual has a permanent home available to him, a criterion that usually solves the case. In saying so, a series of specifications are given regarding the concept of permanency and the concept of home.

The former means that “the individual must have arranged and retained it for his permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration”, while the latter refers to any form of home (i.e. house or apartment belonging to or rented by the individual, rented furnished room).

However, whenever this criterion of permanence residence is not useful for determining tax residence for conventional purposes, as stated by the Italian Supreme Court in Judgment No  26638/2017, “it is necessary to apply the subsequent criterion of the centre of vital interests with reference to economic, social, moral and affective relations”.

If the residence cannot be determined by reference to this rule, there are two subsidiary criteria, first the habitual abode and second the nationality. In more complex cases, e.g. where an individual is a national of both States or has another nationality, according to the Commentary, the competent authorities have the duty of resolving them through the negotiated procedure as provided by Article 25 – following a hierarchical order.

More specifically, whenever it is necessary to recourse to the Mutual Agreement Procedures (MAP), provided by Article 25 of the OECD MTC, competent authorities “shall endeavour” to resolve the conflict of dual residence through a fruitful dialogue and consultation.

In any case within three years (a shorter deadline of two years is identified in most bilateral conventions concluded by Italy) from the first notification of the measure taken by one or both States that will result in double taxation based on a dual-residence, the competent authorities should try to reach an agreement – indeed, they are obliged to seek an agreement in a fair and objective manner in accordance with international law principles, but are not obliged to effectively solve the case. That is why any unresolved issue shall be solved by resorting to the arbitration process (according to Paragraph 5 of Article 25, introduced in 2018), if provided by the single bilateral conventions.

A clause frequently inserted in bilateral conventions (e.g. those between Italy and, respectively, Germany, Switzerland and Panama) is the split year clause. Under this kind of provisions, the tax period relevant for the residence attribution can be split between the competing states (cf. ex multis Article 4(10) OECD Convention), containing an explicit provision for splitting the tax year in cases of dual residence if domicile is transferred from one state to another during the year. Accordingly, any individual who has permanently transferred his domicile from one Contracting State to the other ceases to be a tax resident of

the first Contracting State from the day after that of the transfer (on multiple occasions the Italian Supreme Court has invoked the OECD Model Tax Convention as a hermeneutic parameter to resolve the interpretative uncertainty on the bilateral rules, ex multis Judgment No. 20054/2024).

If there is no double tax avoidance agreement between States, two situations may alternatively arise:

a) if, regardless of the inexistence of the international legal discipline, the domestic legislation of either State provides a unilateral tax exemption to individuals able to prove they have paid their taxes in the other State;

b) in the absence of both the international rule and the domestic exemption, the income shall be exposed to double taxation.