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Legal value of OECD Commentary and lack of international tax residence conflict

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The OECD Commentary to the Convention Model on Double Taxation has no regulatory value, being only a direct recommendation addressed to the member countries. According to this principle, already stated by the Supreme Court in its ruling N.6242 of 2020, the Court rejected the appeal of a taxpayer, who sought the application of the OECD Commentary, to be considered a “source of international law”. The Supreme Court recalls, in the case at hand, that the Commentary is by its nature a “soft law” and, therefore, it is not binding.

International tax residence and lack of conflict

Furthermore, the same Order N.25690 of 2023 states the actual lack of conflict in respect of the international tax residence of the taxpayer; therefore paragraph 2 of Article 4 of the bilateral Convention signed between the two Member States cannot be applied.

In this respect, it should be pointed out what is provided by Article 4 of the OECD Convention Model, with which the international Conventions signed by Italy usually comply.

Definition of residence status

Paragraph 1 of Article 4 refers to the domestic laws of the Contracting States for the definition of Residence status, relevant for the purpose of delimiting the subjective scope of application of the Convention.

Conflict of dual tax residence

Paragraph 2 of Article 4 then provides a series of so called tie breaker rules, that is criteria to be applied in the event of conflict of dual tax residence, arising from the concurrence of the domestic laws of the relevant Member States; these criteria are applied in order to define which of those Member States should be preferred in considering the taxpayer a resident.

Italian law on how to identify resident taxpayer

As far as the Italian Law is concerned, the criteria to identify a Resident Taxpayer in the country are stated in Art2, comma 2 of TUIR, and are based on three objective requirements, alternately considered, which must be met for the majority of the relevant tax period (year).

The 3 requirements are: being registered as a resident in the local resident registrar, having home residence and/or domicile in the country, as specified by the Civil Code. Depending on the period of time when the above criteria are met, the tax residence is defined.

Italian tax system does not recognize “tax period splitting” or “partial” tax residence

It has to be noted that the splitting of the tax period and the concept of “partial” tax residence are alien to the Italian tax system, since the domestic rules and regulation refer to the entire tax period, there being no procedures/rules regulating the acquisition or loss of residence during the year – for tax purposes.

Therefore, in case of dual residence of a taxpayer, even the so-called tie break rules provided in the Double Taxation Conventions (aimed at solving these kind of conflicts) refer to the full tax year and cannot be applied when the dual residence issue refers to a fraction of the year, as in the case considered by the Supreme Court.

Exception in case double taxation convention applies

The only exception to this rule is found in case the relevant Double Taxation Convention provides for the so-called “split year clause”. This provision is foreseen, for example, in the Conventions signed and ratified by Italy with, respectively, Germany and Switzerland – which specifically state that the tax period may be split.

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Regulatory Framework

Art. 2 TUIR

Reference (Italian only)

Order of 04/09/2023 n. 25690 - Corte di Cassazione - Sezione/Collegio 5

Reference (Italian only)

Judgment of 05/03/2020 n.6242 - Corte di Cassazione - Sezione/Collegio 5

Reference (Italian only)

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