Tax residence is the legal status allowing to identify the fiscal jurisdiction within which a taxpayer is required to fulfil their tax duties. From a global perspective, there are no universally accepted sets of rules providing the coordinates of this discipline, as tax law is a subset of public law, as it pertains to the sovereign – and, to a degree, unlimited – powers of every State to extol the resources necessary to perform its institutional mandates.
Hence, to identify the fiscal regime applicable to a corporate (or legal) entity, it is cogent to discern whether that entity is considered to be resident in Italy according to the Italian tax provisions, in particular concerning the Tax on the Income of Legal Persons (in Italian, Imposta Sul Reddito Delle Società, hence the acronym IRES).
Under Article 73(1) of the Consolidated Text on Tax Income (in Italian abbreviated as TUIR), corporate income tax encompasses companies and entities of all kinds, including trusts, with or without legal personality, even if they are not resident in the State.
What is crucial, therefore, is the fundamental concept of tax residence, which is defined in Article 5, paragraph 3, letter d) (for partnerships and associations) and in Article 73, paragraph 3 (for joint-capital, limited liability companies etc.) of the TUIR, subject to recent amendments introduced by the d.lgs. 209/2023:
“The following discussion will focus solely on the criteria for tax residence outlined in Article 73, paragraph 3, as these are essentially identical, both in form and substance, to those provided for partnerships under Article 5, which also apply, therefore, to partnerships, under Article 5, paragraph 3, letter d) TUIR.
How to identify tax residence under art. 73, paragraph 3 TUIR
Under the original version of Article 73, paragraph 3, legal entities were considered resident in Italy if “for the majority of the tax period, they ha[d] their legal seat, their place of administration, or their main object within the territory of the State”.
That text has been thoroughly amended by the legislative decree 209/2023. Since 1 January 2024, legal entities are considered tax residents if, for the majority of the tax period (183 days, or 184 days in the case of a leap year), they have been within the territory of the State:
- their registered office;
- their place of effective management;
- their main place of ordinary business activities.
The differences between the current text and the pre-reform ones are clear: in line with international practice, references to the administrative office and main corporate purpose have been removed and replaced by the criteria of effective management and primary place of ordinary business activities.
The three territorial criteria are alternative. Accordingly, for a company or similar entity to be considered tax resident in Italy, the existence of just one of the aforementioned conditions is sufficient. Conversely, entities that do not meet any of the above conditions are deemed to be tax non-resident.
The conditions above must persist for the majority of the tax period, which, for legal entities, corresponds to the financial year (Article 76 of the Italian Income Tax Code – TUIR). The financial year typically coincides with the calendar year, but it may also be longer. If the tax period is not established by law or by the articles of incorporation, or if it spans two or more years, the tax is payable for each calendar year.
The new rules on the tax residence of companies have been in force since January 1, 2024 (see Articles 7, paragraph 2, and 63 of Legislative Decree 209/2023).
The registered office
Of all the criteria, the registered office is the only one that has remained unchanged after the reform, and it is the only formal criterion. Since there is no tax concept of a registered office, its definition must refer to civil law provisions.
According to Article 46 of the Civil Code, the residence of legal entities is:
“[…] the place where their registered office is established. In cases where the registered office established pursuant to Article 16 or the registered office resulting from the register differs from the actual office, third parties may also consider the latter the legal entity’s registered office”.
Therefore, the registered office is the one indicated in the articles of association or bylaws and recorded in the appropriate register pursuant to Article 16 of the Italian Civil Code. It corresponds to the concept of residence or domicile for natural persons.
Paragraph 2 of Article 46 regulates cases in which the registered office is distinct from the actual headquarters, understood as the place where the administrative and management activities of the entity effectively take place (see Cass. Civ. I, 18/01/1997, no. 497 and Cass. Civ. VI- 3, 28/01/2014, no. 1813). In the event of such a dissociation, substance prevails over form. To protect the legitimate expectations of third parties, it is provided that precedence shall be accorded to the actual registered office rather than the legal registered office. It is nevertheless possible to invoke the prevalence of the legal registered office, provided that it can be demonstrated that third parties were aware of it.
It can therefore be concluded that, based on the first assumption referred to in Article 73, paragraph 3, legal entities that have their registered office in Italy, as defined in the articles of association or statutes, are considered residents.
The place of effective management
The second connecting criterion between a legal entity and a State is of a substantive nature and has replaced the previous requirement of the “place of management,” which was often subject to hermeneutic perplexities.
This amendment attempts to harmonise domestic rules on tax residency with international treaties, as underlined both in the Explanatory Report and the case–law of the Italian Supreme Court, in particular Cass. Civ. 02/10/2024, No. 25917:
“The criterion of effective management substantially corresponds to the concept of ‘place of management’ as referred to in Article 4 of the OECD Model (which, in its original formulation, stated: ‘for 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 similar nature’)”.
The place of effective management more precisely refers to the notion of Place of Effective Management (PoEM), as defined in paragraph 24 of the Commentary to Article 4:
“The place where the key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made”.
Therefore, the place of effective management is the location where the most important decisions concerning the management of the legal entity and its business activity are made (cfr. Cass. civ., Sez. V, Ordinanza, 25/07/2022, n. 23150).
The shift from the formal criterion of the registered administrative office to the more substantive criterion of “effective management” acknowledges the place where management decisions are genuinely made, rather than the one merely declared.
Defining the boundaries of this concept is, again, crucial for determining the tax residency of legal entities that have their registered office in one country despite taking the operational and management decisions in a different one.
Seeking to avoid any potential interpretative ambiguity, the lawmaker in Article 73, paragraph 3, clarified the meaning of the expression above:
“The place of effective management is understood to mean the continuous and coordinated taking of strategic decisions concerning the company or entity as a whole”.
The emphasis is placed on the type of activities. The phrase “strategic decisions” refers to management-related decisions made by directors or by shareholders with delegated management powers, which do not encompass:
- the decisions that do not have a managerial content
- the supervisory activities
- the monitoring activities related to management.
This view is supported by the lawmaker’s Accompanying explication, affirming that:
“For the purposes of determining the place of effective management, decisions made by shareholders that are not of a managerial nature are not relevant, nor are supervisory activities or any monitoring of management carried out by them. […] Supervisory activities and any monitoring of management by shareholders must be regarded as distinct from effective management and from day-to-day administrative management”.
With this clarification, the legislator aims to draw a clear distinction between management and administrative activities (which fall within the notion of effective management) and control or supervisory activities (which do not fall within that notion), to avoid any overlap between the two.
Indeed, the two types of activities involve different subjects: on one hand, it is the managing or delegated shareholders who make top-level management decisions; on the other hand, it is the shareholders who hold control of the entity that carry out monitoring activities.
The main place of ordinary business activities
The third and final connecting criterion between a legal entity and the State of residence — also of a substantive nature — has replaced the previous requirement of the “main corporate purpose”. Although this criterion shares with the “place of effective management” the function of anchoring tax residency to a concrete connection with the territory, it retains an autonomous significance.
Also in this case, the Italian legislator has aligned the domestic discipline with supranational standards, incorporating the provisions of paragraph 24.1 of the OECD Commentary on Article 4, which highlights the relevance of the place where the legal entity’s “senior day-to-day management” takes place — that is, the daily operational management.
This approach has been adopted in domestic law as well, under Article 73, paragraph 3 of the Italian Income Tax Code (TUIR):
“Ordinary management is understood to mean the continuous and coordinated performance of day-to-day management activities concerning the company or entity as a whole.”
This concept includes all activities related to the normal functioning and day-to-day administration of the legal entity. The purpose of this criterion is therefore to identify the place where the entity is rooted from an operational and organizational standpoint, even in the absence of its registered office or strategic management within the territory.
It is important to underline that there are essential differences between ordinary management and effective management.
The former refers to operational and organizational day-to-day management activities; the latter refers to the place where top-level, strategic management decisions are made — decisions typically attributed to the governing bodies of the entity.
he amended article reiterates in several places the importance of the “entirety of the business” (“primarily” and “as a whole”) and the continuity of the activity performed (“continuous and coordinated”), in order to delineate and distinguish cases of primarily conducted ordinary management — which results in the recognition of tax residency in Italy — from cases involving the permanent establishment of a foreign company or entity.
The reference to the legal entity as a whole aims to exclude from the outset the possibility that the mere presence in Italy of a branch or part of the entity may be sufficient to establish tax residency.
From this distinction, two important corollaries arise:
- a company that has a branch in Italy performing management activities cannot, for that reason alone, be considered resident in the country; it would merely constitute a case of permanent establishment.
- A company is considered tax resident in Italy if, despite having facilities abroad, its ordinary management activities are predominantly carried out within Italian territory.
Although Article 73 provides a specific definition of “ordinary management” — thereby distancing it from overly broad interpretations — it still leaves room for a wide range of circumstances.
For this reason, in Circular No. 20/E of 2023, the Italian Revenue Agency listed a number of factors to be considered in determining ordinary management, including the structure of the business, the core activity performed, and the organization of the company’s or entity’s business complex.
With specific regard to permanent establishment, it is also worth considering the definition n. 52 of the Annex A to the legislative decree 209/2023 as well as the Accompanying Explication to the amendment (ref. Art. 12 para. 3), which clarifies that, when a permanent establishment is located in a country where it is recognized as such under a Double Taxation Convention and where income is attributed to it, that entity must be regarded as located in that country.
In the absence of a Convention, the same permanent establishment will be considered as located in the country that recognises it as such under its domestic legislation and subjects it to taxation on the income attributable to it, based on its commercial presence in the territory.
Another case involves a permanent establishment located in a country that does not apply a corporate income tax system, but which would be treated as such under the OECD Convention for tax purposes — in such a case, the permanent establishment is nonetheless considered to be located in the country where it operates.
Finally, the fourth and last scenario concerns a permanent establishment that does not fall under any of the aforementioned cases and carries out business activity in a country different from that of the parent company (meaning an entity that includes the net accounting profit or loss of the permanent establishment in its financial statements), and where the income is exempted by the parent company’s jurisdiction. In this case, the permanent establishment is considered stateless.
Legal Presumptions of Tax Residency: UCIs, Trusts, and So-Called “Foreign-Dressed” Companies or Entities
Article 73, paragraph 3, sets out three legal presumptions — one absolute and two rebuttable — regarding tax residency in Italy, applicable to:
- undertakings for Collective Investment (UCIs) established in Italy or having their registered office in Italy pursuant to Article 1, paragraph 1, of Legislative Decree No. 58/1998;
- unless proven otherwise, trusts and similar entities established in low-tax jurisdictions that do not allow for adequate exchange of information (“other than those listed in the decree of the Minister of Economy and Finance issued pursuant to Article 11, paragraph 4, letter c), of Legislative Decree No. 239 of April 1, 1996”), where at least one of the settlors and at least one of the beneficiaries are tax resident in Italy;
- unless proven otherwise, trusts established in a low-tax jurisdiction that does not allow for adequate exchange of information (“other than those listed in the decree of the Minister of Economy and Finance issued pursuant to Article 11, paragraph 4, letter c), of Legislative Decree No. 239 of April 1, 1996”), in cases where, after the trust’s establishment, a person resident in Italy makes a contribution to the trust involving the transfer of ownership of real estate or the establishment or transfer of real rights in rem over such property, even in part, as well as the creation of destination constraints over such assets.
Compared to the previous legislation, the legal presumption concerning trusts and similar entities — formerly absolute — has now been downgraded to a rebuttable presumption, which therefore allows the taxpayer to present evidence to the contrary.
In addition to these, there is a further anti-avoidance rebuttable legal presumption set forth in Article 73, paragraph 5-bis. According to this provision:
“Unless proven otherwise, companies and entities that hold controlling interests — as defined under Article 2359, paragraph 1, of the Civil Code — in the entities referred to in letters a) and b) of paragraph 1, are also considered to be resident in the territory of the State, if, alternatively:
a) they are controlled, even indirectly, pursuant to Article 2359, paragraph 1, of the Civil Code, by resident persons in the territory of the State;
b) they are managed by a board of directors, or an equivalent governing body, the majority of whose members are resident in the territory of the State.”
Under this provision, companies or entities that are controlled or managed by persons resident in Italy are considered to be tax resident in Italy, unless proven otherwise.
The legal presumptions set out in Article 73 are rooted in Italy’s “anti-esterovestizione” policy, aimed at countering the avoidance practice by which a company dissociates its formal seat (abroad) from its actual seat (in Italy) in order to evade domestic tax law and obtain an undue tax advantage.
The Court of Cassation, on multiple occasions (cfr. Cass. Civ. n. 2869 del 7/2/2013, e Cass. Civ. n. 33234 del 21/12/2018 e Cass. civ., 23/05/2024, n. 14485) has clarified that “esterovestizione” is characterised by a purely artificial arrangement established solely to obtain a tax advantage.
A delicate issue concerns the relationship between the determination of tax residency in Italy and the assessment of “esterovestizione” (foreign dressing), insofar as in both cases there may be a dissociation between factual situations (effective management and ordinary management) and formal situations (registered office).
Consider the case of a company incorporated abroad but deemed resident in Italy under Article 73, paragraph 3, due to the presence of its effective management within Italian territory. In such a scenario, the conditions for both the determination of residency in Italy and the identification of the abusive practice of esterovestizione might be present.
However, the Supreme Court (Cass. civ., Section V, 02/10/2024, No. 25917) resolved this issue by stating that:
“There is no necessary coincidence between the determination of a company’s residency in Italy under Article 73, paragraph 3, of the T.U.I.R. and the finding of so-called abusive esterovestizione, since these are concepts that may, but do not necessarily, occur simultaneously in every cross-border case. Consequently, the verification of a company’s residency in Italy under the aforementioned Article 73 does not necessarily require attributing to the taxpayer an intent to pursue a specific tax advantage through abuse.”
In other words, the proof of esterovestizione requires an essential additional element: a subjective judgment of an abusive intent.
Article 4 OECD Model Tax Convention
Domestic legislation cannot disregard coordination with supranational sources, by virtue of the principle of precedence of treaty provisions over national laws established by Article 75 of Presidential Decree No. 600 of 29 September 1973.
Double Taxation Conventions come into play in cases of dual tax residency, where multiple States recognize the same taxpayer as resident and both claim taxing rights over the same taxpayer. According to Article 4, paragraph 1, of the OECD Model Convention, the determination of tax residency criteria is left to the individual national legislations. This results in heterogeneity of criteria at a global level and, consequently, the possible emergence of conflicts of taxing jurisdiction.
The resolution of “dual residency” cases is entrusted to the tiebreaker rule in paragraph 3 of Article 4 of the OECD Model, according to which it must be followed the mutual agreement procedure pursuant to Article 25 of the same MTC.
The pre-2017 OECD Convention recognized the place of effective management (PoEM) as the decisive criterion, as described in paragraph 22 of the Commentary on Article 4: “[t]he place of effective management was intended to be based on the place where the company, etc. was actually managed.”
The place of effective management was defined as the place where decisions related to the management of the commercial activity are made.
However, following changes introduced by the BEPS (Base Erosion and Profit Shifting) Project, paragraph 3 of Article 4 was entirely revised. It no longer automatically applies the place of effective management criterion in dual residency cases, but leaves it to the mutual agreement procedure between the States involved to decide which tax authority prevails. Such agreements must consider a variety of relevant factors, including (see paragraph 24.1 of the Commentary):
- the place of effective management;
- the place of incorporation;
- the place where board meetings are regularly held;
- the place where executive directors perform their functions;
- the place where managers carry out ordinary administrative functions.
The current rules do not exclude that Contracting States may prefer to maintain the traditional PoEM criterion. To this end, the Commentary proposes a revised version of paragraph 3 to be included in mutual agreements.
It may, however, occur that the States in dispute fail to reach an agreement. In such cases, paragraph 3 of Article 4 establishes that the legal entity shall not be entitled to any tax exemption except as agreed upon by the competent authorities of the Contracting States.
Finally, Legislative Decree No. 209/2023, Article 12, paragraph 4, recognizes tax residency as a criterion for determining the localization of an enterprise in cases of dual residency.
If an enterprise is considered to be located in two countries, priority is given to the country where it is resident according to the rules laid out in the Double Taxation Convention concluded between the two States.
