In Italy, tax residency is the status that, if recognized as such by the tax system of a State, translates into a worldwide taxation of natural persons. The recognition of such legal status implies the fulfilment of the tax obligations related to this legal condition (Art. 3 TUIR).
Double tax residence: how to avoid double taxation
In general, there is nothing preventing a natural person from having more than one tax residency, but each must be in a different legal system.
Double legal taxation identifies the situation in which two States impose similar taxes, on the same tax base of the same tax period, to the same legal entity. This is how the OECD Model, the main instrument-guide to the drafting of bilateral conventions, identifies double taxation.
The OECD has approved the update to the Model Tax Convention on income and capital, providing for the so-called “tie breaker rule” (art. 4 §2) in order to solve and avert potential conflicts of double residence tax, and to overcome the fiscal asymmetries existing in the field on an international level.
The OECD Model offers four criteria to be applied in bilateral Conventions, so that the exact tax residence of the subject can be peacefully determined. These criteria are subsequent to one another: starting from the rule under a), it is advisable to use the first useful criterion to solve the conflict that has arisen.
Double taxation in the European Union
In the European Union system, international double taxation has been considered by the European Commission as a significant obstacle to the free market, to be eliminated and avoided. However, no ban on double taxation has been legally expressed in EU law to date, as also recalled by the Court of Justice (case C-336/96 Gilly).
EU Treaties do not contain provisions on direct taxes. However, they recognize the EU’s power to adopt directives promoting the convergence and harmonization of administrative provisions, laws and regulations of the Member States that directly affect the internal market (Art. 115 TFEU).
Double taxation in Italy
The Italian legal and tax system considers its adaptation to the OECD Model Convention relevant, also by virtue of the reference to art. 3 of Law n. 111/2023 and in the preamble of Legislative Decree n. 209/2023.
It is fundamental to underline that the content of the OECD Model is not legally binding, as it is a model to which bilateral Conventions signed between Contracting States have to be inspired. The Conventions will acquire legal value once they become part of the State legal system.
In other words, bilateral Conventions that have entered into force act as a regulatory reference, together with the main Italian tax laws in force – i.e.:
- the Statute of the rights of taxpayers (Presidential Decree n. 212/2000);
- the Consolidated Law on Income Taxes – TUIR (Presidential Decree n. 917/1986);
- the provisions on the establishment of income taxes (Presidential Decree n. 600/1973);
- the regulation on tax litigation (Legislative Decree n. 546/1992);
- the VAT regulations (Presidential Decree n. 633/1972);
- Legislative Decrees n. 471/1997 and 472/1997 on administrative penalties;
- Presidential Decree n. 602/1973 on tax collection.
Bilateral Conventions against double taxation in Italy
The Italian legal system does not provide any obstacle clause regarding situations of double tax residence or double taxation, but tries to solve them. Indeed, Italy has signed numerous bilateral Conventions against double taxation. These legal instruments make it possible to avoid double taxation by harmonizing the tax treatment of multiple tax residences.
However, it should be specified that this is only possible when bilateral Conventions have been signed and ratified between Italy and the Contracting State. Therefore, the existence of these Conventions makes it possible to identify the actual tax residence and to apply the right tax regime.
It is essential to remember that, pursuant to art. 169 TUIR, the provisions of Presidential Decree n. 917/1986 (TUIR) apply also in derogation to the international conventions in force against double taxation, if they are more favorable for the taxpayer. In this way, a favorability principle is recognized to taxpayers, in case they are more advantaged by the provisions of the TUIR than those of the Convention.
The implicit assumption is the previous existence of a bilateral agreement between Italy and the other State, in which the treatment provided for the taxpayer is more disadvantageous than what provided for by national legislation under the same conditions. This applies even if national law were to conflict with the Convention. If the previous requirements are met, Art. 169 TUIR will be applied.
To take advantage of the benefits provided by double taxation agreements, taxpayers may request a tax residency certificate.
Registered Residence and Tax Residency in Italy
In the Italian context, it is important to distinguish the concepts of tax residence and registered residence, both in the case of Italian and foreign citizens, since different obligations and rights arise from them.
Registered Residence is governed by the relevant paragraph of art. 43 of the Italian Civil Code, according to which it coincides with the place where the person has his habitual residence, that is, where the presence of the subject is real and habitual. Moreover, registered residence consists in an administrative rooting that legally testifies the political and social link between a subject and a territorial community. In other words, it is a status that provides a precise identity to the person.
On the other hand, tax residency is one of the criteria used by the Italian tax system to consider a person as a resident or not. It represents a legal condition that implies the fulfilment of certain tax obligations. The main reference is represented by art. 2 of Presidential Decree n. 917/1986 (TUIR), largely just reformed by art. 7 c.1 of D. Lgs. 209/2023 (on “Implementation of tax reform in the field of international taxation”).
Do foreigners have to be registered in Italy?
According to Italian legislation, residence registration with the local Ufficio Anagrafe is an unconditional subjective right for Italian citizens and for non-EU citizens residing in Italy (art. 6 c.7 D. Lgs. 286/1998). However, there are specific requirements, and, as a result, registration is not automatic.
In particular:
- foreign citizens’ stays on national territory have to be legal. Requirements in this sense vary according to the status of European or extra-EU citizen. EU citizens do not need a residence permit, but in order to establish their residence in Italy, they must have a qualification and health insurance. In addition, they must prove to have sufficient financial resources to support themselves;
- non-EU citizens may access residence registration by presenting their passport and residence permit – the receipts of the first issue and of renewal are valid for registration.
- for applicants or holders of international protection, residence registration is based on the title issued by the Questura (Circular of the Ministry of the Interior 2006).
Who is subject to taxation in Italy?
Art. 2 par. 1 of TUIR provides that Italian resident and non-resident natural persons are taxable. Consequently, it is sufficient that a natural person is present in Italy to be considered a taxable person by law (e.g. the tourist tax provided for by art. 4 of Legislative Decree n. 23/2011).
In this sense, any natural person present on Italian soil may be required to fulfill the applicable tax obligations. In a nutshell, the concept of presence on the national territory is crucial.
What makes you a tax resident in Italy?
For income tax purposes, art. 2 par. 2 of TUIR specifically provides that natural persons who have their residence (according to the Italian Civil Code, art. 43) or domicile in Italy for most of the tax period (Art. 7 TUIR) – also considering fractions of day – are tax resident in Italy.
These conditions are alternatives: it means that it is sufficient that at least one of the three is fulfilled for a natural person to be granted tax residence in Italy.
In summary, the three alternative conditions are:
- Residency;
- Domicile;
- Mere presence on the national territory.
Tax Residency in Italy 2024: three main points
Because of the recent legislative news, there are some innovations that deserve to be highlighted to fully grasp the requirements for the attribution of tax residence and the subsequent obligations. In particular, there are three aspects to be considered:
- The tax period;
- The new definition of domicile for the purpose of tax residency in Italy;
- The primary connotation of family and personal aspects.
The 183 days’ rule for tax residency in Italy
First of all, with regard to the tax period, the fractions of day are now also considered in the calculation of the period spent in Italy. Therefore, it will be sufficient to exceed 183 days (or 184 in case of a leap year) – however computed and even not necessarily consecutive – to be tax resident in Italy and, therefore, to be taxable.
New definition of domicile for tax residency in Italy
Secondly, in the second section of art. 2 par. 2 of TUIR, a new definition of domicile is provided. This concerns exclusively the interpretation of the concept of domicile for the purpose of the application and implications of the new art. 2 of TUIR.
Therefore, the legislative news defines domicile as the place in which the subject’s personal and family relationships “mainly” develop. The very recent introduction of this definition has not yet made it possible to consolidate either a uniform interpretation or a well-established jurisprudence on the subject.
Therefore, the question arises whether this definition of domicile should be understood as residual and supplementary to that provided by art. 43 of the Italian Civil Code, or independent from the latter. In view of the recent entry of this definition and the other reasons mentioned above, we believe that, at the moment, we should move towards a literal interpretation of the provision.
Thus, only in the context of the TUIR and, in particular, of the attribution of the status of tax residence, the definition of domicile provided by art. 2 par. 2 TUIR is to be considered as prevalent, with respect to the Civil Code one (art. 43).
Within the hierarchy of sources, the TUIR still belongs to a lower rank, with respect to ordinary law, represented by the Civil Code and its art. 43.
The role of personal and family relationships
Thirdly, the above-mentioned “mainly” clarification, expressed in art. 2 par. 2 of TUIR, emphasizes the primary importance of the personal and family relationships developed by the subject in a given place.
Other criteria for tax residency in Italy: burden of proof
According to par. 2, natural persons who have been registered with the registers of resident population for most of the tax period are also presumed to be tax residents, unless they prove otherwise. Thus, there is a legal presumption which can only be disproved if evidence to the contrary is provided.
In this situation, the logical-argumentative principle of the burden of proof emerges. According to this, whoever intends to prove or disprove the existence of an assumption, a fact or a presumption has the obligation to provide the evidence supporting their thesis. For tax law, we refer to art. 2697 of the Civil Code, which provides that:
Whoever wishes to assert a right in court must prove the facts on which the right is based. Who claims the ineffectiveness of such facts or that the right has been changed or extinguished must prove the facts on which the exception is based.
The Latin maxim onus probandi incumbit ei qui dicit expresses and sums up well the burden of proof: the latter falls on those who invoke a right or a fact in support of their thesis. Law n. 130/2022 introduces paragraph 5-bis to art. 7 of D. Lgs. 546/1992 (tax litigation), giving greater rigor to the determination of the person on whom the burden of proof rests.
On the one hand, the Financial Administration, which in the process plays the part of plaintiff and creditor, must prove the an and the quantum of its tax claim, as well as the infringements contested. On the other hand, the burden falls on the taxpayer to justify their claims for refund
Tax Residency for Italian citizens
Finally, exclusively for Italian citizens, art. 2 par. 2-bis provides that persons holding Italian citizenship are to be considered residents, even if deleted from the registers of resident population and transferred elsewhere, unless proof to the contrary is provided.
In the light of this other legal presumption, the same arguments as above apply to the burden of proof.
The tax base: a world-wide taxation
In general, the tax base is the value on which the tax rate is applied to calculate the tax to be paid. The tax base is the part of the income on which the tax is applied after deductions and reductions.
How to calculate total income
In Italy, art. 3 par. 1 TUIR provides that the tax is applied to the total income of the subject: this implies a world-wide taxation of the individual. The total income is determined differently depending on the subject’s status:
- for residents, the total income consists of all the income held, net of deductible charges (indicated in art. 10 TUIR) (art. 3 c.1 TUIR);
- for non-residents, instead, the total income is formed only by the income produced in the territory of the Italian State (Art. 3 c.1).
Art. 3 par. 2 TUIR provides for a derogation from paragraph 1, under which the income tax listed in art. 16 TUIR (subject to the provisions of paragraphs 2 and 3) applies separately.
Excluded income
Art. 3 par. 3 TUIR lists the income excluded from the calculation for the purpose of determining the tax base. Specifically, the following types of income are excluded:
- tax-exempt income and income subject to withholding tax or substitute tax;
- periodic child support allowances payable to the spouse as a result of effective and legal separation or annulment, dissolution or termination of the civil effects of the marriage, resulting from judicial measures;
- family allowances and emoluments for household loads, however defined and provided in accordance with the law;
- the social majority of pension benefits (Art. 1 L. 544/1988)
- the sums paid by the Italian Government as scholarships to foreign nationals under international agreements.
Taxation in Italy of income produced abroad
For a complete overview of Italian taxation for natural persons, read our complete guide on taxes in Italy for expats.
The income produced by a person abroad is not ignored by Italian law and it is considered only if it contributes to the formation of total income. Under certain conditions, the Italian tax system may recognize a tax credit. On a preliminary basis, it is appropriate to anticipate that the tax credit institution will not be applicable to income subject to withholding tax as:
- tax;
- substitute tax;
- substitute imposition.
According to art. 165 par. 2 TUIR, income produced abroad is considered according to criteria that are reciprocal to those provided for identifying income produced in the Italian territory (art. 23 TUIR ad. e.g.: property income, capital income, royalties). Here, the principle of reciprocity is enshrined.
Foreign tax credit
If a person obliged to comply with tax obligations in Italy also has income abroad that contributes to the formation of overall income, art. 165 par. 1 TUIR provides that taxes definitively paid abroad on foreign income may be deducted from the net tax due.
However, there is a limit: the deduction will be allowed until reaching the tax share corresponding to the ratio between income produced abroad and total income, net of losses from previous tax periods allowed to be deducted. To summarize visually, the formula is:
(foreign income × net tax due) ÷ net total income.
If income is produced in several foreign countries, paragraph 3 of art. 165 TUIR provides that the deduction is applied separately for each State. This allows individuals who own sources of income in various nations not to lose the benefit of deduction.
Requirements to obtain the tax credit
To summarize, in order for the right to tax credit to be recognized, the following situations must occur:
- the foreign income must contribute to the overall taxable income in Italy;
- income must be produced abroad;
- the taxes must have been paid definitively abroad, in the State(s) where the income was produced. If taxes have been paid provisionally or as advance payments, the tax credit will be attributed in the year in which the payment becomes definitive;
- the nature of the foreign income tax must be comparable to the Italian one (principle of reciprocity).
However, the deduction is not always recognized. Indeed, art. 165 par. 8 TUIR establishes that the deduction is not recognized in case of:
- Failure to submit the tax return, or
- Failure to indicate the income produced abroad in the tax return submitted.
These two conditions are alternatives: therefore, it is sufficient for one of them to take place for the deduction to be rejected.
Calculation of the deduction
The deduction is calculated in the tax return for the tax period to which the income produced abroad belongs (Art. 165 par. 4 TUIR). There is one condition: the final payment of the tax abroad must take place before the submission of the tax return in Italy.
However, if the final payment is made later, art. 165 par. 7 TUIR applies. In this case, a new settlement is carried out, also taking into account the possible increased foreign income. The deduction concerns the tax due for the tax period to which the declaration refers.
If the period for assessment has already passed, the deduction is limited to the share of foreign tax proportional to the amount of income produced abroad.
Carry-back and Carry-forward
In addition, for all types of foreign income, art. 165 par. 5 provides an additional possibility of calculation for the deduction. This can be calculated from the tax for the relevant period, even if the final payment will take place within the term for submitting the declaration for the first subsequent tax period.
This option can be exercised upon indication (in the tax return) of the foreign taxes deducted, which have not been paid definitively yet.
Moreover, for all types of foreign income, art. 165 par. 6 introduces the possibility to carry-forward and carry-back surpluses that remain unused for a period, in both cases, of a maximum of eight years. Two surpluses can be identified:
- one is represented by the share of Italian tax on foreign income, which exceeds the foreign tax (Italian tax > foreign tax);
- the other one derives from foreign tax exceeding the share of Italian tax on foreign income (foreign tax > Italian tax).
Tax residency in Italy: additional obligations
As pointed out extensively in the previous paragraphs, tax residency in Italy (actual or presumed) involves the onset of several obligations under the tax law in force in the country. It should be added that, among the others mentioned above, there are also other obligations such as:
- the fiscal monitoring obligation;
- the payment of property tax on the value of properties abroad (IVIE);
- the payment of tax on the value of financial products (IVAFE).
Fiscal monitoring obligation
The obligation to monitor and communicate data on transfers to and from abroad is regulated in accordance with art. 1 of Legislative Decree n. 167/1990 on “Recognition for tax purposes of certain transfers of money, securities and assets to and from abroad”. Financial intermediaries must report the analytical data of transfers and transactions to or from abroad of an amount equal to or greater than €5,000, also carried out in virtual currency or crypto-activity.
IVIE: Property Tax on the value of properties abroad
Natural persons resident in Italy who own property abroad must pay tax on the value of property located abroad (IVIE), regulated by Law n. 214/2011. The tax is due for:
- the owners of building areas, buildings and land, including business properties;
- the holders of real rights of usufruct, use or dwelling, emphyteusis and surface on them;
- the concessionaires, in the case of concession of state-owned areas;
- lessees for property, even to be built or under construction, granted on finance lease.
The tax does not apply to owners of buildings used as main dwellings and their appurtenances, and to the marital house legally assigned to the spouse. These properties must not be classified in Italy in cadastral categories A/1 (stately dwelling), A/8 (villa) and A/9 (castles and palaces of eminent artistic or historical relevance).
According to the amendments introduced by the last budget law (art. 1 par. 91 lett. a) Law n. 213/2023), the ordinary rate of IVIE is 1.06%.
IVAFE: Tax on the value of financial products
Also pursuant to L. 214/2011, natural persons resident in Italy must pay tax on the value of financial assets held abroad (IVAFE) if they hold the following types of products abroad:
- financial products;
- current accounts;
- savings accounts.
Art. 1 par. 91 lett. b) of L. 213/2023 provides that the tax is fixed at a yearly rate of 4×1000 for financial products held in States or territories with a privileged tax regime or identified by the decree of the Minister for Economic Affairs and Finance of 4 May 1999. As a result, for current accounts and savings accounts, the tax remains at 2×1000 per annum.