With its Reply No. 122/2023, the Italian Revenue Agency provided clarifications on the taxability in Italy of the transfer of a property located in the Netherlands and owned by an Italian citizen for more than five years. The Italian citizen declared to have lived in the same tax period both in Spain, where the taxpayer has an ongoing employment contract, and in Italy, for most of the reference year (194 days).
The taxpayer’s request to the Italian Revenue Agency
The taxpayer asked the Italian Revenue Agency to provide an opinion on which State holds the taxing power over the income in question and, if there is an Italian taxing power over the capital gain generated in the Netherlands, what its correct tax treatment is.
The Agency’s response: verification of the applicant’s residence
The first part of the Agency’s reply focuses on the applicant’s residence status, highlighting how the question is ill-posed. The taxpayer’s residence for tax purposes cannot be verified in the context of an appeal as it requires the verification of factual elements that are outside the scope of ordinary appeals. Indeed, the function of ordinary appeals is limited to providing advice only in cases where there is an uncertainty of interpretation relating to the tax rule (the so-called “pure ordinary ruling ”), or to the legal-tax qualification of the case (so called ”qualifying ordinary ruling see Circular no. 9 of 1 April 2016 /E).
Application of regulations to determine tax residence
When analysing the subject’s tax residence, the Italian Revenue Agency starts by dealing with domestic legislation. Reference is therefore made to Article 2(2) of the Income Tax Consolidation Act, approved by Presidential Decree No. 917 of 22 December 1986 (hereinafter referred to as TUIR). On the basis of Article 2(2), considering the elements provided by the taxpayer, the latter is classified as physically resident in Italy.
Italy-Spain Convention against double taxation
After having ascertained the applicable domestic legislation, the analysis shifts to the international level. Regarding the residence aspect, reference should be made to the Convention for the Avoidance of Double Taxation between Italy and Spain. Article 4.1 of the Convention recalls, with respect to the concept of residence, the notion contained in the domestic laws of the contracting States. The Agency recalls that if the person is a resident of both contracting States, the subsequent paragraph 2 of Article 4 establishes the so-called tie breaker rules to resolve conflicts concerning taxing powers in accordance with the OECD Model Convention.
As mentioned above, the Agency cannot assess the taxpayer’s residence either in relation to the application of the Treaty between Italy and Spain or in application of the national tax rules of other States. Therefore, it proceeds uncritically assuming the tax residence of the subject in Italy.
Therefore, it proceeds uncritically assuming the tax residence of the subject in Italy.
Taxability of income category
Turning to the taxability of the specific category of income, the Agency explains that in the event that the person were to be considered non-resident for tax purposes in Spain, there would be no link between that country and the source of income.
Italy-Netherlands double taxation treaty
On the other hand, Article 13 of the Convention for the Avoidance of Double Taxation between Italy and the Netherlands provides in that the profits derived by a resident of one of the States from the alienation derived by a resident of one of the States from the alienation of real estate located in the other State are taxable in both countries. Thus, according to the treaty provision, the income from the transfer of the real estate is taxable in both Italy and the Netherlands.
With respect to the taxability of the specific category of income in Italy, the Agency recalls that tax residents are subject to taxation in our country, pursuant to Article 3(1) of the TUIR, on their total income, consisting of all income held for the entire tax period.
Therefore, the detail specified by the taxpayer, who clarifies that the property in the Netherlands was sold before moving to Italy, is not relevant. Indeed, Italian tax law does not contemplate the splitting of the tax year, but rather provides for the taxability of income received on a global basis over the entire tax year for resident persons.
Article 67(1)(b) of TUIR
Article 67(1)(b) of the TUIR provides that capital gains realised through the transfer for consideration of real estate acquired or constructed not later than five years earlier are subject to taxation. Here, the Agency clarifies that the regulatory provision is not limited only to capital gains generated by the sale of real estate located in Italy, but also includes capital gains deriving from the sale of real estate located abroad. Therefore, it may be concluded that the income in question should not be subject to taxation in Italy.