October 16th, 2023, the Italian Council of Ministers approved, in a preliminary way, a legislative decree implementing the tax reform on international taxation. Two provisions of the decree entail the review of the notion of tax residence applicable to individuals, companies and other legal entities. The new definition shall finally align the domestic tax rules with most recent international practices and OECD Model Tax Convention.
Current legal framework.
The current provisions – Articles 2 and 73 of the Income Tax Code governing, respectively, the tax residence for individuals and companies and other legal entities – provide for the application of the “worldwide principle” for resident persons and the “source taxation” for non-residents.
The linking criteria used to trigger the tax residence of individuals are the following:
– the enrolment in the Registry Office of Italian resident population (formal requirement);
– the set of civil domicile in Italy (i.e., the taxpayer’s principal place of business and interests; material requirement);
– the set of civil residence in Italy (i.e., the place where the individual has his habitual home; material requirement).
All of the above three alternative conditions shall be verified for the majority of the tax period (i.e. 183 days in the calendar year).
If one of the above conditions is met for most of the tax period, the individual qualifies as tax resident for Italian tax purposes.
On the other way, the linking criteria used to trigger the tax residence of corporations/legal entities are the following:
– the registered office (intended in a formal meaning as the place indicated by the legal entity in its bylaws; formal requirement);
– the administrative seat (i.e., the place where the management activity is actually carried out and/or the company’s administration);
– the location of the main object of the activity (i.e. the place where the legal entity carries out the essential activity to realise its primary purposes or where its economic activity takes place).
Also in this case, all of the above three alternative conditions shall be verified for the majority of the tax period (i.e. 183 days in the financial period).
Special provisions to attract the tax residence of individuals transferring their tax residence to Italy from low tax jurisdictions (including e.g., Liechtenstein, Monaco; please note that Switzerland will be repealed from the list of non-cooperative countries starting from 2024 and thus shall be considered for fiscal year 2023) and trusts, foundations and similar vehicles (e.g., trusts having settlors/beneficiaries non-tax resident in Italy or having properties abroad).
The new legislation according to the envisaged (and desired) reform.
The tax reform aligns the domestic tax rules with updated international practices and most recent OECD approach with double tax treaties.
With respect to the notion of tax residence of individuals, the tax reform amends the definition of domicile making reference to a more substantial criterion, whereby the “domicile” is the place where the taxpayer’s personal and family relationships are primarily developed. The physical (and ongoing) presence in Italy will be a key factor to trigger the Italian tax residence.
The formal criteria connected with the enrolment in the Registry Office and the civil residence will also be included in the new provisions, even if the taxpayer shall now be allowed to provide proof to the contrary.
No modifications also apply to the relevant timeframe (183 days), that now considers also fraction of days.
As regards the notion of tax residence of corporations/legal entities, the tax reform eliminates the reference to both main object and administrative seat criteria that have given rise to several audits and disputes in the last decades. Two new criteria shall be introduced to be verified for the majority of the tax period (183 days):
– the “place of effective management” criterion (material requirement), mirrored by the OECD Model Tax Convention, and to be interpreted accordingly;
– the “principal ordinary management” criterion (material requirement) in case there is no management but anyway there is a “strong” establishment of the legal entity in Italy.
No modifications apply to the application and interpretation of the registered office’s formal requirement.
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