Presumption of residence and tax treatment: what implications?

18.1.2023

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Italian citizens who have been removed from the resident population registers and moved to a privileged tax country are also considered residents unless proven otherwise.

It is up to the taxpayer to provide contrary evidence to overcome the presumption of residence

Conflict of residence is resolved by splitting the tax period following the provisions of the OECD Model Convention against double taxation

The presumption of residence

As is well known, according to paragraph 2-bis of Article 2 of the Consolidated Income Tax Act, Italian citizens who have been removed from the registers of the resident population and transferred to states or territories with a privileged tax regime are also considered residents unless proven otherwise. The presumption of residency operates to prevent that by merely transferring residence to jurisdictions considered "tax havens," individuals evade taxation on income produced. Under Article 2 Tuir, in fact:

Individuals, both resident and nonresident in the territory of the State, are taxable persons
For income tax, persons who, for the more significant part of the taxable period, are registered in the registers of the resident population or have in the territory of the State their domicile or residence under the Civil Code are considered residents.
Italian citizens who have been erased from the registries of the resident population and transferred to states or territories other than those identified by Ministerial Decree 4.5.1999, published in G.U. 10.5.1999 No. 107, are also considered residents unless proven otherwise.

It can be inferred, therefore, that the physical permanence of an individual in a particular territory affects the tax treatment of income received by that individual; income which, in some cases, may continue to be subject to taxation in the country of origin, despite the transfer abroad.

Evidence to the contrary

In these terms, starting from this normative assumption, the Internal Revenue Agency, in its answer to interpellate No. 54 of 2023, highlighted that even concerning Italian citizens formally registered with Aire and transferred to Switzerland, there continues to be a (relative) presumption of tax residence in Italy. Switzerland is on the list of states and territories with a privileged tax regime. It will be up to the taxpayer to prove, by providing proof to the contrary, that they are not residents of Italy and that, consequently, their income cannot be taxed there under Article 3 of the Tuir.

What happens in cases of "conflict" of residence?

As highlighted by the Revenue Agency in the interpellation as mentioned earlier in case of conflict of residence limited to the year in which the transfer took place, to avoid double taxation, it will be necessary to have regard to Article 4 of the OECD Model of the Convention against double taxation, which solves the problem by splitting the tax period. Specifically, in the case of a transfer from one State to another during the course of a year, Article 4(4) of the Convention stipulates that an individual who permanently transfers his domicile from one Contracting State to the other ceases to be subject in the first Contracting State to the taxes for which the residence is decisive as soon as the day of the transfer of home has passed. Subjection to the taxes for which the residence is decisive begins in the other State on the same date.

The case under appeal

In the present case, since the final transfer of the taxpayer's domicile took place in 2022, the provision of Article 4 of the OECD Model will apply. Therefore, the income received by him from the performance of his employment in Switzerland during the period January 1 to May 31, 2022, will have to be subject to exclusive taxation in the Swiss Confederation and will not incur any taxation in Italy or have to be included in the tax return for the tax year 2022. Otherwise, the income received by the Applicant in the period June 1 (the day following the day of transfer of domicile from Switzerland to Italy) - December 31, 2022, in respect of an employment activity carried out in Italy, will have to be subject to exclusive taxation in Italy, with the consequent declaration obligations provided for by the current domestic regulations.