The Legislative Decree no. 209 of 27 December 2023 has amended the criteria to establish the tax residence in Italy both for individuals and for legal entities effective January 1st, 2024.
The definition of tax residence for individuals is of the essence as when an individual is deemed to be resident in Italy their aggregated income will be subject to the Italian income tax on a “worldwide principle” basis, or they will be granted, if the conditions are met, the possibility to opt for the alternative new residents regimes.
The new definition valid since January 1st 2024 (as per article 2 of the Italian Tuir) provides that individuals shall be considered as tax resident in Italy if, for the greater part of the fiscal year, including fractions of a day, they alternatively:
- have their domicile in Italy, domicile being defined as the place where the individuals’ personal and family relations are primarily located;
- have their residence in Italy, residence being defined as the habitual abode;
- are physically present in Italy.
The new definition of tax residence for individuals
The new rule goes further into setting a rebuttable presumption of residence when an individual has been registered with the Office of Resident individuals for the greater part of the fiscal year.
The new definition of tax residence for individuals according to the criteria set out above bears some significant differences to the previous reading of the law that can be summarised as follows.
The concept of domicile
Firstly the concept of domicile now relates to the place where the personal, social and family ties can be found and no longer to the place where the individual has established their seat of business and interest, as is the definition of domicile in the Italian Civil Code.
The new definition of domicile as the place where a person develops their personal and family ties will therefore only be relevant for tax matters, as the definition of domicile set forth in the Italian Civil Code continues to refer to the business and interests ties: the change of focus is likely to create uncertainties as the same concept of family and personal or social interests is less objective and more fluid than the business interests.
In many pratical cases it will be difficult to determine a person’s tax residence according to the new definition of domicile: someone with an ex spouse and children in one country and a new spouse in another country; someone with only one brother in a country but having all closest friends and connections in another country; and many others examples that come to mind.
It is also interesting to note that the most recent case law called to decide on residence conflicts has been stating that domicile relates to the center of a person’s interest over family and personal ties so the new definition of tax domicile has also failed to take the hint of the recent jurisprudence on the matter.
The different criteria from the residence intended as habitual abode
Secondly in the new tax residence definition the mere physical presence of an individual in the Italian territory for the greater part of the fiscal year shall cause the individual to be considered Italian resident for tax purposes. This is a different criteria from the residence intended as habitual abode: the habitual abode is in fact characterized by two elements, one objective (length of stay in the Italian territory) and the other subjective (the willingness to settle in Italy), while the physical presence has now a specific role as indicator of the tax residence independently from any willingness of the individual.
So if for example someone remains in the Italian territory for more than six months for study or work or tourism reasons they shall be considered as tax residents in Italy even without any intention to settle in Italy on their side.
The registration with the Office of Resident individuals
In the third place the registration with the Office of Resident individuals has become a factor that triggers a rebuttable presumption of residence and not an autonomous criteria which by itself implies the tax residence. This is a positive modification as it is now allowed to an individual who has moved their residence and domicile outside of Italy to prove that they are no longer tax residents thus surpassing the formal element of the registration with the Office of Resident individuals being kept.
Physical presence
Finally in the new reading of the tax residence definition, express relevance has been given to the fraction of days in order to assess whether or not an individual has been present in Italy for the greater part of the fiscal year. All residence criteria above (domicile, residence, physical presence and registration with the Office of Resident Individuals) must be in fact met for the greater part of any relevant fiscal year.
Under Italian law, the fiscal year for individuals corresponds to the calendar year, thus an individual is considered to be tax resident in Italy if they meet one of the residence criteria above for at least 183 days in a given calendar year (184 days in case of a leap year), counting also fraction of days.
The new definition of tax residence on the other side failed to introduce within the Italian tax system a split-year provision: the principle remains that even if a person has been resident in Italy for less than the full year, provided it is for the greater part of the fiscal year, they will be taxed in Italy on the income produced in the whole year.
So far example if a person moves to Italy and is physically present in Italy since the beginning of the month of May of a certain year, they will be considered tax residents in Italy as they have been in Italy for the greater part of the fiscal year (from May to December) and they will be taxed in Italy on the income produced from January to December of said year (Italy grants the tax credit in such cases for the avoidance of double taxation).
Accordingly, the split year rule may only apply where a specific tax treaty provides for it (for example, the Italy-Switzerland or Italy – Germany tax treaties).
