1. New regulations regarding Italian tax residence of individuals applicable from January 1st, 2024
Legislative Decree no. 209/2023 has modified Article 2 of Presidential Decree no. 917/1986 (“Italian Tax Code”) concerning the tax residence of individuals.
The new regulations come into force on January 1st, 2024.
Under the new provisions, individuals are considered Italian tax residents if, for the majority of the tax period (i.e., more than 183 days), including any fractions of a day, they have in the Italian territory alternatively:
a) their residence, according to the Italia Civil Code, or
b) their domicile, or
c) they are physically present therein.
d) Unless proven otherwise, individuals are also presumed to be residents if they are registered in the resident population register (“anagrafe”) for the majority of the tax period.
For the application of this provision,
– residence is defined by Article 43, paragraph 2 of the Italian Civil Code as the place where an individuals have their habitual abode, signifying where they live on a regular basis with the intention of staying there. This definition focuses on the individuals’ actual living arrangements and their intent to make that place their permanent home;
– domicile is defined as the place where the individuals’ personal and family relations are primarily conducted (therefore personal and family ties take precedence over economic/business interests).
It is crucial to highlight that, inter alia, according to the “new version” of Article 2, being registered in the resident population register (“anagrafe”) no longer serves as an irrebuttable presumption of Italian tax residence[1].
However, absent, at date, any Circular Letter or different document issued by Italian Tax Authorities, it is not possible at the moment to rule out different scenarios. The new rule, indeed, could lead to unexpected outcomes for those who choose the regime provided for by Article 24-bis of the Italian Tax Code (“100K€ Lump-sum Tax Regime”).
An update on these issues will be made available when Italian Tax Authorities will issue an official document on this topic.
2. New regulations regarding Italian tax residence of companies applicable from January 1st, 2024
Legislative Decree no. 209/2023 has modified also Article 73 of the Italian Tax Code concerning the tax residence of companies and entities.
The new regulations come into force on January 1st, 2024.
According to the new[2] Article 73, a legal entity is resident in Italy for tax purposes if, for the majority of the tax period (i.e. more than 183 days), they have in the Italian territory alternatively:
a) the legal seat (the same formal criteria provided by the former Article 73);
b) the “main ordinary management”, which is the location where the “day-by-day management activities concerning the whole legal entity are taken in a stable and co-ordinated manner”; and
c) the “place of effective management”, which is defined as the place where the “main and most strategic decisions concerning the whole legal entity are taken in a stable and coordinated manner”[3].
The phrase “effective management” used in the context of “stable and coordinated manner” ought to preclude the scenario where the typical prerogatives exercised by an Italian controlling shareholder over its non-Italian subsidiaries are deemed adequate to associate the subsidiaries’ “place of effective management” with Italy[4].
Hence, under the new Article 73, positioning the “place of effective management” within the parent entity’s country is considered legitimate only if the subsidiary is, in reality, managed by the parent entity, while the directors of the subsidiary merely ratify decisions made elsewhere and lack any real management authority.
The revised Article 73 has not changed the presumption concerning the Italian tax residence of non-resident companies that exert control over a resident company and are, in turn, controlled, directly or indirectly, by a resident individual or entity. In such cases, the existence of significant control is taken as an indication of the foreign legal entity’s tax residence in Italy, unless the taxpayer presents evidence otherwise. Considering the widespread of remote and smart working practices, it will be critical to carefully assess the location of the decision-makers when evaluating the tax residency of entities (or the existence of a permanent establishment in Italy of foreign entities[5]). This is especially relevant considering domestic tax practices that tend to emphasize the significance of physical presence in the application of the linking rules.
Indeed, Section 24.1 of the Commentary to Article 4 suggests that relevant factors to assess tax residence could be “where the meetings of the person’s board of directors or equivalent body are usually held, where the chief executive officer and other senior executives usually carry on their activities, where the senior day-to-day management of the person is carried on, where the person’s headquarters are located”.
However, it should be noted that Italian Circular Letter No. 17/2017 appears to provide a kind of “safe harbor” for foreign entities managed from Italy by directors who benefit from the Italian €100K Lump-sum Tax Regime provided for by Article 24-bis of the Italian Tax Code.
[1] Regarding the previous version of the mentioned Article 2, the Court of Cassation has consistently held that, in matters of direct taxation, individuals listed in the population registers are deemed residents for tax purposes ex lege and the registration excludes any further verification.
[2] According to the former linking rules, a legal entity was resident in Italy for tax purposes if, for most of the taxable period (more than 183 days), one of the following conditions was met:
– Its registered office (or legal seat) was in Italy;
– Its “place of management” was in Italy; or
– The main object of its business was in Italy.
With reference to the “place of management”, in the absence of a legal definition, a typical issue was related to the type and level of decisions needed to locate it in Italy. One of the crucial points was whether the management and coordination activities exercised by the parent company in respect of its subsidiaries could locate the “place of management” in the Country where the parent company was tax resident.
Regarding the main object of the business location (i.e., the place where the legal entity carries out the essential activity to realise its business purpose), a common controversial topic was whether this place should coincide with the location of the main company’s assets, especially in the case of:
– real estate,
– participations in Italian companies, or
– intangible assets licensed to Italian companies.
Such issues were not solved by the international tax treaties entered into by Italy, which entrust the resolution of conflicts regarding residence to the concept of “place of effective management”. Indeed, according to the observations of Italy on the commentary to Article 4 of the OECD Model Tax Convention on Income and on Capital (versions from 2000 to 2017), the assessment of the place of effective management also requires an evaluation of the “place where the main and substantial activity of the entity is carried on” and not only the place where the key and strategic decisions are taken.
Actually, the only outcome of this latter law amendment should be to benefit taxpayers, allowing individuals who have effectively moved abroad but failed to deregister from the register of the Italian resident population (“anagrafe“) the opportunity to demonstrate their actual tax residence abroad. Consequently, this evidence enables them to avoid being classified as tax residents of Italy ex lege.
[3] The introduction of the ‘place of effective management’ criteria – which reflects some conventions entered into by Italy on the basis of the OECD models prior to the 2017 version – should help to clarify the type and level of decisions that may lead to the tax residence of a legal entity being located in Italy.
[4] The conclusion is reinforced by the explanatory report accompanying the Legislative Decree no. 209/2023, as drafted by the Italian government, which clarifies that “decisions taken by the shareholders, other than those with management content, are not relevant, nor are supervisory activities and any monitoring of the management by the shareholders”.
[5] According to Article 162 of the Italian Tax Code (“Article 162”) the term “permanent establishment” (branch) means a fixed place of business through which a non-resident company carries on all or part of its activity in the territory of the Italian State.
Article 162 states a positive list of what is considered a permanent establishment (branch):
a) a place of management;
b) a branch;
c) an office;
d) a workshop;
e) a laboratory;
f) a mine, an oil or gas field, a quarry or other place of extraction of natural resources;
f-bis) a significant and continuous economic presence in the Italian territory built in such a way as not to result in its physical presence within that territory.
In addition, according to Article 162, if a person/company acts in the Italian territory on behalf of a non-resident company and habitually concludes contracts or acts for the purpose of concluding contracts without substantial modifications by the foreign company and those contracts are in the name of the foreign company, or relating to the transfer of ownership, or the granting of the right of use, of goods of that foreign company or that the foreign company has the right to use, or relating to the provision of services by such a foreign company, such an foreign company shall be deemed to have a permanent establishment (branch) within the Italian territory.
