Italy's Council of Ministers has given preliminary approval to significant changes in the definitions of tax residency for both individuals and corporations.
Article 1 of the draft decree replaces the civil-law criterion of domicile for individuals with a tax-specific definition. It will be defined as the place where the individual's personal and family relations are 'primarily developed'.
Under Law No. 111/2023, individuals will be considered tax-resident if they are physically present in Italy for the greater part of the tax period, including fractions of a day, or if Italy is their habitual abode or place of primary personal and family relations.
The previous criterion of considering individuals tax-resident if they are registered as a member of the resident population 'for the greater part of the tax period' also remains relevant, but only as a rebuttable presumption until disproved.
The changes are intended to be adjustments to international practice and double tax conventions and are aimed at providing greater legal certainty. However, according to law firm McDermott Will & Emery, the factor represented by mere physical presence in Italy does not seem to be in line with the principles adopted in the OECD and international practice. The firm comments that it ‘conflicts with the stated purpose of standardizing the residency criteria dictated by national regulations and international provisions’.
In many cases, the application of the physical presence criterion could lead to a residence conflict that has to be resolved by tie-breaker rules. In most tax treaties, the tie-breaker criteria are permanent home, centre of vital interests, habitual abode, nationality and mutual agreement between the treaty states. The primacy of the presence rule in the Italian proposals appears not to align with this, says McDermott Will & Emery. The same applies to the new definition of domicile, it says, as the new Italian definition refers only to personal and family relations while most international treaties refer to economic as well as personal affairs.
Regarding corporate tax residency, the new decree repeals two of the existing criteria, namely, the 'seat of administration' and the 'main purpose of business'. It replaces them with the 'place of effective management' and the 'place of routine management', along with the place of the company's registered office. If any of these places are considered to be in Italy 'for the greater part of the tax period' then the company will be considered Italian-tax-resident.
The draft decrees have been referred to parliament and are expected to be fully approved and published by the end of 2023. The provisions will apply as of 1 January 2024.
News Source：【McDermott Will & Emery 2023/11/6】