INTERNATIONAL TAX REFORM IN ITALY: IMPACT ON TAX RESIDENCE FOR INDIVIDUALS AND CORPORATIONS AND TAXATION OF EXPATRIATES AND IMPATRIATES
The new Draft Law of the Budget for the year 2024 and the program document have included significant changes that may also affect expatriates in several respects.
The Council of Ministers in Italy approved, in preliminary consideration, a legislative decree implementing the tax reform in international taxation.
INTERNATIONAL TAX REFORM IN ITALY: IMPACT ON TAX RESIDENCE FOR INDIVIDUALS AND COMPANIES AND TAXATION OF EXPATRIATES AND IMPATRIATES
Changes to the impatriate regime are implemented, and in particular, as stated in the Council of Ministers Press Release:
“Employees or self-employed persons who transfer their tax residence to Italy will be granted, as of 2024, a new facilitated regime for a maximum of five years. Workers meeting the requirements of high qualification or specialization who are not found to have already been resident in our country in the three tax periods prior to obtaining residency will be eligible for a 50 percent reduction in taxation, within a limit of taxable income of 600,000 euros. Impatriate workers will have to return the benefits, paying interest, if they do not maintain tax residency in the following five years. The provisions for researchers, university professors and sports workers already provided for are unchanged.”
We will analyze the details in a later article but certainly, the new regime is pejorative to the previous one, reducing the tax reduction from 70% (or 90%) to 50%, not providing for an extension period beyond 5 years and requiring a longer period of foreign residency before re-entry. The rule speaks of relief reserved for Italian Citizens (NOT foreigners as before) and with specific and high qualifications, apparently excluding even sportsmen and women.
Let us now focus our attention on the aspect of FISCAL RESIDENCE abroad of both individuals and corporations.
The Council of Ministers in its communiqué states:
“In particular, for individuals, the civilistic criterion of domicile is replaced by a criterion of a substantive nature, in which domicile is the place where the taxpayer’s personal and family relations are primarily developed, and the criterion of physical presence in the territory of the State is added. The civil law criterion of residence remains in place. These criteria must be verified for most of the tax period, taking into account also non-consecutive periods. Fractions of days are also taken into account for the purpose of computing days.”
Let’s look at what the tax residency regulations provided.
Currently, to be considered resident in Italy, Italian regulations are very strict on the matter and require specific elements.
According to Article 43 of the Italian Civil Code :
– domicile is the place where a person has established the principal seat of his business and interests
– residence is the place where he has his habitual abode
– abode is the place where one is occasionally found
When you habitually and voluntarily live in a place you must take up residence anagrafica that is, register with the Registry Office of the Italian municipality where you have your habitual abode.
The concept of registered residence is different from tax residence, although the two residences often end up coinciding.
Tax residency is the necessary premise for assessing where a person is liable to pay taxes.
Who is tax resident in Italy and liable to pay taxes in Italy?
Art. 2 of the TUIR-the Consolidated Income Tax Act in Italy-provides that for income tax purposes, persons who for the greater 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 in accordance with the Civil Code are considered resident in Italy.
They fall into the category of tax residents in Italy:
- Who is registered as a resident for more than 183 days in the fiscal year
- Who has domicile understood as the principal place of business or interest
- Who has residence understood as habitual abode.
Any one of the 3 conditions is sufficient to be considered tax resident in Italy and liable to pay income taxes.
Who is considered tax resident abroad from Italy?
Following the above for Italy, the following is a tax resident abroad:
🔺 – who is registered with AIRE for more than 183 days
🔺 – does not have the principal seat of his business or interests in Italy
🔺 – does not have a habitual residence in Italy.
Moreover, not only the formal element of residence and AIRE registration is sufficient to be considered resident abroad, but the substantive element of the center of interests is also relevant.
With the new legislation from 2024:
“2. For the purposes of income tax, persons who for the greater part of the taxable period, also considering fractions of a day, have their domicile or residence in the territory of the State or are present there, shall be considered residents. For the purpose of the application of this provision, domicile means the place where the person’s personal and family relations are primarily developed. Unless proven otherwise, persons registered for most of the tax period in the resident population registries are also presumed to be resident.”
Let’s see what elements are changed under the new legislation:
- the concept of DOMICILE changes from the CIVILISTIC concept and takes on a SUBSTANTIAL character , moreover, already adopted by much case law on the subject, where emphasis is given primarily to the personal and family relationships of the taxpayer. The wealth and economic aspect that used to be considered in the concept of “principal place of business and interests” is not mentioned in the new text but it seems strange that in the assessment of a person’s tax residence all aspects as a whole are not taken into account starting from personal and family (now included ) to economic and wealth (now excluded) . I am more inclined to believe that all elements are taken into account, as has already been done in the jurisprudential pronouncements formed over time.
- presence in the territory for most of the tax period is also considered for fractions of a day . Therefore, the counting of days of physical presence in Italy takes on importance, which has become seemingly more stringent since fractions of a day are considered as physical presence in Italy!
- in the new legislation has been added “unless proven otherwise “persons registered for most of the tax period in the registries of the resident population are presumed to be residents.”
- This relative presumption would allow the person living abroad to provide concrete and certain evidence of his or her actual stable residence in a country other than Italy, overcoming the previous concept of absolute presumption for those who remained registered at the registry office of an Italian municipality. We will see the interpretations and possibilities of giving proof of this, however, in practical cases.
The Council of Ministers in its statement says:
Regarding the residency of legal persons, references to the “main object” criterion, which has given rise to disputes and risks of double taxation, and the criterion of the seat of administration are eliminated. The residence of companies and entities is thus brought back to three criteria that are alternative to each other and thus capable of founding, even individually, the personal connection to the taxation of legal persons:
the “registered office” criterion, with a formal character, which represents an element of necessary continuity with the regulations in force prior to the reform;
the criterion of “effective place of management”
and the criterion of “principal ordinary management,” which have innovative aspects and are substantive in nature, concerning respectively the place where strategic decisions are made and the management activities of the company or entity are actually carried out.
Also in this case the new formulation of the tax residence of companies related to the presence, for most of the tax period, of the registered office , the seat of effective management instead of the seat of administration or ordinary management in the main instead of the corporate purpose, lay the foundation on the aspects of substantive nature , also already highlighted in the rulings on previous cases .
It will be important, in addition to the formal aspect of the registered office, to have regard to where the management of the company is done, where the business is actually conducted and where important decisions are made.
We will see how the proposed tax reform will evolve and whether there will be any changes or clarifications in this regard.
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