In this article, we will discuss an important modification that has been introduced starting from 2024: the new formulation of Article 2 of the Italian Income Tax Code, which redefines the new concept of Tax Residence in Italy. This concept is extremely important for individuals who wish to come and live in Italy, as the obligation to pay taxes arises from the moment they acquire Tax Residence in Italy.
Let’s see what the new rule establishes and what has changed compared to the past.
Before starting the analysis, we would like to point out that this article is closely connected to the one concerning the introduction of sanctions for Italian citizens residing abroad who are not registered in the AIRE (Registry of Italians Residing Abroad), to which we refer in the following link:
In present article we will use some technical words that we will explain in this small glossary. We will keep using the Italian words, as it’s important to use them precisely:
A person acquires residenza anagrafica as soon as he/she registers in the list of the Comune where he/she lives in Italy. The list is called ANAGRAFE COMUNALE.
a) Previous interpretation: Domicilio is the place where the person has his/her business and economic interests.
b) New interpretation from 2024: Domicilio is the place where the person has his/her personal and family relationships.
Is the place where the person lives for the majority of time.
CENTRO DEGLI AFFETTI:
is the place where the person has his/her personal and family relationships.
CENTRO DEGLI INTERESSI:
is the place where the person has its business and economic interests.
THE IMPORTANCE OF THE CONCEPT OF TAX RESIDENCE
We have already addressed the concept of Tax Residence in Italy in numerous contributions and posts, highlighting its differences from the "Residenza anagrafica" concept.
Here are some useful links to understand the basics of the concept of “Residenza fiscale” in Italy:
Coordinazione tra norme interne e norme convenzionali tra Italia e Stati Uniti in tema di residenza fiscale
For a comprehensive discussion of the complex dynamics related to “Residenza fiscale”, we refer you to our webinar in English on the subject:
VIDEO - Moving to Italy: Fiscal effects of becoming a Tax Resident of Italy
Article 2 of the Italian Income Tax Code (TUIR) has a fundamental importance, as it defines the Italian domestic rule by which a person is qualified as a tax resident in Italy.
Remember that “Residenza fiscale” in Italy determines that the individual must pay taxes in Italy on income generated worldwide (Worldwide Taxation Principle), allowing them to offset any taxes paid in other countries where the income was generated in case of existence of a Convention against double taxation between the two Countries.
The domestic rule of Article 2 must then be coordinated with the domestic rule of the other country. It is very common for the domestic rules of the two Countries, such as Italy and the United States, for example, to both consider the same person as a tax resident, resulting in the individual having to pay taxes in both states and experiencing double taxation.
To overcome this, when there is a conflict between the domestic regulations of two Countries, the Convention against Double Taxation signed between the two Countries comes into play. Article 4 of the Convention defines how to resolve residency conflicts arising from the different formulations of the domestic rules of the two Countries.
The Convention is a law of higher rank than the domestic rules of the two Countries and therefore prevails over them, definitively establishing which of the two Countries has the right to qualify the subject as a tax resident.
THE NEW FORMULATION OF ARTICLE 2 OF THE ITALIAN TAX INCOME CODE.
The new formulation of Article 2 of the TUIR, is the following:
Article 2 – new formulation, in Italian:
"Ai fini delle imposte sui redditi si considerano residenti le persone che per la maggior parte del periodo d'imposta, considerando anche le frazioni di giorno, hanno la residenza ai sensi del codice civile o il domicilio nel territorio dello Stato ovvero sono ivi presenti.
Ai fini dell'applicazione della presente disposizione, per domicilio si intende il luogo in cui si sviluppano, in via principale, le relazioni personali e familiari della persona.
Salvo prova contraria, si presumono altresì residenti le persone iscritte per la maggior parte del periodo di imposta nelle anagrafi della popolazione residente".
Article 2 - new formulation, in English:
For the purposes of income taxes, individuals are considered residents if, for the majority of the tax period, including fractions of a day, they have their residence as defined from the Italian Civil Code or their “Domicilio” in the territory of the State or are physically present there.
For the purposes of applying this provision, “Domicilio” is understood as the place where personal and family relationships of the person mainly develop.
Unless proven otherwise, individuals registered for the majority of the tax period in the “Anagrafe Comunale” of the resident population are also presumed to be tax residents in Italy.
Before delving into the analysis of this new formulation, let's first see what the previous legislation provided:
Article 2 – old version, in Italian:
"Ai fini delle imposte sui redditi si considerano residenti le persone che per la maggior parte del periodo di imposta sono iscritte nelle anagrafi della popolazione residente o hanno nel territorio dello Stato il domicilio o la residenza ai sensi del codice civile".
Article 2 – old version, in English:
For the purposes of income taxes, individuals are considered tax residents if, for the majority of the tax period, they are registered in the Anagrafe Comunale of the resident population or have their “Domicilio” or “Residenza” in the territory of the State as per the Italian Civil Code.
THE THREE ALTERNATIVE CRITERIA TO QUALIFY AS A TAX RESIDENT IN ITALY.
The new formulation of Article 2 of the TUIR establishes three different alternative criteria (and a relative presumption) to qualify as a tax resident in Italy:
1st Criteria: “RESIDENZA” ACCORDING TO THE CIVIL CODE.
This criterion has been retained since it was also present in the previous formulation.
2nd Criteria: DOMICILIO.
This criterion has been maintained, but it is important to note that there is no longer a reference to the Civil Code.
3rd Criteria: PHYSICAL PRESENCE.
This criterion is new, as it was not present in the previous formulation.
Relative Presumption: REGISTRATION INSIDE THE “ANAGRAFE COMUNALE”.
In the previous formulation, registration in the “Anagrafe Comunale” was a criterion for determining Tax residence; now, it has been “downgraded” to presumption, that can be proven wrong by the taxpayer.
This downgrading is extremely important because until 2023, the person who remained registered inside the “Anagrafe Comunale” had no way to give that proof to the Agenzia delle Entrate and the only way to overcome those criteria was to asking the application of the Convention.
Before analyzing the three criteria and the presumption, let's highlight two important elements:
- All three criteria must be met for the majority of the tax period.
- An important specification is introduced that fractions of a day must be included in the calculation of days.
Mr. Joe Smith moves with his wife and children from the United States to Italy and books a New York - Milan flight for July 1, 2023. They arrive at the airport in Italy on July 2 at 10:45 AM and stays in Italy until the end of the year.
How many days did Mr. Joe Smith spend in Italy in 2023?
If we do NOT consider the fraction of the day on July 2, the count would be as follows:
29 days in July (31-2) + 31 in August + 30 in September + 31 in October + 30 in November + 31 in December = 182 days out of 365 (2023 is not a leap year).
Therefore, NOT counting the fraction of the day on July 2, 2023, Joe Smith would not be physically present in Italy for the majority of the tax period (remember that the tax period in Italy always coincides with the calendar year and therefore starts on January 1 and ends on December 31).
On the contrary, the new formulation definitively clarifies that fractions of a day related to departure or arrival (typically by plane, ship, or train, as evidenced by the travel tickets) are to be considered as "days spent in Italy."
Therefore, considering the FRACTION OF THE DAY in the count, we have the following:
30 days in July (31-1) + 31 in August + 30 in September + 31 in October + 30 in November + 31 in December = 183 days out of 365 (2023 is not a leap year).
Therefore, Mr. Joe Smith is physically present in Italy for the majority of the tax period.
THE FIRST CRITERIA: THE RESIDENCE AS “DIMORA ABITUALE”
Firstly, let's examine Article 43 of the Civil Code, which defines “Residenza” and “Domicilio”:
Art. 43 — Domicilio and Residenza - Italian Civil Code.
“Domicilio” of a person is where they have established the main location of their business affairs and economic interests.
“Residenza” is where a person has the “Dimora abituale” (where he/she usually lives).
As mentioned, this criterion remains unchanged from the previous formulation: “Dimora abituale”, as said in the glossary, is understood as "the place where a person lives for the majority of the time."
This criterion generally refers to the place where one spends most of their life and usually does not give rise to particular interpretative issues. The individual can live in Italy in a hotel, can be hosted by friends, can rent or own a property.
THE SECOND CRITERIA: “DOMICILIO” AS “CENTRO DEGLI AFFETTI”.
As mentioned, this criterion was also present in the previous formulation, but the old norm referred to the civil code, which stated that Domicilio is the place where a person has established the main location of their affairs and interests. Therefore, the previous formulation emphasized the concept of Domicilio as the center of interests.
Now, however, the new law no longer refers to the Civil Code but introduces a new concept of Domicilio for tax purposes:
"For the purposes of applying this provision, Domicilio is understood as the place where personal and family relationships of the person mainly develop."
Therefore, the new definition of Domicilio coincides with the “Centro degli Affetti”, considered as the place where the person has his/her personal and family relationships.
This is an important modification, because from 2024 the importance of the family in the definition of tax residence will definitely increase.
This modification is important also because the “Centro degli Interessi” is removed from the elements triggering the Tax Residence.
This change seems somewhat perplexing for two reasons:
1) The “Centro degli Interessi” seems to be more easily controllable and identifiable by the tax authorities than “Centro degli Affetti”.
2) The “Centro degli Interessi” seems to be a good indicator of where a person lives his/her life.
THE THIRD CRITERIA: THE PHYSICAL PRESENCE.
This third criterion is a novelty as it was not present in the previous norm. However, we are not dealing with anything significantly different from before, as in the past, the calculation of days of mere physical presence in Italy was always considered an essential element of the analysis of Residenza fiscale.
As mentioned earlier, the most interesting novelty concerns the fact that now fractions of a day are also counted in the calculation, as highlighted in the example above.
It is also essential for those intending to transfer their Residenza fiscale to Italy to avoid flight and trip to Italy and from Italy that are "close" to the limit of 183 days per calendar year. Relying on such a strategy can be risky, as a simple health or travel problem could completely overturn the outcome in terms of Tax Residence.
There are four final considerations that can be drawn from this legislative innovation:
a) We must always remember that Article 2 of the TUIR represents the Italian domestic law on Tax Residence, and therefore, it does not affect the Convention in any way. The Convention remains in force and takes precedence over Article 2.
b) We can say that the downgrading of the “Residenza Anagrafica” to a presumption is undoubtedly a positive development.
c) The novelty of the criterion of physical presence is only a formal news, as the concept was already present in the analysis before 2024 but the news of the fractions of day is relevant.
d) The most significant innovation concerns this new concept of Domicilio entirely based on the familiar and personal relationship, which, of course, needs to be particularly considered in all those situations where a specific individual resides in one country and has family and children in another country.
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