The reform to the fiscal residence framework introduced by the Legislative Decree No. 209/2023 is a turning point in the Italian tax landscape, aligning national legislation with international principles set by the OECD and the EU. The new rules significantly modify the criteria for determining fiscal residence for both individuals and legal entities, reflecting a move towards a more equitable and transparent tax system improving tax administration.
The Italian Revenue Agency, through Circular No. 20/E of 4 November 2024, clarified the of changes introduced by the Decree and their effects. These changes are thought to have an impact on the effective establishment of fiscal residence in Italy which is based on the worldwide taxation principle. Under Article 3 of the Consolidated Income Tax Act (TUIR), Italian tax residents must declare and pay taxes on all income earned worldwide. On the other hand, non-residents are only taxed on income considered to have been produced in Italy, as outlined in Article 23 TUIR.
1. FISCAL RESIDENCE FOR INDIVIDUALS ↑
The new provisions establish that an individual is considered fiscally resident in Italy when for the majority of the tax year (including fractional days), at least one of the following criteria is met:
- Civil Residence: Defined by the Civil Code as the place of usual residence.
- Fiscal Domicile: Now interpreted under Article 2(2) of TUIR as the primary location of personal and family relationships. Economic or financial interests are no longer relevant, shifting the focus to personal rather than economic factors.
- Physical Presence: new criterion introduced by the reform, recognising fiscal residence for individuals who physically live in Italy for most of the tax year, regardless of formal ties.
- Registration in the Resident Population Register: Treated as a “rebuttable presumption,” allowing for contrary evidence.
These conditions are alternative; satisfying any one of them is sufficient to establish fiscal residence. Additionally, disjointed periods of presence throughout the year count toward the relevant tax period. Continuous or uninterrupted presence is not required; fulfilling the statutory requirements for a total of 183 days (or 184 in a leap year) is sufficient. This reflects a more flexible approach that accounts for modern work and lifestyle trends, such as remote working, which may tie an individual to a territory without formal residence.
What Are “Personal Relationships”?
The Revenue Agency, in Section 2.1.1 of Circular No. 20/E understands “personal and family relationships” as broadly, encompassing traditional relationships (marriage, civil unions) as well as stable partnerships (cohabiting couples). Stable social connections – such as annual memberships to cultural or sports organisations – are also relevant. Fiscal domicile requires clear actions indicating the intention to maintain a concrete link to Italy, such as keeping utilities active in an Italian property.
Cross-Border Workers
Cross-border workers from neighbouring countries may meet the new physical presence criterion for fiscal residence by spending significant parts of the year in Italy, even for short daily periods. In cases of dual residence conflicts, international tax treaties and their “tie-breaker rules” can resolve disputes.
The Complexity of the “New Domicile” Criterion
The redefinition of fiscal domicile raises some practical questions. For instance, is owning a property in Italy sufficient to establish domicile, even if economic and professional ties remain abroad? The exclusion of economic factors makes the application more difficult, requiring qualitative assessment of personal and family relationships. This could lead to discretionary evaluations, increasing legal uncertainty.
“Mere Physical Presence” and Its Risks
The recognition of fiscal residence based solely on physical presence – spending over half the year in Italy – may lead to unintended special cases. For example, a foreign student or caregiver temporarily in Italy could be deemed fiscally resident due to time spent, despite no intent to establish permanent ties. In the absence of double taxation treaties with certain countries, this could expose individuals to double taxation.
2. EXAMPLE OF RESIDENCE DAY CALCULATION ↑
The Explanatory Report to the Decree confirms (consistent with Article 2(2) of TUIR) that disjointed periods of presence throughout the year count towards the tax period calculations. As an example, in the leap year 2024, a person spending the following non-consecutive days in Italy:
- 11–31 January (21 days),
- 5–10 February (6 days),
- 1–30 April (30 days),
- 12–26 May (15 days),
- 1 June–31 July (61 days),
- 1–31 October (31 days),
- 5–12 November (8 days),
- 27 November (1 day),
- 2–12 December (11 days),
totals 184 days of physical presence, qualifying as fiscally resident in Italy for 2024.
3. FISCAL RESIDENCE FOR COMPANIES AND ENTITIES ↑
For companies and institutions, fiscal residence is determined by any one of three alternative criteria:
- Registered Office: the place where the company is formally registered.
- Place of Effective Management: where strategic decisions are made.
- Ordinary Management Location: where daily management and administration occur.
This aims to close loopholes allowing artificial relocation of fiscal residence while retaining substantial operations in Italy.
Place of Effective Management: Strategic Decision-Making Hub
This criterion (Article 73(3) TUIR) focuses on where company’s ongoing strategic decisions are made, excluding shareholder assemblies (unless these directly influence operations).
4. INTERNATIONAL IMPLICATIONS ↑
The rules are aligned with international treaties to avoid double taxation. Under Article 4 of the OECD Model Tax Convention, residence conflicts are resolved through “tie-breaker rules,” prioritising permanent home, centre of vital interests, habitual abode, nationality, and mutual agreement between States.
5. IMPACT OF THE REFORM ↑
The updated rules reflect global dynamics and remote work trends, enhancing legal clarity while reducing tax avoidance opportunities. This supports fairness and compliance within international standards.
6. TAX PLANNING AND PERSONALIZED SUPPORT ↑
At Caravati Pagani, our team of experts provides tailored fiscal planning and compliance assistance, ensuring seamless transitions for those relocating to or from Italy. Contact us for proactive guidance and effective dispute resolution with tax authorities.
