On 16 October 2023 the Italian Government preliminarily approved a legislative decree to implement a reform regarding international taxation (Draft Decree). The proposal is yet to be approved by parliament. One key change is to the way tax residence is determined for individuals. 

The current definition of tax residence for individuals

Under Art. 2(2) of the Italian Income Tax Code (IITC) individuals are resident in Italy for tax purposes if, for most of the year (i.e. more than 182 days in a calendar year or more than 183 days in leap years), they are:

• registered in the general register of the resident population, or
• resident in Italy in accordance with Art. 43(2) of the Italian Civil Code, or
• domiciled in Italy in accordance with Art. 43(1) of the Italian Civil Code.

The minimum period does not need to be continuous, so long as it is met during a single calendar year.

The Italian Civil Code defines residence as “the place where an individual has his habitual abode”. Residence is thus determined by an individual’s habitual and voluntary dwelling in a given place and depends on both an objective element (that the individual is permanently living in a place) and a subjective element (that the individual intends to stay there). An abode can still be habitual without necessarily being continuous or final (for example, if the individual works or performs other activities outside their residence state), provided that the individual retains a dwelling there, returns there whenever possible and shows an intention of maintaining the centre of their family and social relations there.

The Italian Civil Code defines domicile as “the place where an individual has established the main seat of his business and interest”. According to case law, “business and interest” must be interpreted broadly to include not only business and financial relations but also moral, social and family ones.

The new definition of tax residence for individuals

Art. 1 of the Draft Decree states that: “individuals are considered residents for income tax purposes if for most of the year, including fractions of days, they have their domicile or residence in Italy or are present in Italy. Domicile is defined as the place where the individual’s personal and family relationships are primarily developed. Unless proven otherwise, individuals who are registered in the population register for most of the year are also presumed residents”.

The new rule:

• retains the same civil law test of residence under the Italian Civil Code (even though the reference to Art. 43(2) of the Italian Civil Code - included in the previous version of the law - has been deleted); 
• adds a test of physical presence in Italy for most of the year; 
• replaces the civil law definition of domicile with a version borrowed from international tax law; and
• downgrades registration in the population register for most of the tax year to a rebuttable presumption, rather than an absolute indication of tax residence.

The Italian Government has decided to not adopt the ‘split year’ mechanism.

Preliminary comments

Physical presence in Italy for most of the year is a new test that resembles the substantial presence test in the USA. Under this test, an individual who spends a significant amount of time in Italy will be considered an Italian resident and subject to tax on their worldwide income.

This new test is compatible with Art. 4(1) of the OECD and UN Model Tax Convention which states that “for the purposes of this Convention, the term ‘resident of a Contracting State’ means any person who, under the law of that State, is liable to tax therein by reason of domicile, residence, place of management or any other criterion of similar nature” (emphasis added). According to prevailing literature, the wording “of similar nature” requires both unlimited liability to tax and a territorial connection between the taxpayer and the State concerned. This connection with the Italian territory is established by the (new) “physical presence” test.

The Draft Decree clarifies the new definition of domicile by emphasising that the place where an individual has their (main) personal and family relationships prevails over the centre of their business and financial interests. The Italian Government has thus adopted the interpretation by the ECJ (Judgment 12 July 2001, C-262/99), the OECD (Commentary on Art. 4, par. 15), and the Italian Supreme Courts (Order No. 18009 of 6 June 2022).

It also follows the famous tax dispute involving the opera singer Pavarotti, where the Italian tax authorities emphasised the importance of the personal relations over economic ones by arguing that Pavarotti spent a significant part of the year in Italy (albeit less than 183 days) where his family (i.e., parents, children, ex-wife and then current partner, who he supported financially) was resident. That case established that the key factor to consider is where a taxpayer has established their personal relations (even if their business and financial interests are in another state) - i.e., the place where the taxpayer likes to return as often as possible. 

Perhaps the best advice is to follow the words of the Italian maestro himself: “Mamma son tanto felice perché ritorno da te … Mamma sarai con me, tu non sarai più sola … Mamma ma la canzone mia più bella sei tu, sei tu la vita e per la vita non ti lascio mai più” (“Mum, I am so happy because I am coming back to you … Mum you will be with me, you will no longer be alone … Mum, you are my most beautiful song, you are [my] life and I will never leave you again”).