Italian Supreme Court Rules on Individual Tax Residency

The Italian Supreme Court in its Ruling 20285 dated September 4, 2013 held that an individual taxpayer claiming to have his tax residency outside of Italy had properly discharged his burden of proof and correctly established his tax residency abroad by producing copy of his residential lease, regular payments of rent and utility bills and use of personal bank account for day to day expenses, thereby proving that his actual and real residence and domicile was located in the foreign country. 

Under Italian tax law, individual tax residency is determined pursuant to highly factual tests and can be established even when there are relatively minor contacts with Italy, such as a house, frequent visits to the country, or business interests located there. Once determined, it subjects the taxpayer to worldwide taxation in Italy both for income and estate tax purposes including the obligation to report all of taxpayer's assets wherever located in the world under a form that is the equivalent of the american foreign bank account report, except that it requires reporting of non financial assets (such as cars, houses, planes, artworks, etc.) as well as financial assets and accounts. Foreign persons with interests in Italy must pay particular attention to those rules to avoid to be trapped into unintended Italian tax residency. 

Under the facts of the case decided by the Supreme Court,  the taxpayer - a tennis player originally resident in Italy - claimed to have moved his tax residency to Monaco, while still traveling to Italy and other countries in connection with his business interests and professional activity.

Under Italian law, Monaco is a tax haven, black listed jurisdiction and Italian taxpayers who register as residents there are presumed to be still resident in Italy for Italian tax purpose, unless they prove that their actual residence and domicile is located in that country. For this purpose, residence identifies the taxpayer's habitual and regular place of living, while domicile identifies the taxpayer's main center of personal, financial and business interests.  

 

Under Italian tax law, tax residency for individuals must be determined for each relevant tax year under three alternative tests, and tax residency is established when, for each year, either of the three tax residency tests is met for more than 183 calendar days. The three alternative tax residency tests are the registration test, the residence test and the domicile test. 

The registration test is mechanical and is met when an individual is registered on the list of Italian resident individuals held at the local municipal office of the place where the residential address is located. 

The residence test is factual and based on two components. The first component of the residence test is the physical presence in Italy, which must be regular and continuous, as opposed to sporadic and occasional. When the taxpayers spends time both in Italy and abroad, the periods of presence abroad must be computed and compared with the periods of presence in Italy [1] to see which one is prevalent. The second component of the residence test is the taxpayer’s subjective intention to stay and live in Italy for the foreseeable future. In order to determine the taxpayer’s intention to move and live in Italy on a regular basis for the undefined future, reference is made to the taxpayer’s overall conduct and social and personal habits, working relationships, family relationship, business and personal activities etc. and can be ascertained ex post facto and exists even before the required minimum physical presence is satisfied. Overall, the physical presence in Italy and all of the factors considered in order to determine the taxpayer’s intention to establish his stable place of living in Italy, must be prevalent compared the presence and the factors located in any foreign country. The regular and continuous presence in Italy exists when the taxpayer travels frequently abroad, even for long periods of time, if it is proved that the taxpayer maintains his home in Italy, returns to Italy as soon as she has a chance, and maintains in Italy the center of her social and family relations [2]. 

Domicile is defined as the place in which a person has established the head quarter of his or her business and interests. For this purpose, interests include personal, social, moral, familiar, economic, professional and business interests and relationships. The test can be met regardless of the actual time spent or physical presence in Italy. Unlike the residence test, the domicile test is not based on the physical presence and time spent in Italy; rather, it revolves around the taxpayer’s intention to establish and keep her main center of relations and interests in Italy and it is based on the nature, extent and quality of the connections between the taxpayer and Italy, compared with the taxpayer’s connections with any other country [3]. As a result, a taxpayer who lives primarily abroad, but maintains in Italy the principal center of his or her interests, satisfies the test [4]. The test requires a careful and comparative evaluation and balancing of all the facts of the taxpayer and his or her business or personal relationships that are connected with Italy compared to those connected with other countries.  The Italian Supreme Court has referred to a decision of the European Court of Justice on a non tax matter, for the purposes of concluding that in case of multiple relations and ties connected with different countries, so that the location of the main center of that person’s interest cannot be easily determined, a prevalent consideration should be given to the relations of personal nature [5]. 

However, some more recent decisions suggest that extensive economic interest may trump personal connections in establishing taxpayer's domicile and therefore tax residency in Italy. Most notably, in its ruling n. 5382 of April 4, 2012 the Italian Supreme Court held that a taxpayer had his tax residency in Italy despite the fact that he lived with his family in Monaco (as he proved by showing school attendance certificate for his children, memberships at local clubs, home utility bills, etc.) as a result of maintaining significant interest and management positions at several family owned Italian companies which he mainly managed from Italy. A similar conclusion under different facts was reached by the Tax Commission of Liguria (an appellate tax court) in decision n. 87 of January 23, 2012.           

The tax administration has issued specific guidance on the application of the domicile test for the purposes of determining the Italian tax residency of individual taxpayers by way of the Circular n. 304/E of December 2, 1997. Circular 304 provides instructions for the tax agency’s control and audit activities, which should include the following: 

- Collecting all information contained in the tax agency data base system;

- Collecting copies of all public documents concerning purchases of real estate, gifts, formation of companies and entities; capital contributions to companies and entities;

- Collecting information on transfers of money from or to foreign countries;

- Reviewing the taxpayer’s family relations in Italy,

- Reviewing the taxpayer’s economic interests in Italy;

- Ascertaining the taxpayer’s intention to remain and live permanently in Italy as appearing from public statements or any other available information.


[1] Supreme Court, United Sections, n. 5292 dated December 28, 1985.

[2] Supreme Court n. 1738 of March 14, 1986; Supreme Court n. 5194 dated June 12, 1987; Supreme Court n. 5584 of 1983, Circular 304/E of 1997.

[3] Supreme Court n. 1342 dated May 22, 1963; Supreme Court  n. 435 dated February 12, 1973; Supreme Court n. 2963 dated May 5, 1980. 

[4] Supreme Court n. 3322 dated December 29, 1960; Supreme Court n. 884 dated March 21, 1968. 

[5] European Court of Justice (ECJ) July 12, 1991 in Case C262/99; Supreme Court n. 13803 dated November 7, 2011.

 

 

 

 

 

 
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