Italy’s tax residency for foreign taxpayers buying Italian real estate, and spending significant time in Italy for pleasure or business continues being a very critical and challenging issue. Italy assigns tax residency of individuals based on residence, which means fixed place of living ; domicile, which means main center of interests, or registration on the list of Italian resident individuals for administrative purposes. Whenever one of the three tests is met for more than 183 days in any given year, an individual is resident of Italy for Italian tax purposes for that particular year. Italian tax residency triggers worldwide income taxation and obligation to report worldwide financial and non financial assets to Italian tax authorities on taxpayer’s Italian income tax return.
In case of tax residency under the internal laws of Italy and another treaty country, Italy applies the tie breaker provisions of article 4 of the tax treaty to resolve the double residency problem, which assign tax residency based on the location of of permanent home, center of vital interests, habitual abode or nationality. The treaty "center of vital interests" test requires a comparative analysis of the taxpayer’s contacts or ties in Italy and the other treaty country. According to one view, personal and family ties should prevail, while another interpretation gives relative weight to economic and business interests.
A recent decision of Italy’s Supreme Court, which we comment here, seems to support the second interpretation. Proof of business and economic interests abroad while living or spending significant time in Italy for personal pleasure may help taxpayer demonstrate that that she kept her center of vital interest and tax residency in her own country.
This area of Italian international tax law is in flux and needs attention. Foreign taxpayers who transfer money to Italy to purchase homes, spend regular time there, register their administrative residency in Italy at their Italian address for convenience, open Italian bank accounts to handle the funds needed to manage their Italian house and living expenses are under the radar screen on Italian tax authorities, which check the real estate database, receive automatic information about the cross border transfers of the funds and often send inquiry letters asking for explanations on the taxpayer tax position in Italy in the absence of past filed Italian income tax returns.
Such inquiries and related audits requires careful consideration, including the provision of carefully selected and explained tax documents and information, to avoid the risk of an Italian tax residency determination that would trigger far reaching and very troubling consequences.