In its Supreme Court Ruling n. 21695-2020 (issued on October 8, 2020) the Italian Supreme Court held that an individual (the “Taxpayer”) who is classified as a resident non domiciled in the U.K., is not eligible for the benefits of the income tax treaty between Italy and the U.K. of October 21, 1988, entered into force on December 31, 1990 and effective in Italy on January 1, 1990 (see U.K.-Italy Tax Treaty, the “Treaty”), and cannot rely upon the the provisions of article 4 of the Treaty to tie-break his tax residency to the U.K. for Italian income tax purposes.
Under the facts of the case, the Taxpayer is an Italian national individual who moved to the U.K. and established his regular place of abode there. As required under Italian administrative law, the Taxpayer cancelled himself from the register of Italian resident individuals, held in Italy, and registered himself as an Italian citizen resident abroad, on the register of Italian expatriates held with the Italian Consulate in London.
The Italian tax administration at the end of a tax audit concluded that the Taxpayer had remained an Italian tax resident under Italy’s domicile test, and assessed Italian income taxes on Taxpayer’s worldwide income, plus interest and penalties, for the four tax years under audit.
The Taxpayer challenged the tax assessments on the basis of two different theories:
– first, he took the position that he should be treated as a non-resident, under Italian internal tax law, as a result of moving to and establishing his place of habitual above in the U.K.;
– second, he argued that, in the event he should be treated as an Italian tax resident, under Italian internal tax law, he nevertheless should be treated as a U.K. tax resident, and an Italian nonresident, under the provisions of article 4, par. 2 of the Treaty, considering that he had a permanent home in the U.K. and no permanent home in Italy, and, as a consequence, he should be exempt from Italian tax on all of his non-Italian source income (and subject to Italian tax solely on his Italian source income, of which he had none).
Italian tax law establishes an individual’s tax residency under one of three alternative tests: (1) the registration test, which is met whenever an individual is registered on the register of Italian resident individuals, in Italy, for more than six months during the tax year); (2) the place of habitual above test, which is met when an individual regularly lives in Italy, with the intention of living there for an indefinite period of time, and (3) the domicile test, which is met whenever an individual’s “main center of interest and affairs” is located in Italy.
For purposes of the residence test, a “place of habitual abode” requires a regular presence coupled with the intention of living in Italy indefinitely. The actual number of days spent in Italy does not matter, and an individual is treated as an Italian tax resident, under the residence test, whenever (i) he or she lives in Italy “regularly”, as opposed to “occasionally” or “sporadically” – regardless of the fact that he or she may have spent in Italy less than 183 days during a tax year – and, (ii) based on the analysis of all of the facts and circumstances, her or she intends to live in Italy for the foreseeable future (as opposed to transitorily, for a limited period of time or a specific purpose). The test is met whenever the individuals “place of habitual abode”, within the meaning clarified above, exists for more than six months in any given tax year.
For purpose of the domicile test, reference is made to the place where an individual’s most meaningful personal, family, and social relations as well financial and economic interests are located, regardless of the place where an individual lives or spends all or part of his or her time during the tax year. The test is met whenever a taxpayer’s “domicile”, within the meaning clarified above, in Italy, exists for more than six months in a tax year.
The Supreme Court upheld the tax court’s and appellate court’s rulings, which ruled in favor of the tax agency and held that the taxpayer should be treated as a tax resident under the domicile test of Italy’s domestic tax law, considering that he had his most meaningful personal and family connections and substantial professional and economic interests in Italy, even though he lived regularly in the U.K.
Then, the Court turned to the Taxpayer’s tax treaty argument, and observed that the Taxpayer was registered in the U.K. as a resident non domiciled, and was subject to regular income tax there solely on his U.K. source income, while the U.K. income tax would apply on his non-U.K. source income solely to the extent that such income had been remitted back to the U.K. during the tax year.
Indeed, non-domiciled individuals resident in the U.K. may choose, on an annual basis, to be taxed on the remittance basis. The remittance basis of tax restricts the U.K. tax liability to UK source income and gains, plus any non-U.K. source income and gains brought into (remitted) to the U.K. Thus, any non-U.K. income and gains retained outside the U.K. (for instance in an offshore bank account) will not be taxed. This is a major tax incentive for those with significant sources of income outside the U.K., or those that (subject to anti-avoidance provisions) can legitimately arrange their affairs such that income is payable outside the U.K.
The Supreme Court referred to the provision of article 4, paragraph 1 of the Treaty, which reads as follows:
“(1) For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that Contracting State only if he derives income from sources therein“.
According to the Supreme Court, the fact that a U.K. resident non-domiciled is subject to U.K. tax only if he derives income from sources within the U.K., while no U.K. tax is collected on non-U.K. source income, unless and until that income is remitted to the taxpayer in the U.K., results in the taxpayer’s failing to me the Treaty’s tax residence test of article 4, par. 1). As a consequence, according to the Supreme Court, the Taxpayer could not be treated as resident of the U.K. under the definition of article 4, paragraph 1) of the Treaty, and the tie-breaker provision of paragraph 2) of the Treaty did not apply.
The Supreme Court issued identical rulings (n. 21694-2020, 21696-2020 and 21697-2020) for the other three tax years involved.
Ruling n. 21695 stands as a warning for individual taxpayers who move to the U.K. and are treated as resident non-domiciled there, while maintaining significant personal or economic ties to Italy. In the event the Italia tax administration has sufficient reasons to argue that they have their domicile in Italy, and are tax residents there, under Italian internal tax law, they may have no relief under the U.K.-Italy tax treaty and remain indefinitely exposed to worldwide income taxation in Italy.