In its ruling n. 370 issued on July 4, 2023, the Italian Tax Agency concluded that in a case of a change of tax residency during the year, the treaty provision according to which the change of tax residence takes effect on the day of the transfer out of Italy to the foreign country is consistent with the clarifications provided at paragraph 10 of the OECD commentary to tax treaty article 4 and prevails over domestic tax law.
As a consequence, the taxpayer will file a part-year resident tax return in Italy, reporting her worldwide taxable income earned during the first part of the year through the last day of residence and reporting solely Italian source income, if any, earned from the last day of residence through the end of the year.
The case submitted in the ruling arises under the tax treaty between Italy and Switzerland and involves an Italian national who moved to Switzerland and took on new employment there during the course of the year. The taxpayer registered on the list of Italian nationals living abroad held at the Italian consulate in Switzerland and established her domicile there. The taxpayer will keep a permanent home in Italy, but her vital connections would be in Switzerland, where she will live with her family and carry on her employment. The transfer to Switzerland occurred on May 31. The issue is whether the taxpayer will file a full-year tax resident income tax return, as required under Ityaly’s internal tax law, or a part-year tax resident return through the date of the relocation (May 31), pursuant to the treaty.
For the purpose of the ruling, it is assumed that the taxpayer will have her center of vital interest in Switzerland, within the meaning of article, 4 paragraph 2 of the Italy-Switzerland tax treaty.
Under Italy’s domestic tax law, there is no split tax year tax residence. Instead, a taxpayer is treated as a tax resident of Italy for the entire year if she moves to a foreign country during the first half of the year (i.e., on or before July 2). Conversely, a taxpayer is treated as a nonresident for the entire year if she leaves Italy in the second half of the year (i.e., on or after July 3).
Paragraph 4 of Article 4 of the tax treaty between Italy and Switzerland provides that “The individual who permanently transfers her residence from one contracting State to another contracting State ceases to be subject to taxes in the first contracting State for which domicile is relevant, immediately after the day of transferring the domicile. The tax liability for which domicile is relevant begins in the other State from the same date”.
The Tax Agency referred to article 4, paragraph 4 of the Switzerland treaty, while also pointing out that the treaty provision is in accordance and consistent with the “recommendations” set forth in paragraph 10 of the Commentary to the tax treaty article 4. Consequently, the Tax Agency ruled that, under the facts submitted by the taxpayer and summarized above, the treaty prevails over domestic tax law, and the taxpayer’s Italian tax residency terminates on the date of the transfer.
The Commentary to treaty article 4, at paragraph 10, clarifies the following:
“The facts to which the special rules will apply are those existing during the period when the residence of the taxpayer affects tax liability, which may be less than an entire taxable period. For example, in one calendar year, an individual is a resident of State A under that State’s tax laws from 1 January to 31 March, then moves to State B. Because the individual resides in State B for more than 183 days, the individual is treated by the tax laws of State B as a State B resident for the entire year. Applying the special rules to the period 1 January to 31 March, the individual was a resident of State A. Therefore, both State A and State B should treat the individual as a State A resident for that period and as a State B resident from 1 April to 31 December”.
Ruling 370 raises an interesting issue: should the interpretative language of the OECD commentary to article 4 determine the interpretation of Italian tax treaties in general, and should the split tax year resident rule also apply to situations that arise under other tax treaties that do not contain a specific provision such as that of the Switzerland treaty?