Are you resident or domiciled in Italy?
In this article, we compare being resident or domiciled in Italy and explore the tax implications.
According to Italian tax law, individual tax residency is pursuant to tests. An individual may find themselves tax resident although they only have relatively minor contacts with Italy. This might be property ownership, frequent visits to the country, or business interests in Italy.
If the Italian tax authorities determine that an individual is tax resident in Italy, the taxpayer is subject to worldwide taxation in Italy.
Tax would therefore be applicable for both income and estate tax purposes. It would include an obligation to report all assets wherever they are in the world. In addition to financial assets and accounts, it requires an individual to report all non-financial assets such as, cars, houses, planes, artworks.
Non-Italian nationals with interests in Italy should pay particular attention to these matters to avoid becoming an unintended Italian tax resident. Because this is a complex topic and, each case is different, we recommend that you seek advice and guidance from your lawyer and accountant.
Applicable tax laws determine whether an individual is resident or domiciled in Italy
Domicile is generally determined by an individual’s intention to permanently or indefinitely reside in Italy. Often, an individual will physically have a presence in the country. Domicile is a legal concept. Its rules have been established by way of case law rather than a statutory definition. There are three types of domicile.
Domicile of Origin
This is usually acquired from an individual’s parents.
By actually residing in Italy, the individual demonstrates the intention of remaining permanently or indefinitely in Italy. In this way, an individual may acquire an elected domicile – also known as a domicile of choice. Where an individual later gives up elected domicile, domicile of origin is automatically re-acquired.
Domicile of Dependency
This is the domicile a minor holds. When the minor reaches 18 they then acquire elected domicile.
Domicile takes into account subjective elements of an individual’s intentions. The country where an individual habitually lives determines residence.
The EU test for habitual residence is based on an individual’s interests rather than by a particular duration of residence. In 2014, the European Commission published a practical guide on the Habitual Residence Test.
Under Italian tax law, three alternative tests determine an individual’s tax liability in Italy. The tests are registration, residence and domicile. If an individual meets one of the three tests for more than 183 calendar days per annum, this triggers an Italian tax liability.
This is a straightforward test. If an individual has registered as a resident with their local municipal office – in the comune where the individual’s residential address is located, they are liable to pay tax in Italy.
The residence test comprises two components.
The first component looks at whether physical presence in Italy is regular and continuous, as opposed to sporadic and occasional. If an individual spends time both in Italy and another country, periods of presence outside of Italy are compared with the periods of presence in Italy. This ascertains where presence is prevalent for tax purposes.
The second component of the residence test is more subjective. It is based on an individual’s intention to stay and live in Italy for the foreseeable future. A variety of aspects will determine an individual’s intention to live in Italy on a regular basis. In order to determine intentions, authorities will look at an individual’s conduct, social and personal habits. Authorities will also consider working relationships, family relationships, business and personal activities.
Italian tax liabilities arise if an individual’s physical presence in Italy is prevalent compared to an individual’s presence outside of Italy. For example, a regular and continuous presence in Italy is deemed to exist even if an individual travels abroad on a frequent basis. In other words, if an individual is away from Italy for extended periods of time but then returns as soon as possible. This would denote that an individual maintains Italy as the principal centre of their social and family relations.
This third test aims to define the place where an individual has their principal centre of interests for business and or social reasons. In this context, ‘interests’ include personal, social, moral, familiar, economic, professional and business interests and relationships.
The domicile test revolves around an individual’s intention to establish and maintain their main centre of relations and interests in Italy.
There are tax implications based on the nature, extent and quality of the connections between an individual and Italy, compared with an individual’s connections with any other country. As a result, an individual who primarily lives abroad but, maintains their principal centre of interests in Italy satisfies the domicile test.
The domicile test therefore requires careful and comparative evaluation to balance all the facts related to business or personal relationships and connections with Italy.
Case Law regarding the legal concept of domicile
In 2011, the Italian Supreme Court referred to a 1991 decision of the European Court of Justice relating to a non-tax matter. The Italian Supreme Court concluded that, in the case of multiple relations and ties with different countries, where the location of the principal centre of an individual’s interest cannot easily be determined, a prevalent consideration should be given to the relations of a personal nature.
However, more recent decisions suggest that extensive economic interest may outweigh personal connections in establishing an individual’s domicile. Thus, an individual may still be liable to pay tax in Italy.
In a ruling in April 2012, the Italian Supreme Court held that a tennis player living in Monaco qualified for tax residency in Italy. This, despite the family proving that they lived in Monaco. They provided proof through children’s school attendance records, household utility bills, membership of local clubs. The ruling took into consideration the fact that the tennis player maintained significant interests and management positions at several family-owned Italian companies. The individual mainly managed these matters from Italy.
In this case, residence identified the taxpayer’s habitual and regular place of living, while domicile identified the taxpayer’s main center of personal, financial and business interests.
Resident or domiciled. Tax guidance
The Italian tax authorities have issued specific guidance on determining whether individuals are resident or domiciled in Italy. 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 collection and review of the following.
– All information contained in the tax agency data base system.
– Copies of all public documents relating to purchases. This includes real estate, gifts, formation of companies and entities, capital contributions to companies and entities.
– All information on transfers of money from or to foreign countries.
– Information regarding the taxpayer’s family relations in Italy.
– The taxpayer’s economic interests in Italy.
– Information about taxpayer’s intention to remain and live permanently in Italy.
De Tullio Law Firm specialises in Italian and international property law. We have over 55 years of helping overseas nationals obtain Italian residence. If you need help or would like to discuss your situation, please get in touch with us.
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