Tax residence: the connection between italian and conventional regulations

published on 3 October 2023 | reading time approx. 3 minutes

The Italian Revenue Agency, with Circular No. 25/E/2023, has provided some clarifications about tax residence, smart working and frontier workers, also reiterating the issue of the coordination between domestic regulations and Conventions for the avoidance of double taxation.

The domestic regulations on tax residence are set forth in Article 2 of the TUIR. This article provides that, for income tax purposes, people are considered resident in Italy if, for the greater part of the tax period, alternatively:

are registered in the Records of the Italian Resident Population;
are domiciled in Italy;
have their residence in Italy.

If only one of the above conditions is met, the individual is qualified as resident for tax purposes in Italy.

In any case, in order to define the tax residence of a person, domestic legislation must necessarily be coordinated with the provisions contained in the Conventions for the avoidance of double taxation entered into by Italy with individual foreign States. In fact, Article 169 of the TUIR and Article 75 of Presidential Decree No. 600/73 explicitly recognize the prevalence of Double Tax Treaties over domestic law.

Circular No. 25/E/2023 further reaffirmed this latter theme, debunking the erroneous belief, which had arisen from the publication of several rulings by the Supreme Court of Cassation, that the criterion of civil registration under Article 2 of the TUIR could not be exceeded by the conventional provisions for the purpose of defining a person's tax residence.

In particular, the aforesaid Circular correctly provides the relationship between domestic and conventional rules, stating that:

first, residence must be assessed based on the domestic rules of the Contracting States. In fact, the Convention does not apply if the subject is considered resident in only one country;
a conflict of residence arises if the person is considered resident in more than one country under the domestic law of each of the Contracting States. In this case, reference must be made to the tie breaker rules set out in the Double Taxation Convention in order to define tax residence. Tie breaker rules are a set of rules to be used according to a hierarchical criterion. In particular, this hierarchy provides that residence is established by first considering the place where the person has a permanent home. If it is not possible to identify the permanent home, it is then necessary to check:

the centre of vital interests;
the place of habitual residence;
the nationality;
the agreement between the States.

The aforementioned conflict of residence could occur, for example, if a person acquires the residence of the country in which his place of work is contractually fixed but maintains his habitual abode or domicile in Italy. In this circumstance, the Country of residence for tax purposes is defined according to the conventional rules that make the criterion of permanent residence prevail, subordinately followed by the centre of vital interests, habitual residence and nationality of the taxpayer.

Accordingly, it should never be assumed that a country other than Italy considers a taxpayer to be tax resident by applying Article 2 of the TUIR. Tax residence must always be assessed according to the rules of each State and in case of conflict the provisions of the Conventions always prevail over domestic law.

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