Italy: First clarifications on the new tax residency criteria for companies and entities

published on 18 September 2024 | reading time approx. 3 minutes

Assonime's Circular No. 15/2024, published on 30 July 2024, analyses the regulatory changes published on the subject of the tax residence of companies and entities.

Article 2 of Legislative Decree No. 209 of 2023 revised the notion of residence of companies and entities, contained in Article 73, Paragraph 3 of the TUIR, by replacing the criterion of the ‘seat of administration’ with that of the ‘seat of effective management’ and ‘principal management’, as well as by eliminating the criterion of the ‘principal object’.

In particular, the new paragraph 3 of Article 73 of the TUIR now provides that ‘for income tax purposes, companies and entities that for the greater part of the tax period have their registered office or effective place of management or principal ordinary management in the territory of the State are considered resident’.

As pointed out in Assonime's Circular No. 15/2024, the new wording of the aforementioned paragraph 3 of Article 73 of the TUIR has the main objective of aligning the domestic criteria for defining the residence of companies and entities with international practice.

In fact, as of the 2017 edition of the OECD Model, the ‘place of effective management’ tie-breaker rule was eliminated and there was, therefore, a shift to a case-by-case approach to deal with cases of dual residency of companies and entities, thus leaving a wide discretion of interlocutor between the different states concerned.

The case-by-case approach has led to a greater level of complexity and uncertainty in international relations, requiring each system to equip itself to resolve any conflicts of tax residence.

From this perspective, the Italian legislature has aligned the wording of the tax residence criteria in force in Italy with international practice, first of all replacing the criterion of the ‘seat of administration’ with the two different criteria of the ‘effective place of management’ and the ‘principal place of management’.

These criteria were already implicitly contained in the concept of ‘seat of administration’; however, the new wording of the legislation allows for a more accurate scope of application for defining tax residence and avoids extensive interpretations by clarifying without a shadow of a doubt the irrelevance of the place where shareholders reside and/or meet for the purpose of defining the tax residence of companies and entities. In fact, it is clarified that:

by effective place of management is meant the place where the strategic decisions concerning the company or the entity as a whole are taken in a continuous and coordinated manner, not counting the decisions other than those having management content taken by the shareholders nor the supervisory activity and any monitoring of the management by the same;
ordinary management means, on the other hand, the continuous and coordinated performance of the acts of day-to-day management concerning the company or the entity as a whole, thus making it possible to enhance the entity's actual rootedness in the territory of the State. In essence, this is senior day-to-day management, i.e. the intermediate level made up of managers responsible for groups of people and their performance as well as the implementation of the strategic decisions of top management.

Ultimately, the objective of the new legislation is to strengthen the elements of legal certainty by outlining with greater precision the criteria of subjective connection to the taxation of companies and entities by recalling, without finding full correspondence, the concepts of ‘central management and control’ and ‘day-to-day management’, which constitute the two souls of the aforementioned ‘place of effective management’ criterion. This criterion, in fact, despite having been replaced by the case-by-case approach described in the 2017 edition of the OECD Model, is still present in most of the Double Taxation Conventions entered into by Italy.