Italy’s New Tax Residence Rules: Implications for Domestic and Overseas Individuals

The Italian government has recently redefined the concept of tax residence through Legislative Decree No. 209, issued on December 27, 2023. This decree brings significant modifications to Article 2 of the Italian Income Tax Code (TUIR), aligning Italy’s tax residence rules with international standards and addressing uncertainties that have long been the subject of tax disputes. These changes, effective January 1, 2024, introduce a new criterion for determining tax residence, emphasizing physical presence alongside domicile and registration in the resident population registry. This article will explore the key amendments, their implications for individuals residing in Italy and abroad, and their interaction with double taxation treaties.

Key Changes in the Definition of Tax Residence

Before the legislative changes, an individual was considered a tax resident in Italy if they met at least one of the following criteria for more than 183 days in a year:

1. Registered in the Italian resident population registry (Anagrafe della Popolazione Residente).
2. Maintained a domicile in Italy, as defined by the Italian Civil Code (i.e., the center of their personal and economic interests).
3. Had a residence in Italy, meaning their habitual place of living.

This meant that if you were living overseas but didn’t cancel your registration at the Italian Anagrafe, you were defined as a tax resident of Italy de jure, thus attracting the worldwide taxation on all your income sources, even if you were no longer spending any time in Italy.

The revised legislation maintains these criteria but introduces the following critical changes:

• Physical Presence as a New Criterion: A person is now considered a tax resident in Italy if they are physically present in the country for more than 183 days (or 184 in a leap year), regardless of other factors.
• Redefinition of Domicile: The term “domicile” is now specifically linked to the place where an individual’s primary personal and family relationships are centered, rather than economic interests.
• Revised Presumption of Residence for Registered Individuals: The previous absolute presumption of tax residence for individuals registered in the Italian resident population registry has been replaced with a rebuttable presumption. Taxpayers can now provide evidence to challenge their deemed residency status.

If you were resident of a country with which Italy has a double tax treaty in place, the treaty itself would provide a tie breaker clause to determine the ultimate place of residence.

In addition, it must be noted that if you are deemed a tax resident of two EU countries, the country where you have your family ties attracts your tax residence as long as you visit them regularly (cfr. EU directive 83/182/EE art. 7, n. 1 par. 2) link.

Which Elements Are Considered Proof of Residence?

To determine tax residence under the new criteria, the Italian tax authorities will consider a variety of factual elements. These include, but are not limited to:

• Registration in the Resident Population Registry: Although now a rebuttable presumption, being listed in the Italian Anagrafe remains a key indicator of residency.
• Physical Presence: Documented proof of staying in the country for more than 183 days, including travel records, flight tickets, passport stamps, and border crossing logs.
• Housing Arrangements: Ownership or long-term rental of a residence, along with utility bills, lease agreements, or property tax records.
• Family and Social Ties: The presence of immediate family members (spouse, children) residing in each jurisdiction, school enrollment of children, and local community involvement.
• Financial and Economic Ties: Bank accounts, active credit cards, local business activities, employment contracts, or participation in any country social security systems.
• Health and Insurance Coverage: Enrollment in the country National Health Service (Servizio Sanitario Nazionale – SSN) or private health insurance policies.
• Memberships and Subscriptions: Gym memberships, club affiliations, or cultural association participations in Italy may serve as further proof.
• Voting ledger: voting registration and voting receipts strengthen your case of which jurisdiction you are deciding to maintain your ties.

The Italian tax office has outlined these and other elements in detail in its official guidance, which can be referenced here.

You must bear in mind that the burden of proof is yours, therefore you must actively collect all your statements, and evidences to be proven to the tax office, or in court, in the event of a litigation.

Implications for Individuals Residing in Italy

For individuals living in Italy, these changes have several consequences:

1. Greater Tax Clarity: The shift towards an objective physical presence test reduces ambiguity and potential disputes over domicile.
2. Impact on Cross-Border Workers: Individuals who frequently travel in and out of Italy must carefully monitor their days of presence, as even short visits can accumulate to exceed the 183-day threshold.
3. Smart Working and Remote Employment: Individuals working remotely from Italy for foreign employers may now qualify as tax residents based solely on their physical presence, potentially subjecting their global income to Italian taxation.

Implications for Individuals Residing Abroad

For individuals who have moved abroad or plan to relocate, the new rules introduce both risks and opportunities:

1. Rebutting the Residency Presumption: Italian citizens registered in the resident population registry but living abroad can now challenge their residency status more effectively by demonstrating that their domicile and physical presence are outside Italy.
2. Impacts on High-Net-Worth Individuals (HNWIs): Many HNWIs who previously structured their affairs around the residency registry rule may need to reassess their tax planning strategies in light of the strengthened presence-based criteria.
3. Cross-Border Tax Disputes: The new rules may increase conflicts with other jurisdictions’ tax authorities, particularly where individuals claim residency in multiple countries. The application of double tax treaties will play a crucial role in resolving such disputes.

Interaction with Double Tax Treaties

Italy has signed numerous double taxation treaties that include “tie-breaker” rules to resolve residency conflicts. These rules typically prioritize the country where the individual has:

1. A permanent home.
2. The center of vital interests (family and economic ties).
3. A habitual place of stay.
4. Citizenship.

Under the new Italian rules, individuals who are physically present in Italy for more than 183 days could still claim tax residence in another country under a treaty if they meet the tie-breaker criteria. However, such claims must be carefully documented and defended in case of tax audits.

Considerations for Tax Planning

To mitigate risks and optimize tax efficiency under the new rules, individuals should:

• Track Days of Physical Presence: Keeping precise records of time spent in Italy can help individuals avoid unintentional tax residency.
• Reassess Domicile and Family Ties: Given the revised domicile definition, taxpayers should evaluate their primary family and social connections.
• Seek Professional Tax Advice: Given the complexity of international tax law, professional guidance is essential, especially for expatriates, cross-border workers, and HNWIs.

What are the implications for Italian temporary residence permits holders?

Holders of Italian temporary residence permits who do not exceed 183 days of physical presence in Italy can maintain their permit eligibility without becoming tax residents. This means they are not required to disclose their worldwide income to the Italian tax authorities, nor to pay wealth tax on their foreign held assets. Since tax residence is now based on physical presence, individuals who spend fewer than 183 days in Italy can legally renew their residence permits without triggering tax residency status. However, they should ensure accurate documentation of their presence in Italy and abroad to substantiate their non-resident status in case of tax audits.

Implications for Individuals Residing in Italy

For individuals living in Italy, these changes have several consequences:

1. Greater Tax Clarity: The shift towards an objective physical presence test reduces ambiguity and potential disputes over domicile.
2. Impact on Cross-Border Workers: Individuals who frequently travel in and out of Italy must carefully monitor their days of presence, as even short visits can accumulate to exceed the 183-day threshold.
3. Smart Working and Remote Employment: Individuals working remotely from Italy for foreign employers may now qualify as tax residents based solely on their physical presence, potentially subjecting their global income to Italian taxation.

Implications for Individuals Residing Abroad

For individuals who have moved abroad or plan to relocate, the new rules introduce both risks and opportunities:

1. Rebutting the Residency Presumption: Italian citizens registered in the resident population registry but living abroad can now challenge their residency status more effectively by demonstrating that their domicile and physical presence are outside Italy.
2. Impacts on High-Net-Worth Individuals (HNWIs): Many HNWIs who previously structured their affairs around the residency registry rule may need to reassess their tax planning strategies in light of the strengthened presence-based criteria.
3. Cross-Border Tax Disputes: The new rules may increase conflicts with other jurisdictions’ tax authorities, particularly where individuals claim residency in multiple countries. The application of double tax treaties will play a crucial role in resolving such disputes.

Interaction with Double Tax Treaties

Italy has signed numerous double taxation treaties that include “tie-breaker” rules to resolve residency conflicts. These rules typically prioritize the country where the individual has:

1. A permanent home.
2. The center of vital interests (family and economic ties).
3. A habitual place of stay.
4. Citizenship.

Under the new Italian rules, individuals who are physically present in Italy for more than 183 days could still claim tax residence in another country under a treaty if they meet the tie-breaker criteria. However, such claims must be carefully documented and defended in case of tax audits.

In order to renew your temporary residence permit, and to convert it to the permanent residence card, you are required to show minimum income declared to the Italian tax authorities to obtain its renewal.

In this scenario, you can still achieve this goal by sourcing the required minimum income from Italy, yet screening all your non Italian income sources as long as you don’t spend 183 days in Italy during any tax year.

author: Nicolò Bolla, Founder of Accounting Bolla