The importance of being resident: is it possible to simplify the notion of tax residence of individuals?

Monday 26 February 2024

Barbara Emma Pizzoni
Ughi e Nunziante Studio Legale, Milan

Linda Favi
Ughi e Nunziante Studio Legale, Milan

It is well known that an individual’s tax residence is a key criterion for the application of income taxes. In most jurisdictions, tax residence implies the application of taxation on the individual’s worldwide income, as opposed to the source-based taxation of a non-resident.

Establishing the tax residence of individuals has become increasingly challenging in the age of global mobility. In the post-Covid-19 era, digital nomadism has become increasingly popular and jurisdictions are competing to attract high-net-worth individuals (HNWIs) with appealing tax incentives.

The Agnelli case

And yet, sometimes, we forget the impact that the tax residence of a person can have in areas other than direct taxation, such as estate planning. Recently, the Agnelli family (founder of the Fiat Group, now Stellantis) inheritance saga has brought this issue to the forefront in Italy. A year ago, Margherita Agnelli filed a complaint with the Turin Prosecutor’s Office alleging that her mother, Marella Agnelli, committed tax evasion in 2018 and 2019. Agnelli’s estate deny any wrongdoing.

Marella, a Swiss resident, had made a will and had chosen to apply Swiss law, which allows testamentary pacts, unlike Italian law. Based on a testamentary pact from 2004, Margherita had received her share of the estate immediately and had agreed to pay her mother Marella a monthly annuity of approximately €700,000. 

Margherita attempted to invalidate the testamentary pact in various ways after the value of the estate increased significantly between 2004 and Marella’s death in 2019. One of these attempts included filing a complaint with Turin’s public prosecutor, claiming that her mother, having spent the whole of 2018 and the first few months of 2019 (until her death) in Turin, had taken up tax residence in Italy and should therefore have paid income tax (around €3.8m) in Italy on the monthly annuity. The case is currently in the hands of the judiciary, and the documents are not in the public domain, but the press is prolific.

If Marella’s residence in Italy is established by the public prosecutor, Margherita would take a step forward in her battle to have the 2004 testamentary pacts declared null and void and the testamentary issue reopened. And the Italian tax authorities would have access to Marella Agnelli’s assets abroad. All because of the matter of residence...

Residence for tax purposes

But, let’s get back to how to determine whether an individual is a resident for tax purposes in a particular jurisdiction.

In Italy, an attempt has recently been made to overcome the difficulties faced by the tax authorities in establishing the tax residence of individuals, through a rewriting of the definition of tax residence contained in Article 2 of the Income Tax Code.

With Article 1 of Legislative Decree No 209/2023 (amending Article 2 of the Italian Income Tax Code, Presidential Decree No 917/1986), the legislator has sought to simplify the assessment of tax residence. There are still three alternative criteria (ie, the occurrence of one of them is enough to consider an individual resident in Italy for tax purposes) for determining the tax residence of an individual, but they have changed. In particular, a new criterion based on the number of days (including fractions thereof) a person is physically present in the country has been introduced.

The only criterion that remains unchanged is the one that considers as resident for tax purposes the individual who, for the greater part of the tax year, has ‘residence according to the Civil Code’ in Italy (ie, a habitual residence). This criterion is seldom used by the tax authorities, mainly due to the difficulty faced by the tax authorities in identifying the ‘habitual adobe’ of an individual.

On the other hand, the reform has abolished the criterion according to which most tax assessments were based, ie, the criterion of a ‘domicile according to the Civil Code’ (ie, the centre of one’s business and interests), and replaced it with a criterion concerning a person’s domicile defined as ‘the place where the individual’s personal and family relationships develop primarily’. The change here is significant, because the notion of ‘business and interests’ was understood to be a mixture of professional and work relationships (business) and personal relationships (interests), but has more recently been interpreted by the Supreme Court as to be ascertained from the public behaviour of the taxpayer without attributing prevalence to personal relationships over professional ones.[1]

However, now only the personal relationships of the individual are relevant, and this seems to be in line with the judgment by the Court of Justice of the European Union of 12 July 2001 in the Louloudakis case C-262/99, which emphasised the primacy of personal ties over professional ties. Therefore, in principle, an individual who leaves the country and works abroad may be considered resident in Italy for the sole reason that their family lives in Italy.

The third criterion, the really new one, concerns an individual’s physical presence in Italy. This is a criterion that until now has only been used in Italy for the purposes of applying the provisions of double taxation treaties based on the 183-day rule in Article 15 of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital. The relevance of fractions of days also relates to this rule. The Italian tax authorities probably find the words in paragraph 5 of the commentary to Article 15 of the OECD Model Convention on the ‘days of physical presence’ method reassuring: ‘The application of this method is straightforward as the individual is either present in a country or he is not. The presence could also relatively easily be documented by the taxpayer when evidence is required by the tax authorities’.

Hence, based on the second and third criteria, the Italian tax authorities will now be able to consider a person resident in Italy for tax purposes either because their family is in Italy for more than 183 days (even if they themselves are not) or because they are physically present for more than 183 days (even if they work abroad and their family remains abroad). On the other hand, it will no longer be possible for the tax authorities to consider an individual resident in Italy just because they forgot to remove themselves from the registry of the resident population. In fact, civil registration now only works as a rebuttable presumption.

In the case of double tax residence, the impact of the double tax convention will also be taken into account. Article 4 of the OECD Model Convention provides, as a tie-breaker rule, the centre of vital interests, ie, the place where the personal and economic relations of the taxpayer are closer. This rule very much resembles the newly abolished ‘domicile according to the Civil Code’ and less the new criterion of ‘the place where the individual’s personal and family relationships develop primarily’, which could leave the taxpayer with double taxation issues.

Unfortunately, nothing has been provided for in the reform with reference to the split year, which continues to be relevant only in cases where the tax treaties concluded by Italy with Switzerland and Germany apply. For all other countries, double taxation arising from any income tax paid in the country of residence in the other part of the year can only be managed through the foreign tax credit mechanism.                                                                         


[1] This principle, expressed for the first time by the Court of Cassation in decision No 6501 of 31 March 2015, has been reaffirmed since then by the Court on several occasions.