[World Tax News] Italy Publishes Guidance on Tax Residency for Natural Persons, Companies and Other Persons and More

Editorial Team – [2024] 168 Taxmann.com 145 (Article)

World Tax News provides a weekly snippet of tax news from around the globe. Here is a glimpse of the tax happening in the world this week.

1. Italy publishes guidance on tax residency for natural persons, companies and other persons

The Italian Revenue Agency has issued Circular No. 20/E dated 4 November 2024, offering guidance on tax residence for individuals, companies, and other entities following the changes introduced by Legislative Decree No. 209 of 27 December 2023.

Key highlights of the guidance are as follows:

(a) Tax Residency for Natural Persons:

The Circular clarifies that, prior to the amendments, an individual was considered a resident of Italy for income tax purposes if they met at least one of the following conditions for the majority of the tax period (at least 183 days per year or 184 days in a leap year):

1. They were registered in the resident population registry;
2. They had their domicile in Italy;
3. They maintained residence in Italy.

Following the amendments, these criteria have been revised and expanded. Now, a person is considered a tax resident of Italy if they meet any of the following conditions for the majority of the tax period:

1. They maintain their residence in Italy, as defined by the civil code;
2. They have their domicile, as specified in Article 2, paragraph 2 of the Italian Tax Consolidated Act (ITCA), meaning the place where their primary personal and family ties are centered;
3. They are physically present in Italy, counting even partial days; or
4. They are registered in the resident population registry, with this condition now treated as a “rebuttable presumption” that allows for proof to the contrary, rather than an “absolute presumption.”

The Circular also provides further guidance on:

• The domicile-based criterion for tax residence;
• The new physical presence criterion, including provisions related to remote work;
• The change to a rebuttable presumption for residency based on registry enrollment;
• The implications for tax regimes for individuals relocating their residence to Italy for tax purposes; and
• How these rules interact with Double Taxation Conventions.

The updated tax residence rules for individuals will take effect from January 1, 2024, starting with the 2024 tax period.

(b) Tax Residency for Companies and other Entities

The Circular explains that, before the amendments, companies and other entities were deemed residents of Italy for income tax purposes if, for most of the tax period, they maintained their registered office, place of administration, or primary business activities within Italy. With the new amendments, the criteria have been updated and expanded. Now, companies and other entities are considered tax residents if, for the majority of the tax period, they have their registered office, place of effective management, or principal ordinary management in Italy. This rule also extends to partnerships and similar entities, such as associations. Amendments have also been made concerning the tax residency rules for collective investment undertakings and trusts.

Under the revised rules, the “place of effective management” refers to the continuous and coordinated decision-making process related to the entity’s overall strategic direction. Ordinary management pertains to the day-to-day execution and coordination of management activities that affect the entity as a whole.

The Circular also provides further guidance on:

• Defining the place of effective management;
• Clarifying the concept of principal ordinary management; and
• Addressing how these tax residence rules interact with Double Taxation Conventions.

The amended tax residence rules for companies and other entities will apply from the tax period following the one that is ongoing on December 29, 2023. For entities with financial years aligned with the calendar year, the amendments take effect on January 1, 2024. For entities with financial years not aligned to the calendar year, the rules will apply from the start of the next financial year following December 29, 2023. For instance, if the financial year runs from April 1, 2023, to March 31, 2024, the amended rules will take effect on April 1, 2024.

Source: CIRCULAR NO. 20/E

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