The Legislative Decree on International Taxation, No. 209 of 27 December 2023 introduced some important modifications to the Italian rules on the tax residence of individuals and the statutory test of tax residence (STTR).
The STTR contained in art. 2, para. 2 of the Italian Tax Code (Decree of the President of the Republic of 22 December 1986, n. 917) is modified with effect from 1 January 2024 as follows.
Basic Principles
The first and most fundamental point is that under the STTR an individual is either tax resident or in Italy or not, for any particular tax year. The Italian tax year for individuals is a calendar year – from 1 January to 31 December. It is generally not possible to be tax resident for only a part of any year. Apart from limited cases under some of Italy’s double tax treaties (e.g. the treaties with Germany and Switzerland) there is no “split year” concept under Italian rules. If you meet any of the tests under the STTR, then you are tax resident for the whole year. It is an all in, all out test. That means that if you transfer to Italy and meet anyone of the tests of residence for the year of transfer, you are as a general rule, liable to Italian tax on income and gains received from 1 January of that year and wealth tax on foreign situated assets held during the course of the year.
The Statutory Test of Tax Residence
Art 2 of the Tax Code in its current, post 2023 version, provides that you are considered tax resident in Italy if, for the greater part of the tax year (183 days or more – 184 in a leap year), you:
- are physically present on Italian territory; OR
- have your centre of vital interests – defined as the centre of your affections – spouse, close family – in Italy, OR
- have your habitual abode in Italy; OR
- are registered as resident in the list of resident population (anagrafe) maintained by your local authority (Comune) – this is a presumption of tax residence, not an absolute test and can be overcome, if the facts and circumstances allow, e.g. by the terms of an applicable tax treaty.
The Impact of the STTR
All this means that you will be tax resident for any year if you meet any one of the tests for 183, or more, days (184 in a leap year). If you do not meet any of the tests, you are not Italian tax resident for that year. The “clock resets” at the end of each tax year. So if you leave Italy on 30 July of one year, and return on 30 June of the following year, such that you do not meet test 1 – physical presence, and providing you do not meet any of the other tests in either year, you will not be considered as tax resident for the whole of both of the years. In these circumstances however, the issues of centre of vital interests, habitual abode and registration as resident come into play. Even if you are physically outside Italy for an extended period, it is still possible to meet the test of tax residence by virtue of your centre of vital interests or habitual abode or maintaining your registration as resident with the anagrafe.
A day under the STTR includes any fraction of a day during the tax year – so days of arrival and days of departure count as a whole day. The days do not need to be consecutive in the year.
The tests are alternative so meeting any of them will make you tax resident in Italy (or presumed to be tax resident in the case of test no. 4) for a particular tax year.
The Tax Agency is empowered to carry out any necessary investigation on the residence status of an individual including cross-checks with the foreign authorities, where there are arrangements in place for the mutual sharing of information, bank records and in more serious cases, access to information such as entry and exit data , mobile phone records, or the testimony of third party witnesses.
The Physical Presence Test
The Legislative Decree introduced this new test of residence effective for FY 2024 onward. If you are physically present on Italian soil for more than 183 days (or 184 in a leap year) you are considered tax resident in Italy. Days or arrival in and departure from Italy count as a whole day. It is possible that the Italian tax returns (modelli 730 and PF) will be modified to request a listing of days in and out of Italy. In any event you should keep copies of boarding passes or other evidence of arrival and departure especially if the physical presence test is going to be critical in the determining residence status for any tax year.
The Domicilio or Centre of Vital Interests Test
Under the former test of residence your centre of vital interests was relevant. But it referring to the concept of “domicilio” under the Italian Civil Code. This concept of centre of vital interests or domicilio includes both the place in which you have your centre of economic relations – sources of income, location of savings/investments and a range of other typical economic arrangements – insurances, utilities etc. and where you have your centre of affections, ie. the location of spouse/partner, children and wider family.
The reference to the Civil Code definition of domiclio has been removed in the post 2023 STTR, with the exclusion of the place of economic interests. This means that if you are for example working full time outside Italy, thereby possibly having your center of economic interests abroad, but have family in Italy who are tax resident in Italy under the STTR for the greater part of any tax year, you too will be considered as tax resident in Italy under the STTR for that year. In the modified version of the Italian STTR the focus is the centre of your family affections, not economic relations. The post 2024 legislation focusses exclusively on family ties, such that an individual’s economic arrangements/relationships are no longer relevant in determining tax residence under the Italian STTR.
Consequences of Tax Residence
As a tax resident of Italy you are generally (subject to specific exemption under Italian law or under a double tax treaty), liable to tax on worldwide income and gains received during the whole of the tax year. As a tax resident you are also liable to report assets owned during the tax year (e.g real estate, investments, private pensions, valuable objects and bank accounts) located outside Italy and where applicable pay the Italian wealth tax on these.
If you are not tax resident for any year, you are generally (subject to exemption under an applicable double tax treaty) liable to Italian tax only on Italian source income (e.g. income from an Italian employment, self employment where you are working from Italy, rental income from an Italian property, royalties paid by an Italian resident etc.) There is a precise definition for different types of income of what is considered to have an Italian source, and that definition may be wider than expected. Other countries may have a split year concept of residence, whereby you are tax resident for only part of their tax year. Some countries have a different tax year from the calendar year. This can lead to problems of double taxation where, as an Italian tax resident for a whole year, you are also considered tax resident elsewhere for a part of the foreign tax year. Identifying, in advance, exact timings and potential issues of double taxation for an overlapping “stub” period is important.
See this article on the importance of timing the first year of Italian tax resident as efficently as possible.