The tax reform modifies the concept of tax residence for individuals

On October 16th, 2023, the Italian government preliminarily approved the first implementing decree of the tax reform, which was ratified in its principles by Parliament last August (Law No. 111/2023). 

This first decree, which has not yet entered into force, revises the concept of tax residence for individuals for income tax purposes, in line with international practices and double taxation conventions. 

It is worth nothing that the current legislation (Article 2 of the Italian Income Tax Code) provides that individuals are considered tax resident if, for the greater part of the tax year (i.e. more than 182 days during a calendar year or more than 183 in case of leap year), they are:

• enrolled in the Italian Register of the resident population; or
• domiciled in Italy, which means that they have established in Italy the principal center of their business and interests, including family and social relationships, pursuant to article 43 of the Italian Civil Code; or
• resident in Italy, which means that they have established their habitual abode there, pursuant to article 43 of the CC. The above three conditions are alternatives; therefore, tax residence arises if just one of the conditions is met. 

According to the new law, individuals are considered residents if they have their domicile or residence in Italy for most of the tax year, considering even fractions of days, or if they are present in Italy. 

Domicile is defined as the place where the person's personal and family relationships are primarily developed. Unless proven otherwise, individuals who are registered in the population register for most of the tax year are also presumed residents. 

The new law introduces four key changes:

• the definition of domicile is clarified to emphasize that the place where the person's personal and family relationships are developed prevails over the center of economic and patrimonial interests.
• A new, "fourth criterion" of determining tax residence is introduced, consisting of "presence" in Italy for most of the tax year.
• In the calculation of the "majority of the tax year," explicit reference is also made to "fractions of days."
• Registration in the population register for most of the tax year is now a "relative" presumption, rather than an absolute indication of tax residence, subject to the application of tie-breaker rules in case of concurrent foreign tax residence. This change aims at avoiding recurrent tax issues of those individuals living abroad who did not cancel from the population register. 

The tax reform does not change Article 2, paragraph 2-bis of the Italian Income Tax Code, which provides that Italian citizens who are removed from the population register and move to “black list” Countries are also considered residents, unless proven otherwise. 

Finally, it should be remembered that the reference period for tax residence is the calendar year, and that Italian domestic law does not provide for the "split year" rule, under which a natural person may be considered tax resident for a fraction of a year. This rule is applied only to Switzerland and Germany, by virtue of specific clauses in their respective double taxation treaties. 

The new rules are expected to take effect on January 1st, 2024.