Italy’s Revenue Agency released the Circular No. 20/E, offering guidance on tax residency for individuals, companies, and other entities on 4 November 2024.

The guidance follows the revisions introduced by Legislative Decree No. 209 of 27 December 2023.

Along with purposes of harmonisation at the international level, the amendments to legislation aim to ensure greater legal certainty and reduce litigations. The introduced amendments have great relevance since they affect the establishment of residence for tax purposes in Italy, a fundamental ground for the Italian tax law based on the worldwide taxation principle.

The key guidance points include:

Tax residence of natural persons

Regarding natural persons, the Circular clarifies that before the amendments, a person was deemed a resident of Italy for income tax purposes if they met any one of the following conditions for most of the tax period (namely, 183 days in a year or 184 days in case of leap year):

• They were enrolled in the resident population registry;
• They had their domicile in the territory of the Italian State;
• They had their residence in the territory of the Italian State.

The three conditions were alternative, so only one determined the establishment of a natural person’s residence in Italy.

It must be underlined that although Article 2 of TUIR regulates the residence for tax purposes, the conditions mentioned above of residence and domicile were defined by civil law as rendered by the civil code.

Article 1 of the Decree has replaced paragraph 2 of Article 2 of TUIR, introducing a new definition of natural persons’ residence for income tax purposes.

The new provision states that:

“For income tax purposes, persons who, for most of the tax period, also considering fractions of a day, have their residence within the meaning of the civil code or their domicile in the territory of the State or are physically present therein are deemed to be resident. For the application of this provision, domicile is defined as the place where personal and family relationships of the person mainly develop. Unless otherwise proven, also persons enrolled for most of the tax period in the resident population registries are presumed to be resident”.

By way of example, natural persons are deemed to be resident in Italy for tax purposes if, for most of the tax period (namely 183 days in a year, or 184 days in case of leap year):

• They have their residence, within the meaning of the civil code, in the territory of the Italian State;
• They have their domicile, as defined in the same Article 2, paragraph 2 of TUIR, in the territory of the Italian State;
• They are physically present in the territory of the Italian State, also considering fractions of a day,
• They are enrolled in the resident population registries; following the amendments made by the Decree, this condition no longer has the character of an ”absolute presumption” but of a “rebuttable presumption” that admits contrary proof.

The revised tax residence rules for individuals will take effect on 1 January, 2024, starting with the 2024 tax year.

Tax residence of companies and other entities

Regarding companies and other entities, the Circular explains that before the amendments introduced by the Decree, companies and entities were considered as tax residents in Italy if, for most of the tax period, they located either their registered office, place of administration, or main business activity within the Country. These were three alternative criteria, meaning that the presence of just one was sufficient to establish the tax residence of the company or entity in Italy.

The amendments have revised and expanded the conditions, stipulating that companies and other entities must comply accordingly for the majority of the tax period.

For income tax purposes, companies and entities that, for most of the tax period, have their registered office, place of effective management, or principal ordinary management in the territory of the State are deemed to be residents.

The “place of effective management” refers to the ongoing and coordinated decision-making process regarding the overall strategic direction of the company or entity. “Ordinary management” refers to the continuous and coordinated execution of day-to-day management activities concerning the entire company or entity.

Collective investment undertakings are deemed to be residents if they are established in Italy. Trusts and similar institutions established in jurisdictions not listed in the Decree of the Minister of Economy and Finance issued under Legislative Decree No. 239 of 1 April 1996 are also deemed to be residents in Italy, provided that at least one settlor and one beneficiary are tax residents in Italy unless proven otherwise.

Trusts established in jurisdictions not listed in the Decree of the Minister of Economy and Finance under Legislative Decree No. 239 of 1 April 1996 are further deemed to be residents, unless proven otherwise, if, after their establishment, an Italian resident makes a contribution to the trust that results in the transfer of ownership of real estate, the establishment or transfer of real property rights (including shares), or imposes destination constraints on these assets.

Detailed guidance is further provided on:

• The location of effective management,
• The place of primary ordinary management,
• The interplay between tax residence rules and Double Taxation Conventions.

Entry into force of the new rules and interaction with the previous regulation 

The new rules are effective from the tax period following that in force on 29 December 2023. Therefore, the new law applies from 1 January 2024 for companies and entities whose financial year coincides with the calendar year.

For companies or entities with a financial year not corresponding to the calendar year, the new determination of residence is effective from the year following the current financial year on 29 December 2023, while the previous discipline continues to operate in the current tax year until the end of the financial year.

For example, a company has set in its statute a financial year that starts on 1 April 2023 and ends on 31 March 2024. The new determination of the tax residence of this company applies from 1 April 2024, with the beginning of the new financial year.