Italy’s Supreme Court Rules onEstablishing Tax Residency

by Marco Rossi

Reprinted from Tax Notes Int’l, February 10, 2014, p. 557

Volume 73, Number 6 February 10, 2014

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Italy’s Supreme Court Rules on Establishing TaxResidencyby Marco Q. Rossi

The Italian Supreme Court recently held that anindividual taxpayer claiming to have his tax residencyoutside Italy had properly discharged his burden ofproof and correctly established his tax residencyabroad by producing a copy of his residential lease,regular payments of rent and utility bills, and use ofpersonal bank account for daily expenses.1 This docu-mentation proved that his residence and domicile werein the foreign country.

Determining Residency

Under Italian tax law, individual tax residency isdetermined according to highly factual tests and can beestablished even when there are relatively minor con-tacts with Italy, such as a house, frequent visits to thecountry, or business interests located there. Once deter-mined, the law subjects the taxpayer to worldwidetaxation in Italy for both income and estate tax pur-poses, including the obligation to report all the tax-payer’s assets wherever located in the world. The re-port is made on a form equivalent to the U.S. foreign

bank account report, except that it requires reporting ofnonfinancial assets (such as cars, houses, planes, art-work, and so forth) as well as financial assets. Foreignpersons with interests in Italy must pay particular at-tention to the rules to avoid being trapped into unin-tended Italian tax residency.

Under the facts of the case decided by the SupremeCourt, the taxpayer — a tennis player originally resi-dent in Italy — claimed to have moved his tax resi-dency to Monaco, while still traveling to Italy andother countries in connection with his business inter-ests and professional activity.

Under Italian law, Monaco is a tax haven and onthe blacklist, and Italian taxpayers who register as resi-dents there are presumed to still be resident in Italy forItalian tax purposes unless they prove that their actualresidence and domicile is located in Monaco. For thispurpose, residence is defined as the taxpayer’s habitualand regular place of living, while domicile is defined asthe taxpayer’s main center of personal, financial, andbusiness interests.

Three Residency Tests

Under Italian tax law, tax residency for individualsmust be determined for each relevant tax year underthree alternative tests, and tax residency is establishedwhen, for each year, either of the three tax residencytests is met for more than 183 calendar days. The threealternative tax residency tests are the registration test,the residence test, and the domicile test.

Registration Test

The registration test is mechanical and is met whenan individual is registered on the list of Italian residentindividuals held at the local municipal office of thetown where the residential address is located.1Ruling 20285 dated Sept. 4, 2013.

Marco Q. Rossi is thefounder and principal ofMarco Q. Rossi & Associatiin New York. E-mail:mrossi@lawrossi.com

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Residence Test

The residence test is factual and based on two com-ponents. The first component is physical presence inItaly, which must be regular and continuous, not spo-radic and occasional. When a taxpayer spends timeboth in Italy and abroad, the periods of presence abroadmust be computed and compared with the periods ofpresence in Italy2 to see which one is prevalent.

The second component of the residence test is thetaxpayer’s subjective intention to stay and live in Italyfor the foreseeable future. To determine the taxpayer’sintention to move to and live in Italy regularly for theundefined future, reference is made to the taxpayer’soverall conduct and social and personal habits, workingrelationships, family relationship, business and personalactivities, and so forth, and can be ascertained ex postfacto and exists even before the required minimumphysical presence is satisfied.

Overall, physical presence in Italy and all the factorsconsidered in order to determine the taxpayer’s inten-tion to establish his stable place of living in Italy mustbe prevalent compared with the presence and the fac-tors located in any foreign country. Regular and con-tinuous presence in Italy exists when the taxpayer trav-els frequently abroad, even for long periods of time, ifit is proved that the taxpayer maintains his home inItaly, returns to Italy as soon as he has a chance, andmaintains in Italy the center of his social and familyrelations.3

Domicile Test

Domicile is defined as the place in which a personhas established the headquarters of his business andinterests. For this purpose, interests include personal,social, moral, familial, economic, professional, andbusiness interests and relationships. The test can bemet regardless of the actual time spent or physicalpresence in Italy. Unlike the residence test, the domi-cile test is not based on the physical presence and timespent in Italy; rather, it revolves around the taxpayer’sintention to establish and keep her main center of rela-tions and interests in Italy and is based on the nature,extent, and quality of the connections between the tax-payer and Italy, compared with the taxpayer’s connec-tions with any other country.4

As a result, a taxpayer who lives primarily abroadbut maintains in Italy the principal center of his inter-

ests satisfies the test.5 The test requires a careful andcomparative evaluation and balancing of all the facts ofthe taxpayer and his business or personal relationshipsthat are connected with Italy compared to those con-nected with other countries. The Italian Supreme Courthas referred a decision to the European Court of Jus-tice on a nontax matter, for the purposes of concludingthat in case of multiple relations and ties connectedwith different countries so that the location of themain center of that person’s interest cannot be easilydetermined, a prevalent consideration should be givento the taxpayer’s personal relations.6

Recent DecisionsHowever, some more recent decisions suggest that

extensive economic interests may trump personal con-nections in establishing a taxpayer’s domicile andtherefore tax residency in Italy. Most notably, in ruling5382 of April 4, 2012, the Italian Supreme Court heldthat a taxpayer had his tax residency in Italy eventhough he lived with his family in Monaco (as heproved by showing school attendance certificates forhis children, memberships at local clubs, home utilitybills, and so forth) as a result of maintaining significantinterests and management positions at several family-owned Italian companies that he mainly managed fromItaly. A similar conclusion under different facts wasreached by the Tax Commission of Liguria (an appel-late tax court) in decision 87 of January 23, 2012.

GuidanceThe tax administration has issued specific guidance

on the application of the domicile test for the purposesof determining the Italian tax residency of individualtaxpayers in Circular 304/E of December 2, 1997. Cir-cular 304 provides instructions for the tax agency’scontrol and audit activities, which should include thefollowing:

• collecting all information contained in the taxagency database system;

• collecting copies of all public documents concern-ing purchases of real estate, gifts, formation ofcompanies and entities, and capital contributionsto companies and entities;

• collecting information on transfers of money fromor to foreign countries;

• reviewing the taxpayer’s family relations in Italy;• reviewing the taxpayer’s economic interests in

Italy; and• determining the taxpayer’s intention to remain and

live permanently in Italy as appearing from publicstatements or any other available information. ◆

2Supreme Court, no. 5292, dated Dec. 28, 1985.3Supreme Court, no. 1738 of Mar. 14, 1986; Supreme Court,

no. 5194 dated June 12, 1987; Supreme Court, no. 5584 of 1983,Circular 304/E of 1997.

4Supreme Court, no. 1342 dated May 22, 1963; SupremeCourt, no. 435 dated Feb. 12, 1973; Supreme Court, no. 2963dated May 5, 1980.

5Supreme Court, no. 3322 dated Dec. 29, 1960; SupremeCourt, no. 884 dated Mar. 21, 1968.

6Louloudakis (C-262/99), July 12, 1991; Supreme Court, no.13803 dated Nov. 7, 2011.

PRACTITIONERS’ CORNER

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