Guillermo Narvaez
Tax Partner at Kreston Mexico City Office, Kreston FLS
Guillermo Narvaez is a Tax Partner at Kreston FLS Mexico City Office and the Technical Tax Director, Global Tax Group, Kreston Global and member of the International Fiscal Association (IFA). Guillermo is a tax expert on international taxation, corporate taxes, transfer pricing, mergers and acquisitions, corporate reorganisations and litigation.
Within international taxation, Guillermo specialises in the analysis and interpretation of treaties to avoid double taxation applied to international transactions.
New rules on tax residency in Italy
December 19, 2023
As of 2024, new rules on tax residency in Italy will change. The amendments may generate new implications when the tiebreaker of a DTA signed by Italy is intended to apply.
It corresponds to the States to set out the rules to determine when an individual should be deemed as a tax resident in that State. Accordingly, domestic tax legislation determines who will be subject to tax in a specific jurisdiction.
Tax treaties
Tax treaties do not address this matter nonetheless they state the rules to define where an individual should be considered a tax resident when such an individual eventually is resident in two different jurisdictions at the same time. This regulation is known as ‘tiebreaker rules’ and generally is part of the residence article of double tax agreements (DTA) to define which jurisdiction has powers to tax a person and accordingly to avoid double taxation when such a person is subject to tax in two states at the same time.
Domicile
One of the relevant changes in the domestic statute of Italy is in the definition of ‘domicile’. Domicile is one of the key elements to define if a person should be considered as a resident in Italy. So far (2023), an individual has their domicile in Italy when therein is their principal place of business or interests. In consequence, that person is deemed a tax resident of that country.
Familial relationships
However, things will change in 2024. The new rules set out that domicile will be in Italy if an individual undertakes most of their personal and family relationships therein and not their business and interests. This means that the law will change from an objective criterion to a subjective one to define the residence of a person by domicile.
A first point to keep in mind is that an individual can be a resident of Italy as of 2024 without having changed their way of life at all. In other words, a change in the activity or performance of an individual is not necessarily the driver of generating new liabilities in Italy for being considered a resident of that country as of 2024 but for a legal amendment.
OECD tiebreakers
Tiebreakers based on the OECD Model Convention (MC) provide a hierarchy to outline the criterion to apply to define the residence of an individual. The latter will be defined in the following order – where a permanent home is available, where the centre of vital interests is located, where the habitual abode is, or according to their citizenship.
Virtual interests
The ‘vital interests’ notion is a mixed concept comprised of objective and subjective elements interlinked. Fulfil one of the elements meaning having only personal and family ties in Italy may create residence according to the domestic framework of Italy in force as of 2024, however, when applying the tiebreaker of a DTA based on the MC it could drive to a different outcome given the lack of one of the elements of the centre of vital interests: the economic relations.
The key question to solve is, if that would be the situation, could the individual in such circumstances be deemed as a tax resident in Italy after applying the tiebreaker of a DTA based on the MC and having only in that jurisdiction personal relations? The response to that question is likely to be in a negative sense.
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