International taxation - tax residence of natural persons: reform is inspired by international best practice
The draft enabling act on tax reform introduces principles to avoid double taxation of natural persons in the year of transfer of residence for civil and tax purposes.
Article 3 of the draft enabling act on the reform of the tax system (d.d.l. no. 111/2023) under discussion in the Chamber of Deputies provides, finally and appropriately, for a revision of the domestic rules on the tax residence of natural persons, in order to make them consistent with the principles conventionally accepted internationally by OECD countries, especially in relation to new forms of remote working, as well as to adapt these principles with the rules on tax benefits for those moving to Italy.
One of the issues most keenly felt by practitioners of international tax law, due to its practical consequences often leading to ‘double taxation’ situations, concerns transfers of residence during the course of the year, when there is no coincidence as to the notion of tax residence in the different domestic rules, or when the two States have established tax periods that, not ending on the same day of the calendar year, overlap.
Double taxation in transfers of residence
Italian domestic legislation (Article 2(2) of the TUIR), in fact, considers individuals who, for the greater part of the tax period, i.e. for at least 183 days, are registered with the registers of the resident population, or have their domicile or residence in the territory of the State, to be resident for tax purposes in Italy. This implies that, for example, a person moving to Italy on 28 June from a State which, by internal rule, considers natural persons as resident for tax purposes until the day they actually move abroad, regardless of whether they stay for more or less than 183 days (the so-called ‘split year’ rule), could be considered, for the period between 1 January and 28 June of the year of the move, as resident for tax purposes both in Italy and in the State of origin, with the risk of being subject to double taxation.
The aforesaid situation is further complicated where the source state adopts the tax period not coinciding with the calendar year: think of the United Kingdom, where for the latter the tax period ends on 5 April of each year. In practice, the resolution of the residence conflict by application of the convention criteria is essentially impossible, leading to burdensome juridical double taxation.
The bilateral double taxation treaties in accordance with the OECD (OECD) model, in fact, after having entrusted the domestic laws of the two States with the task of defining the requirements on the basis of which a person can be considered resident there for tax purposes, Article 4 intervenes by establishing a series of criteria (so-called ‘tie break rules’) aimed at resolving the so-called conflicts of residence, i.e. the situations in which both States could invoke the person's tax residence. However, these principles have been developed to identify which of the two States is to be qualified as the State of the source of the income or as the State of residence of the person, when that person has criteria of concurrent connection with both States as being resident or having vital interests in different territories. They are therefore not suitable for resolving questions concerning conflicts of tax residence caused by overlapping periods in the year of transfer as a result of the non-bilateral application of the Split year, or by cases where tax periods do not coincide with the calendar year.
The Split year clause
The Split year was only introduced in international conventions in the Commentary to the OECD Model Convention and not included in the Model Convention, due to the resistance of some Member States to its general adoption. The Commentary (in paragraph 2 of Article 4) suggests adopting the criterion of splitting the tax period in the year of the physical transfer of a person, who will therefore be tax resident in the source State until the date of departure, and resident in the other State for the remainder of the tax period. Italy, however, has implemented this criterion only in the double taxation treaties signed with Germany and Switzerland, while, for the other States, it adheres to the general principle of Article 2 paragraph 2 of the TUIR.
After years of sporadic interventions on the subject, in the first months of this year, the Revenue Agency published several answers to interpellation requests (numbers 54, 73, 97, 126, 170 and 173), all, however, on the subject of Italy-Switzerland or Italy-Germany relations.
In the past, the same Tax Administration had clarified, in Resolution No. 471 of 2008, that the fractioning mechanism cannot be invoked in relations between States whose bilateral treaties do not expressly provide for it, as it is a specific rule to resolve cases of dual tax residence. Therefore, if a person moves to Italy from a State that applies the fractionation criterion but has not entered into a treaty with Italy providing for it, he will find himself having to pay taxes in both States for part of the year. The only possible solution in this scenario is to claim a tax credit for the taxes paid abroad.
Recently, the Court of Cassation with its Order No. 1234/2023, concerning a taxpayer who had transferred his residence from France to Italy in June 2022, confirmed the orientation of the tax administration, considering that the taxpayer was a tax resident in Italy for the entire calendar year - tax period 2022, as he could not invoke the split year criterion provided for by the OECD commentary, as it was not explicitly implemented by the bilateral convention between Italy and France.
The revision of the rules on tax residence provided for by the enabling act could therefore introduce an internal split year clause, which would make it possible to resolve situations of double tax residence in the year of the transfer from or to Italy, attributing the taxing power to our country for one split year and to the other State for the other, without the need to amend all the bilateral treaties in the network (Finance Department - Conventions for the avoidance of double taxation) of Conventions entered into by Italy. This solution would be more in line with international best practice and the principles of fairness and proportionality.
