In today’s post, in response to a number of questions we have had at De Tullio Law Firm regarding this topic, I explore the legal and tax implications of Italian residency and domicile as they pertain to EU and non-EU nationals.
This is a very complex area and because every individual’s case is different. I would strongly recommend that you seek advice and guidance from your lawyer and accountant.
For EU nationals, a visa is not required to enter or to work in Italy. A valid identity document issued by the relevant authorities in an individual’s country of citizenship is sufficient to allow entry to live and work in Italy.
Italian Immigration Law states that if a non-EU national wishes to enter and remain in Italy, it must be verified whether or not the individual is going to work in Italy.
If a non-EU citizen is going to work in Italy, they will need to apply for and obtain a work visa issued by the competent Italian Consulate in their country of citizenship or residency. A work visa allows non-EU nationals to work in Italy and can be obtained through quotas or extra-quotas.
If, on the hand, a non-EU national is not going to work in Italy and will be living on their own financial resources, an application for an elected domicile visa may be made. An elected domicile visa allows a non-EU national to establish their residence in Italy so long as the individual does not carry out any work activity in the country.
In order to obtain an elected domicile visa, an individual must be able to demonstrate, to the Italian Consulate in their country of citizenship or residency, that they are able to live in Italy without working or having recourse to Italian state benefits. The individual’s financial resources must be regular and constant. The income can be generated from an individual’s real estate property, regular economic and commercial activities, pension and/or trusts and/or other legal sources.
Applicable tax laws are determined by whether an individual is considered to be domiciled or habitually resident in italy.
Domicile is generally determined by an individual’s intention to permanently or indefinitely reside in Italy. Often, an individual will physically have a presence in the country. Domicile is a legal concept. Its rules have been established by way of case law rather than a statutory definition. There are three types of domicile:
Domicile of Origin: usually acquired from an individual’s parents.
Elected Domicile: by actually residing in Italy, with the intention of remaining permanently or indefinitely, an individual may acquire an elected domicile – also known as a domicile of choice. Where an elected domicile is later given up but a new elected domicile is not acquired, the domicile of origin is automatically re-acquired, even if an individual has no intention of returning to that domicile of origin.
Domicile of Dependency: This is the domicile a minor holds if the parent’s domicile changes while he/she is still a minor. When the minor reaches 18 they then hold an elected domicile.
Habitual residence is determined by which country the individual habitually resides in, as opposed to domicile, which takes in to account the subjective element of an individual’s intentions.
The EU test for habitual residence is based on an individual’s interests rather than by a particular duration of residence. In 2014, the European Commission published a practical guide on the Habitual Residence Test.
Under Italian tax law, an individual’s liability to pay tax in Italy is determined each fiscal year under three alternative tests. An individual is liable to pay tax in Italy if, for each year, either of three tax residency tests is met for more than 183 calendar days.
The three tax residency tests are: the registration test, the residence test and the domicile test.
The registration test is straightforward. If an individual is registered as resident with their local municipal office – in the comune where the individual’s residential address is located the test is fulfilled.
The residence test is factual and based on two components. The first component of the residence test is based on physical presence in Italy, which must be regular and continuous, as opposed to sporadic and occasional. If an individual spends time both in Italy and in another country, the periods of presence outside of Italy are calculated and compared with the periods of presence in Italy to see which one is prevalent.
The second component of the residence test is subjective; based on an individual’s intention to stay and live in Italy for the foreseeable future. In order to determine an individual’s intention to live in Italy on a regular basis, reference is made to a number of things, including but not limited to an individual’s conduct, social and personal habits, working relationships, family relationships, business and personal activities.
Italian tax liabilities arise if it is established that an individual’s physical presence in Italy is prevalent compared to an individual’s presence outside of Italy – in a foreign country. For example, a regular and continuous presence in Italy is deemed to exist if an individual travels abroad on a frequent basis. Even if an individual is away from Italy for extended periods of time but returns as soon as possible, for tax purposes, this would denote that an individual maintains Italy as the principal centre of their social and family relations.
Domicile is defined as the place where an individual has established their principal centre of interests for business and or social reasons. In this context, ‘interests’ include personal, social, moral, familiar, economic, professional and business interests and relationships.
Unlike the residence test, the domicile test is not based on physical presence in Italy or the amount of time spent in Italy; rather, it revolves around an individual’s intention to establish and keep their main centre of relations and interests in Italy. There are tax implications based on the nature, extent and quality of the connections between an individual and Italy, compared with an individual’s connections with any other country. As a result, an individual who primarily lives abroad, but maintains their principal centre of interests in Italy satisfies the domicile test. The domicile test therefore requires careful and comparative evaluation to balance all the facts related to business or personal relationships that are connected with Italy compared to those connected with other countries.
In 2011, the Italian Supreme Court referred to a 1991 decision of the European Court of Justice relating to a non-tax matter. The Italian Supreme Court concluded that in the case of multiple relations and ties with different countries, where the location of the principal centre of an individual’s interest cannot easily be determined, a prevalent consideration should be given to the relations of a personal nature.
However, more recent decisions suggest that extensive economic interest may outweigh personal connections in establishing an individual’s domicile and therefore an individual can be considered liable to pay tax in Italy.
In a ruling in April 2012, the Italian Supreme Court held that a family living in Monaco qualified for tax residency in Italy despite proving, amongst other things, childrens’ school attendance records, household utility bills, membership of local clubs that the family lived in Monaco. The ruling was made based on the fact that the individual maintained significant interests and management positions at several families owned Italian companies which he mainly managed from Italy.
The Italian tax administration has issued specific guidance on the application of the domicile test for the purposes of determining Italian tax residency of individuals by way of the Circular n. 304/E of December 2, 1997. Circular 304 provides instructions for the tax agency’s control and audit activities, which should include the following:
- Collecting all information contained in the tax agency data base system;
- Collecting copies of all public documents concerning purchases of real estate, gifts, formation of companies and entities; capital contributions to companies and entities;
- Collecting information on transfers of money from or to foreign countries;
- Reviewing the taxpayer’s family relations in Italy,
- Reviewing the taxpayer’s economic interests in Italy;
- Ascertaining the taxpayer’s intention to remain and live permanently in Italy as appearing from public statements or any other available information.