Corporate tax residency: International taxation overhaul
The Italian Government preliminarily sanctioned the new draft of the decree on international taxation last October 2023. The draft has now been forwarded to the Finance Committee of the Chamber of Deputies, signifying a major reform that revises tax residency by altering at least two of the three criteria used to deem companies fiscally resident in Italy.
CURRENT FORMULATION
Crucially, the proposed formulation deviates from the existing norms outlined in the Income Tax Act (Testo Unico delle imposte sui redditi, DPR n. 917/86.)
As per the current section 73 TUIR, paragraph 3, a company’s fiscal residency hinges on the presence, for a significant part of the tax period, of one of three alternative parameters within Italian territory:
- The registered office,
- The administrative office, or
- The primary business purpose.
Meeting any of these parameters subjects the company or entity to taxation in Italy. Further details in paragraphs 4 and 5 specify that the exclusive or principal purpose of the entity is determined by applicable law, articles of incorporation, or bylaws/constitution. In the absence of formal documentation, the primary purpose is gauged by actual activities within the State’s territory.
A distinct scenario, the “tax inversion,” is governed by paragraph 5-bis section 73. It occurs when a company fulfils two key criteria:
- It is formally resident abroad, possessing foreign articles of incorporation and bylaws.
- It has certain connections with the Italian territory, effectively shifting the company’s fiscal residency from abroad to Italy.
Tax inversion poses a heavier burden on the taxpayer, with a reversed burden of proof placed on them.
NEW FORMULATION OF TAX RESIDENCY CRITERIA
The current draft decree, now under parliamentary scrutiny, maintains the “registered office” as a formal criterion for fiscal residency and introduces the concepts of “place of effective management” and “primary place of ordinary management,” replacing existing norms.
- “Place of effective management” is defined as “where strategic decisions concerning the company or entity as a whole are systematically and continuously taken.”
- “Primary place of ordinary management” referred as “the continuous and coordinated execution of acts of daily management concerning the company or entity as a whole.”
OBJECTIVE OF THE REFORM
By discarding the “primary business purpose” and “administrative office” criteria, the reform aims, as outlined in the technical report (RT), to simplify regulations for improved its applicability.
The criteria of the “place of effective management” and the “primary place of ordinary management” also align national law with international best practices and OECD Commentary on the Model Convention criteria.
PLACE OF EFFECTIVE MANAGEMENT
The “place of effective management” particularly aligns with the business residence criterion in existing Double Taxation Conventions in Italy. The RT clarifies that activities such as supervision and monitoring by shareholders are distinct from effective management, countering interpretations in tax inversion cases.
PRIMARY PLACE OF ORDINARY MANAGEMENT
Concerning the “primary place of day-to-day management,” already adopted in various European countries, it encompasses all activities related to the regular functioning of the company as a whole, constituting “day-to-day management.”
In conclusion, these new criteria underline the rationale behind the legislative innovation, emphasizing the importance of factual elements in determining tax residence status, fostering an approach that enhances legal certainty.
Source: http://documenti.camera.it/leg19/dossier/pdf/VQAG090.pdf
