The Financial Administration undertakes the investigative activity on the tax residence of contributions. The role of the exchange of financial information for tax purposes on establishing the tax residence of contributors.
The effectiveness of the fight against international tax evasion and avoidance is subject to the correct identification of the status of the individual taxpayer. The title of the proper tax residency depends on the final determination of the jurisdictions responsible for taxation.
Precisely based on these considerations, the Italian tax authorities carry out thousands of checks on the tax residence of taxpayers every year aimed to avoid tax fraud and allow the correct taxation of the income received. Over the years, the methods of assessment of tax residence have been refined and more effective.
Today, the primary tool to identify subjects “fictitiously” not resident in Italy is the automatic exchange of information.
In this contribution, I want to illustrate the main tools available to the Italian tax authorities to implement tax residence assessments. In particular, I will focus on the automatic exchange of information (CRS) in which Italy participates. Knowing this type of activity can be substantial. Moreover, very often, taxpayers make mistakes in their transfer of residence precisely because of the lack of regulatory knowledge. Finally, knowing the assessment methods will be helpful if the tax authorities want to check your situation as an expatriate.
Fiscal residence in Italy
Tax residency is one of the founding principles of tax law. Its importance is fundamental for direct taxes and “reflexively” for indirect taxes.
It is precisely on the principle of tax residence that a tax resident in Italy is required to pay taxes on income wherever it is produced. This is the principle of “worldwide taxation,” referred to in the first paragraph of Article 3 of Presidential Decree no. 917/86 (TUIR).
It should be remembered that a person (individual) is considered to be resident in Italy for tax purposes if he/she has been resident in Italy for 183/184 days during the calendar year (according to art. 2, paragraph 2 of the TUIR):
- Is registered in the registers of the resident population (formal criterion); or
- Is domiciled in the territory of the State under Article 43, paragraph 1 of the Civil Code (c.c.) (criterion of a substantial nature); or
- He/she has his/her residence in the territory of the State according to art. 43 paragraph 2 of the Civil Code. (criterion of a substantial nature).
Being registered at the Anagrafe deems person as “fiscally resident” in Italy. This is the case regardless of the factual verification of the actual presence of domicile or residence in Italy. On the contrary, the cancellation from the Registry and the contextual registration with AIRE (only for Italian citizens) is not a sufficient condition for being considered “not fiscally resident.”
To exclude the tax residence in Italy of a taxpayer, it is not sufficient that he is registered with AIRE (i.e., he is deleted from the Registry). It is, in fact, necessary that the taxpayer has neither residence nor domicile in Italy. This principle has been confirmed several times by the jurisprudence of legitimacy.
Tax residence of natural persons in international conventions
In addition to the national rules on tax residence, principles of a conventional nature must also be considered. These are governed by Article 4 of the OECD Model Tax Convention.
This article provides for the identification criteria of tax residence applicable to a person resident in at least one of the two contracting States to resolve any cases of dual residency. I refer to situations of so-called “dual residence.”
In particular, Article 4, paragraph 2 of the OECD Model identifies the so-called “tie-breaker rules.” These are a series of rules to be read in a hierarchical and non-competing manner. These allow the identification of residence in only one Contracting State.
These criteria, in hierarchical order, are:
- Permanent housing;
- The center of vital and economic interests;
- The usual stay;
Where these criteria do not allow residents to be attributed to a Contracting State, the competent authorities of the Contracting States shall resolve the issue by mutual agreement. In this way, it is possible to limit cases of double residence and double taxation.
For these reasons, in the event of a dispute, it is helpful to invoke the presence of a Double Taxation Convention (DTA). This is to allow the so-called “de facto residence” to prevail and settle the costs of dual residence.
On this point, it should be noted that the jurisprudence of the Court of Cassation has affirmed, in the application of the tie-breaker rules of a conventional nature, the prevalence of the center of vital and economic interests (in the foreign country) over the formal requirement of registration in the Register of the resident population. In this sense, the Supreme Court departed from the consolidated formalistic orientation.
The importance of the foreign residence certificate
Foreign tax residency certificate prove the foreign tax residency. Thus, Italian citizens can integrate non-residence by invoking the provisions mentioned above of the conventional matrix by producing a tax residency certificate according to Article 4 of the OECD Model.
The certificate can be used as a helpful tool to overcome the formal requirement of AIRE registration. This “derogation” from the AIRE regulations is applicable only for the “Regime for Expatriate Workers.” These provisions are particularly interesting for all Italian citizens permanently residing abroad but not registered with AIRE.
Openings for non-registration in AIRE from the regulations on expatriate workers
On this issue, it is helpful to highlight that, following the amendments made by Article 5 of Decree-Law no. 39/14 to Article 16 of Legislative Decree no. 147/15, the Government has recognized the possibility for Italian citizens to integrate the non-residence requirement by invoking the provisions mentioned above of conventional matrix.
In particular, it is possible to produce a certificate of foreign tax residence, according to art. 4 of the M-OCSE, instead of the formal requirement of AIRE registration. This is to obtain the benefit for workers who have emigrated to Italy (“Workers who have emigrated to Italy: the benefit“).
In particular, even though the above-mentioned “AIRE derogation” is applicable only for the impartial workers’ regime, it is clear that such provisions can be particularly interesting for all Italian citizens permanently residing abroad but not registered with AIRE.
Verification of split year clauses
When talking about the transfer of residence abroad and the assessment of tax residence, it is necessary to pay attention to some particularities. One of these is undoubtedly represented by the so-called “split year clauses.” These provisions are present in some Conventions against double taxation, such as in the case of Switzerland.
These clauses provide for a fractioning of the tax period, also for tax purposes. In proposed, the same Revenue Agency has specified that:
- This rule does not affect the conventional definition of the resident;
- Nor can it supplement the domestic definition of residence referred to in Article 4(1) M-OECD. It is admitted for the sole purpose of paragraph 2 below to resolve cases of double tax residence.
In practice, in the case of a transfer of an individual from Switzerland to Italy, the criterion of splitting the tax period applies only if the transfer takes place in the first part of the tax period.
If there is a case of the second residence for the first part of the year (i.e., between 1 January and the date of the transfer), the split year clause may be invoked. In this case, the taxpayer will be considered a resident in Italy only from the actual transfer date.
Assessment of tax residence: the investigative activities of the tax authorities
The first requirement to be met to transfer one’s residence abroad is AIRE registration. Only when this registration is verified for at least 183 days in the year is the Italian tax residence “removed.”
Only from this moment is it possible to discharge the Italian tax obligations only on income (if any) produced in the State’s territory. This, according to the provisions of Article 23 of the TUIR (taxation at source).
AIRE registration is carried out by applying to the nearest Italian Embassy or Consulate. The effective date of enrollment is when the office communicates the enrolment to the last Italian municipality of residence of the person concerned.
In this case, the notification must be made within 180 days of registration. Otherwise, it is not possible to make the transfer of residence in the tax period.
Therefore, AIRE registration, on the one hand, is the principal formal requirement – necessary but not sufficient – to prove the non-resident status in the State’s territory. But, on the other hand, it is instrumental for monitoring Italian taxpayers leaving Italy and for the verification of the effectiveness of the transfer abroad.
Domicile and residence in the assessment of tax residence
When we talk about a transfer abroad and possible verifications on the residence, we must always refer to CM n. 304/97. This states that:
“cancellation from the register of the resident population and
registration on the register of Italians resident abroad (AIRE)
does not constitute a decisive element for excluding domicile or
residence in the State, since the latter may be inferred by
Any means of proof”.
The circular provides operational indications on the activities of assessing tax residence to identify “the conditions for taxation in Italy” and ascertain “the income withheld from taxation.”
The audit goal is to identifying the factual elements that can lead back to Italy:
- Residence, meaning the place where the person has his or her habitual abode;
- Domicile means the place where the person has established the principal place of business and interests.
The role of municipalities in ascertaining tax residence
Local Municipalities provide the list of its residents (and foreign ones) to the tax office, and thanks to the integrated database, the tax office has access to the updated list of residents for tax purposes. This integration proves very effective to tackle tax evasion.
Transfer of residence abroad to Black List countries (so-called Tax Havens)
In this context, the provision of Article 2, paragraph 2-bis of the Consolidated Income Tax Law is worthy of further consideration. It provides as follows:
“Citizens who have been removed from the registers of the population resident in Italy and transferred to States or territories identified in the black list referred to in the Ministerial Decree of 4 May 1999 are considered residents in Italy unless there is proof to the contrary.
This is a relative legal presumption that the phrase “unless proven otherwise” places the burden of residence abroad on the expatriate citizen.
This evidence may be provided by any means of a documentary nature designed to show:
- The existence of a habitual abode;
- The center of vital interests (domicile) in the foreign country.
Establishment of tax residence: strengthening of investigative activities by the tax authorities
The activity of ascertaining the tax residence of taxpayers has increased in recent years. This has also occurred thanks to the monitoring of municipalities, which must file to the tax office the residency data of persons who have requested to be enrolled in AIRE for the “formation of selective lists for controls relating to undeclared financial activities and foreign asset investments.”
- To ascertain the reality of the foreign tax residence of the person registered with AIRE;
- Check that there are no elements such as to lead back to Italy the residence and/or domicile of the person registered with AIRE;
- Ascertain foreign source income produced by the self-declared non-resident.
The Italian Revenue Agency has drawn up a list of objective criteria to draw up unique selective lists (Measure no. 43999/17). These are lists that should identify individuals who have used AIRE registration to evade taxation in Italy on a worldwide basis illegally.
On top of that, local municipalities communicate to the tax office the list of individuals who cancelled their tax residency and moved overseas, regardless of their Italian citizenship.
The elements that may lead to an assessment of tax residence
The “alarm bells” that could lead to the identification of suspicious situations regarding the actual foreign tax residence of persons registered with AIRE are the following:
- Declared residence in one of the States and territories with privileged taxation, identified by the Ministerial Decree of 4 May 1999;
- Movements of capital from and to abroad, transmitted by financial operators as part of tax monitoring according to Legislative Decree no. 167/90;
- Information on real estate and financial assets held abroad transmitted by foreign tax administrations under European directives and automatic information exchange agreements;
- Residence in Italy of the family nucleus of the taxpayer known as the “center of vital interests“;
- Acts of the registry indicating the actual presence in Italy of the taxpayer;
- Active electric, water, gas, and telephone utilities;
- Availability of motor vehicles, motorcycles, and recreational craft;
- Ownership of an active VAT number;
- Significant holdings in resident partnerships or closely held companies;
- Holding of corporate offices;
- Payment of contributions for domestic workers;
- Information transmitted by the tax withholding agent with the Certificazione Unica and the 770 forms;
- Information on VAT-relevant transactions.
As you can see, any subject registered with AIRE could fall into one or more cases reported. This, despite the effectiveness of their residence abroad.
The risk, therefore, is that they may end up in the meshes of an assessment on tax residence taxpayers, really expatriates. All this frustrating the action of contrast to subjects, not resident abroad.
Additional databases available to the tax authorities
These selective lists of taxpayers can be integrated with other information already in possession of the tax authorities. This information is relevant as an indicator of actual presence in Italy, including insurance, pension funds, registration in registers, leasing, and rental contracts.
The real challenge for the tax authorities is to be able to integrate all the databases in force. Of course, I am referring to ANPR, the information in the tax register, and the automatic exchange of information.
Investigation and preliminary activities following the exchange of information
Tax Administration through:
- AIRE selective lists;
- The information in the databases;
determine and guide the Financial Administration in the transmission of invitations and questionnaires according to Article 32 of Presidential Decree no. 600/73.
This is, in these cases, the first step towards controls that could lead to an assessment notice.
Based on the information collected abroad, thanks to the many forms of exchange of information (automatic, on request, and spontaneous), the tax authorities have started investigations and/or inquiries by transmitting:
- Compliance letters. Documents referred to in Order No. 299737/2017 of the Director of the Internal Revenue Service;
- Invitations or questionnaires are under Article 32 of Presidential Decree no. 600/73 (following exchange of information).
Compliance letters sent to taxpayers
One of the main tools for establishing tax residency is based on the use of compliance letters as per the Revenue office Measure No. 299737/17. These letters include information provided by foreign tax authorities.
The taxpayer who receives such letters can file an amended tax return, and self assess the applicable fines through the “Ravvedimento operoso.”
This type of letter is usually sent to specific taxpayers for whom possible declaration anomalies have emerged. This type of analysis is carried out following data received from foreign tax administrations. These are the effects of the automatic exchange of information (Common Reporting Standard (CRS)).
These letters are the result of a cross between:
- The declarative data emerging from the RW section relating to foreign financial and patrimonial assets;
- The data received from the automatic exchange of information.
Therefore, all taxpayers with CRS-relevant foreign assets could be the recipients of a compliance letter for RW purposes.
What to do if you receive a compliance letter?
If you are the recipient of a compliance letter, it means you are the subject of a tax residency assessment.
From a practical standpoint, the choices available to you may be as follows:
- Disregard the letter;
- Request more information to the local Tax office;
- Provide relevant information to the office, justifying the non-completion of the RW section.
The latter solution seems preferable. This solution allows you to immediately clarify the anomaly found resulting from the data received from the CRS and those declared.
The receipt of invitations or questionnaires
The sending of invitations or questionnaires to the taxpayer is the second tool available to the tax authorities to assess tax residence.
In this case, the tax office is already on your back. This is because elements of inconsistency have already emerged for the Financial Administration.
The requests for clarification concern particular categories of income considered crucial for the identification of potential cross-border evasion, such as:
- Directors fees;
- Attendance fees;
- Costs to artists and athletes;
- Self-employment remuneration;
- Business consulting contracts;
- Commissions and payments.
Therefore, we can affirm that the requests for clarifications have taken on an investigative nature as they are supported by sufficient grounds under Article 32 of Presidential Decree no. 600/73.
The most problematic aspect of invitations or questionnaires is the greater sensitivity adopted by the Revenue.
When it comes to foreign holdings and income, the tax authorities ask for documentation that goes far beyond the specific income they know of.
“statements of account of all bank accounts held abroad or of any other foreign financial assets through which it has been possible to generate foreign source income, in your name or at your disposal, held abroad for the tax years since their establishment.”
What happens if I don’t respond to invitations or questionnaires?
Failure to respond to invitations or questionnaires has significant consequences in the event of a tax residence assessment.
Such calls are therefore characterized by precise information that the financial administration can easily verify. This may be undeclared income or the availability of unmonitored financial assets.
In this case, any non-response or partial response following the sending of an invitation or questionnaire will be sanctioned with:
- The “prohibition on the use in administrative and procedural proceedings of information and data not relied on by the taxpayer“;
- Monetary sanctions are arising from failure to monitor taxation or inability to pay direct taxes.
Establishment of residence abroad and tax assessments: conclusions
The issue of tax residence is the fundamental starting point for identifying possible tax claims by individual jurisdictions.
The issue of tax residence is a fundamental starting point for identifying possible tax claims by individual jurisdictions.
As a result of international agreements on exchanging information, individual financial intermediaries and tax authorities play a decisive role in identifying tax residence.
However, the effectiveness of such due diligence could be compromised, for example:
- In cases of dual residence. Situations often resolved through self-certification of residence;
- Membership in special schemes aimed at acquiring residence or citizenship in foreign countries.
However, to date, from what is my experience in the field, the main issue related to this type of tax residence assessment is the following:
- Failure to automatically reconcile data in tax returns and RW return with data from CRS;
- Sending compliance letters also to entities that are in line with TUIR requirements in terms of tax residence;
- The vital documentation activity required of the audited taxpayer also goes beyond the income or financial activity being audited.
The tax authorities should improve all these aspects to achieve more targeted assessments.
Controls on foreign financial intermediaries
Finally, it should be noted that the tax authorities, also based on information obtained from the automatic exchange of information, have also started investigations against foreign intermediaries. These are entities that have carried out activities with Italian customers.
In particular, the Guardia di Finanza sent questionnaires to over 250 intermediaries (based in Switzerland, Monaco, and Liechtenstein).
Principality of Liechtenstein) Questionnaires. These are documents aimed at identifying the activities carried out by foreign banks concerning customers resident in Italy for tax purposes.
These requests originated, in particular, from the loan contracts activated by Italian taxpayers with the aforementioned foreign intermediaries.
foreign intermediaries. A circumstance which, de facto, would have constituted the prerequisite
For the payment of tax on the interest paid on the capital disbursed.
Therefore, considering the extent of the information requested (aimed at a complete mapping of the activities carried out by the individual intermediary), these communications have created quite a few concerns for the operators. The latter is still evaluating how to obtain positive feedback on the requests made by the authority.
These findings, if not received, could result in significant administrative and criminal penalties.
I am saying that if you want to move abroad, you can’t think about underestimating domestic and conventional transfer tax law.
Only in this way you can avoid running into tedious tax assessment activities, and we advise the assistance of a chartered accountant expert in international taxation.
If, on the other hand, you have already received or believe you will receive a compliance letter, or invitations or questionnaires, you should consult an expert.