Though often used interchangeably, “domicile” and “residence” have distinct meanings that are crucial when it comes to Italian tax liabilities and legal matters in different countries.
- A domicile is a permanent home where you intend to return, and each person can only have one.
- Residence is a temporary place where you live, and you can have more than one at a time.
Understanding the differences between domicile vs residence Italy becomes essential for legal purposes, particularly in the realm of taxation, as the country of domicile may have the right to tax worldwide income. Additionally, countries may use residency laws to impose tax obligations based on time spent within their borders.
Tax Residents and Italian Tax Law
On 16 October 2023, the Italian Government preliminarily approved a legislative decree to implement a reform regarding international taxation. The proposed Draft Decree, awaiting parliamentary approval, introduces a significant change in determining tax residence for individuals.
Under Italian tax law, a resident in Italy is someone who spends at least 183 days in the country within a calendar year. This definition is critical for determining whether you’re taxed as a resident or non-resident. Residents are taxed on their worldwide income, while non-residents are taxed only on income earned within Italy.
Meanwhile, domicile in Italy refers to the place where you intend to stay permanently or indefinitely. This can be different from your residence, as domicile reflects where your primary business and interests are located.
Moreover, the new Draft Decree expands tax residency rules by adding a physical presence test similar to the substantial presence test used in the USA. It retains the civil law test of residence but adjusts the domicile definition, emphasizing personal and family relationships over business interests.
Individuals who are physically present in Italy for most of the year, including fractions of days, are presumed to be tax residents, subject to a rebuttable presumption if registered in the population register for most of the year. Unlike some jurisdictions, Italy has not adopted the “split year” mechanism, meaning presence throughout the year counts toward tax residency.
Current Definition of Tax Residence
Under Art. 2(2) of the Italian Income Tax Code (IITC), individuals are considered tax residents in Italy if, for most of the year (more than 182 days), they are:
- Registered in the general register of the resident population,
- Resident in Italy according to Art. 43(2) of the Italian Civil Code, or
- Domiciled in Italy following Art. 43(1) of the Italian Civil Code.
Residence, defined as the place of habitual abode, depends on both objective (permanently living in a place) and subjective (intending to stay) elements. Domicile is the primary location for an individual’s business and interests, including moral and social connections.
Singles: Flexibility and Tax Efficiency
For single individuals, choosing between domicile vs. residence in Italy largely depends on how much time you spend in the country and your financial interests. If you’re a digital nomad or frequently traveling, establishing a residence in Italy but maintaining a domicile abroad can help minimize your tax burden, as you’ll only be taxed on income generated within Italy.
However, if your habitual residence and professional life are rooted in Italy, the Italian tax authorities may consider you a tax resident, which means you’ll be taxed on your global income. For singles, maintaining a domicile outside Italy could be beneficial if you plan to work or hold assets in foreign countries.
Couples: Tax Considerations for Joint Income
Couples, whether in civil partnerships or living together, may face different fiscal scenarios. If both partners have their residence and domicile in Italy, they will be subject to Italian income tax on their combined income. Italy does not offer joint filing for income tax, but couples should still consider the tax impact on household income.
If only one partner is a tax resident in Italy, while the other remains domiciled or resident abroad, tax planning becomes more complex. In such cases, it may be beneficial for one partner to maintain their domicile in a lower-tax jurisdiction while the other remains a resident in Italy for tax purposes.
Married Individuals: Family Relationships and Worldwide Income
For married couples, Italian tax residency rules take family relationships into account. If both spouses live in Italy, they are generally considered tax residents and subject to taxes on their worldwide income. However, the flexibility to manage tax implications through domicile is reduced, as married couples are more likely to be viewed as a single unit by the Italian tax authorities.
If one spouse works abroad or has significant interests in foreign countries, it may be more advantageous for that spouse to maintain domicile abroad to reduce their global tax liability. However, any income earned in Italy would still be subject to Italian taxation.
Animus Revertendi: The Intent to Return
Animus revertendi, or the intention to return, is essential for establishing domicile and tax residency in Italy. Individuals eligible to demonstrate this intent include those with permanent ties to Italy, such as expatriates or foreign nationals with homes in the country.
Who Is Eligible?
- Anyone who has a permanent home in Italy and intends to return, such as expatriates or Italians living abroad, can establish a domicile.
- Foreign individuals who have established a home in Italy with the intent to return may also qualify.
- Those with ties to multiple countries must demonstrate their intent to return to their Italian domicile to maintain tax residency.
Tax Rates:
- Residents: Taxed on worldwide income at progressive rates ranging from 23% to 43% based on income brackets.
- Non-Residents: Taxed only on Italian-sourced income, generally at a flat rate of 30% on specific types of income (e.g., dividends).
So…
When considering domicile vs. residence in Italy, it’s important to evaluate your specific situation—whether you’re single, in a couple, or married. Physical presence, amount of time spent in Italy, and the location of your professional and personal interests will dictate your tax obligations. Consulting a tax expert can help you optimize your tax residency to minimize the fiscal burden and ensure compliance with Italian tax authorities.
Are you interested in this topic? Check our related articles here: Tax Returns in Italy, Path to residency: Italy’s permit of stay requirements, Living (and Paying Taxes) in Italy with a Green Card and Establishment of tax residence: investigative activities
