Tax residency in Italy: how to manage your physical presence and avoid double taxation.

Some important changes regarding the determination of tax residency in Italy were introduced by Legislative Decree no. 209/2023, which, in addition to defining domicile differently, also introduced the criterion of physical presence within the territory of the State to define an individual's tax residency.

Fully understanding the principles set forth in the various legislative provisions helps you avoid making mistakes when managing your presence in one country or another.

Tax residency: how is it determined?

The former article 2, paragraph 2, of the Tuir provides that a person has tax residence in Italy when in our country he has:

• residence, understood as habitual abode;
• the home, understood as the place where personal and family interests develop;
• registration in the registry office.

A further factor is added to what we've seen so far: physical presence in a given territory of the country for a period exceeding 183 days. It is precisely this last criterion that raises some doubts and perplexities: an element that essentially does not reflect what Italy has signed in the various double taxation treaties . And for this very reason, it could expose it to a number of tax disputes.

Consider, for example, the extreme case of students: they may be considered tax residents in Italy due to their habitual study stay in the country. This situation could give rise to a number of problems.

Physical presence and the criterion of rootedness

Physical presence, however, constitutes an objective criterion through which an individual's residence in Italy is established. This occurs regardless of the reasons for which the individual is present in our country.

According to the clarification from the Revenue Agency in Circular No. 20/E/24 , this situation may apply to individuals who are present in Italy for the majority of the tax year, even if they remain in the country on vacation or for study purposes. A similar situation may apply to individuals who are working in Italy, even if they maintain residence, family, and any other emotional ties abroad.

When these situations arise, mere physical presence in Italy—for most of the tax year—would establish tax residency in our country.

How physical presence should be verified

Physical presence in Italy can be verified based on evidence that proves one's presence in the country, even if it is not continuous and for a specific number of days.

It should be noted that the current regulation stipulates that each fraction of a day corresponds to a full day of physical presence: this aspect is essentially new, not present in the previous formulation. It also dramatically expands the number of individuals who could potentially be considered tax residents in Italy.

But how is its presence detected in our country? Examples of tracing include:

• flights:
• transfers by train or ship;
• payments made on the territory:
• cash withdrawals;
• invoices;
• subscriptions registered to Telepass or similar systems.

For their part, the taxpayer must be able to demonstrate, through documents that have probative value , that they have actually spent periods in Italy, but that when considered cumulatively, they are not sufficient to reach the maximum limit established by the legislation.

Exclusion from tax residency in Italy is determined by analyzing whether the individual's presence in our country is temporary and occasional, as may occur with a flight stopover in Italy due to a connecting flight to any foreign country.

Smart working: the issue of physical presence

A somewhat unique situation exists for workers working remotely , those who are present in Italy for more than 183 days. If the individual has established their tax residency in Italy, they will have to pay taxes in Italy on all income accrued during the year.

However, when smart workers are abroad, the 183-day threshold remains in effect: if they meet this requirement as well as the other three (civil residence, domicile, and registration in the Italian registry office), they must pay taxes in Italy.

Physical presence in double agreements

The physical presence criterion in Italy does not appear to be consistent with the agreements Italy has signed with other countries to avoid double taxation . In this case, the criterion we have just seen is adopted not to identify a person's habitual residence , but to identify income from employment .

This is the specific case of cross-border workers who spend more than half the year in Italy: they can be considered residents under domestic legislation. Unfortunately, this taxpayer may find himself in the situation of being considered a tax resident also in his country of origin. When this situation arises, Article 4 of the Conventions is useful: this provision serves to identify a single tax residence for the taxpayer who lives in a sort of dual residence .

To resolve the impasse , in this case, it's necessary to consider permanent housing . In the case we've described, the cross-border worker could have placed it in the country of departure, effectively dispelling any doubts at the source. But the solution to the problem may not always be so simple and straightforward.

In double taxation treaties based on the OECD model, the habitual residence criterion is the one that comes closest to the physical presence required by Italian law. In these agreements, the habitual residence criterion is applied when residence in one of the two countries cannot be established based on the permanent home or the center of vital interests.