How do you establish the tax residence of a company? Tax residency is very important to identify so as not to incur the phenomenon of foreign dressed companies. It is necessary to start from a first big distinction between the residence of partnerships and the residence of joint stock companies.
The requirements to establish the company’s tax residence and foreign dressed, tax residence actual residence
Pursuant to Article 5, paragraph 3, of Presidential Decree no. 917/86, TUIR, companies of persons resident in Italy are those that for most of the tax period have their registered or administrative office or the main object of the company, in the territory of the State.
Pursuant to Article 73, paragraph 3, of Presidential Decree no. 917/86, TUIR are resident in the territory of the Italian State limited liability companies that for most of the tax year have in Italy:
- The registered office of the company, which is identified with the registered office and address of the company indicated in the articles of association or articles of association;
- The headquarters of the company’s administration. That is, the place where the management of the company is carried out that can be identified by specific data such as the existence of administrative offices and the indications contained in documents or invoices;
- The main object of the company’s activity actually carried out in Italy as established by law, articles of association and by-laws.
The registered office of the company
To register a company in Italy (find all the necessary instructions for this link HERE), you need the address of the registered office which, however, does not always coincide with the actual office of the company. For the determination of the registered office of the company for tax purposes, please refer to the provisions of the Italian Civil Code on private international law.
The administrative headquarters of the company
The administrative headquarters of the company coincide with the actual headquarters of the company and are located in the place where the administrative body of the company permanently exercises its powers and functions. The administrative headquarters is the place where the strategic and management decisions of the company are formed and made. Therefore, the administrative headquarters is where the top management of the company is located and where the most important decisions are made.
The main object of the company’s business
The requirement of the main purpose of the company must be identified not so much in the activity provided for by the articles of association as, rather, in the commercial activity actually carried out by the company for the achievement of the corporate purpose. Therefore, if the business activity is, for example, the marketing of goods in a foreign country, the interpretation that the essential activity is only that of sale in the foreign country cannot be considered correct because, in this case, it could be argued that all companies that market their products in a single State and, therefore, in a specific reference market, would have tax residence in that State. It is sufficient that there is only one of the criteria defined by the TUIR to consider a company as a company resident in Italy.
Tax residence – Personal Residence – Tax Domicile – A.I.R.E.
For the purposes of determining the tax burden in Italy, it is appropriate to distinguish between 4 different concepts:
- Tax residence is the place that determines where to pay taxes. Usually, personal residence and tax residence coincides. But there are cases where one subject has his or her personal residence in one country and tax residence in another.
- The personal residence is the one where you have your usual residence and derives from the inscription in the municipal archives
- Domicile is the tax address where you decided to receive all communications from the Revenue Agency. It usually corresponds to the personal residence but may also be different.
- A.I.R.E. stands for Italian Registry of Residents Abroad. In case of transfer abroad, in order to no longer be considered resident in Italy it is necessary to register in AIRE. In this way you are removed from the lists of natural persons residing in Italy, but only if you live abroad for at least 183 days a year.
Attention: in order to be considered as a tax resident abroad, you must live outside the Italian State for at least 183 days a year and concentrate your business interests in the foreign country.
Examples of effective personal and tax residence abroad
- Giuseppe is a resident of Rome. He moved to France, but decided not to change his usual residence. So he resides in Rome, but lives in France for more than 183 days a year. His personal residence is Rome. His tax residence is in France. He is required to register with the AI.R.E. to declare the physical residence abroad.
- Giuseppe is a resident of Rome. He moves to France but lives there for less than 183 days a year. His personal and tax residence remain in Rome.
- Giuseppe is resident in Rome and moves to France for work.In France he lives there for more than 183 days a year. He therefore decided to transfer his personal residence to France. Giuseppe is registered in the municipal register of the French country in which he lives and in Italy he is registered in the A.I.R.E.. In this case, Giuseppe in Italy is no longer resident neither by registry nor by tax.
To ensure that you are subject to the tax regime of a State, you can apply for a tax residence certificate. This is the document certifying that you are subject to the tax system of that State and can be sent to the Italian Revenue Office.
Relocation abroad or foreign dressed companies
From a tax point of view, a legal entity resident in the territory of the State is subject to taxation for income produced anywhere in the world, according to the well-known principle of taxation on a global basis (so-called “world wide taxation”).
This is why the issue of the tax residence of companies becomes very important. In Italy, the phenomenon of foreign dressed is regulated by Article 73, paragraph 5-bis of Presidential Decree no. 917/86 TUIR.
The phenomenon of foreign dressed companies indicates the fictitious headquarters abroad of a company’s tax residence, which actually carries out its business and pursues its corporate purpose in Italy. Companies are usually found fictitiously abroad, in order to subject “foreign dressed” income to a more advantageous tax regime than the Italian one.
In order to verify the tax residence of companies, Article 73, paragraph 5-bis of Presidential Decree no. 917/86, provides that:
- Unless proven otherwise, the seat of the administration of companies or entities holding controlling interests in Italy shall be deemed to exist in the territory of the State;
- are controlled, even indirectly, pursuant to Article 2359, paragraph 1, of the Italian Civil Code, by persons residing in the territory of the State;
- are administered by a board of directors, or other equivalent management body, composed mainly of directors resident in the territory of the State.
Attention: in case of verification to establish the corporate investment, the burden of proof is not borne by the Financial Administration but by the company being audited.
Practical cases of foreign dressed. Mistakes to be avoided
The first and most important is to become a member or director of a company abroad, while remaining resident in Italy. Under Italian law, a company registered and managed by persons residing in Italy is no longer a 100% foreign company, even if its registered office and offices are abroad.
In these cases, it can be a case of relocation abroad, that is to say, “dressing” a company as if it were foreign. Foreign dressed is a crime that can have serious criminal consequences, even if the person’s position is not regularized with the tax authorities. In other words, being members or directors or opening a company abroad is not prohibited, but you cannot use the foreign company as a shield to pay less taxes in Italy. Another case of foreign investment may be the establishment of a company with registered office abroad, whose shareholders and shareholders are tax resident in Italy.
Ask for Damiani&Damiani legal assistance to locate the corporate tax residence
A company considers itself a tax resident in Italy when it has THE BOARD OF DIRECTORS composed mostly of persons resident in Italy or when the majority of the shares belong to persons resident in Italy.
Difference between Tax Residence and Actual Residence
Tax residence in Italy or tax domicile are many important for theformation of a company and many confuse tax residence, personal residence, actual residence and tax domicile of legal persons.
It is important to clarify immediately that for the purposes of identifying tax residence, under Italian law, it is not relevant to be resident in a home owned, which may also be in a foreign country. It is important to have a place where you can spend more than 183 days a year freely in any capacity.
Difference between Tax Residence and Actual Residence
The Italian Civil Code explains what tax residence is and what tax domicile is. We have already written HERE what the tax domicile is and that the tax residence may be different from the personal one. In Italy, tax residence usually corresponds to the registered and actual residence. It is not always easy to determine who is actually resident for tax purposes. In order to avoid double taxation and conflicts of residence attribution, international conventions developed on the OCSE model have established that;
- A person is considered to be a tax resident in the State in which he or she has a permanent residence.
But there are cases where a person has more than one permanent home, in more than one state. In these cases, the criterion for determining the tax residence on the basis of which to apply taxes to income produced anywhere in the world for the principle of “world wide taxation” is the actual residence.
- The actual residence is the one where the person has the most important personal and economic relationships.
Tax residence in Italy must be identified as the usual place where the taxpayer lives.
This means that the permanent dwelling on the basis of which to establish tax residence is not necessarily that of property or rent. Permanent residence on the basis of which tax residence is established is that for which the person has full availability, for unlimited periods of time, even if he has neither ownership nor possession of it. The interpretation is confirmed by the judgment of the Court of Cassation, judgment no. 26638 of 10 November2017,whereby the concept of “permanent home” expressed in many international conventions, is not related to the title to property but to the possibility of being able to dispose ofa dwelling at will and for unlimited periods. To give a practical example, for the purposes of identifying tax residence, it is not relevant to be resident in a home owned by a foreign country, but to spend more than 183 days freely at the home of your partner in Italy. Just as in the case of the abovementioned judgment.
To locate your tax residence, ask the team of lawyers of the business’s law professional corporation Damiani&Damiani