International tax law conflicts on residence of individuals Paolo Ludovici Ludovici Piccone & Partners 24 November 2017
Residence status under Italian tax law Under Italian tax law, natural persons are resident of Italy if, for the greater part of the year (i.e. more than 183 days per year): i. are enrolled in the register of the Italian resident population; or ii. have their «residence» (defined by the Italian civil code as place of habitual abode) in Italy iii. have their «domicile» (defined by the Italian civil code as the principal centre of business, family and social interests) in Italy Italian citizens who cancel themselves from the register of the Italian resident population and transfer their residence to «privileged tax jurisdictions» are deemed to be Italian resident by operation of law (rebuttable presumption) Other nexus criteria do not assume relevance for the tax residence status: for instance, Italian citizenship or immigration VISA (including elective residence VISA) 2
Article 4, paragraph 1, of the OECD Model For the purposes of this Convention, the term «resident of a Contracting State» means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein 3
«By reason of» requirement The criteria for determining treaty residence include: Domicile Residence Place of management (not applicable to individuals) Any other criterion of a similar nature The mere enrollment in the register of the resident population represents a criterion of «a similar nature» to residence and domicile? What about the part of the year in which the person is not present in Italy but is nonetheless regarded as resident for domestic tax purposes? Individual moving his residence to Italy on 14 April 201X Tax residence in Italy for the entire 201X Residence from 1 January 201X to 14 April 201X is a criterion of «a similar nature»? 4
«By reason of» requirement (follows) The extension of residence status to the entire fiscal year and the non-application of split year mechanisms often lead to interim periods of double taxation (or non taxation) Interim periods of double taxation (or non taxation) may arise also due to nonhomogeneous tax year (for instance, UK tax year vs. Italian tax year) In principle, the protection of Double Tax Agreements («DTAs») should apply also in relation to interim periods (see OECD Commentary on Art. 4, par. 10) In Italy, Tax Authorities does not recognise the split-year unless expressly provided by DTAs, as in the case of the treaties with Switzerland and Germany (see Resolution no. 471/2008) 5
«Liable to tax» requirement Under domestic tax laws, special regimes may apply: Swiss lump sum regime: an expenditure-based simplified taxation for foreign nationals who are domiciled in Switzerland UK remittance basis regime: UK resident but not domiciled individuals may be taxed in the UK on foreign income and gains only if and when remitted to the UK Italian flat tax regime: a 100,000 substitutive tax applies on all foreign source income of individuals who become Italian resident after a qualified period of residence outside of Italy Similar special regimes apply in other EU States (for instance, Portugal and Malta) and non-eu States (for instance, Australia, China, Singapore) 6
«Liable to tax» requirement (follows) In principle, such special regimes should be considered as meeting the «liable to tax» requirement so far as they do not fully exclude foreign income from taxation both flat tax regimes (as the Italian one) and remittance basis regimes (as the UK system) do not fully exclude from taxation foreign source income but provide respectively for a flat taxation and a conditioned taxation According to the OECD Commentary on the remittance basis regimes, Contracting States wishing to restrict the application of the provisions of the Convention need to provide for a specific clause (Art. 1 par. 26.1) see, for instance, Article 4 of the Italy- Switzerland Tax Treaty If individuals applying for a special regime cannot be considered as «liable to tax», the voluntary opt-out and application of the oridnary regime with respect to items of income arising from one or more specified States may allow taxpayers to benefit from treaty provisions 7
«Liable to tax» requirement (follows) As for the Italian flat tax regime, persons who enjoy from the substitutive tax regime are to be regarded as Italian tax resident for the purpose of any income tax treaty entered into by Italy that follows the OECD Model Treaty (see Circular letter of Italian Tax Authorities no. 17/2017). Italy will thus release a certificate of residence for treaty purposes and this may have a significant impact on the recognition of treaty protection in most of the Contracting States With respect to UK «res non dom» regime, the HMRC released in the past residence certificates emphasizing the possible lack of entitlement to DTAs protection («Mr./Ms. ( ) has claimed to be taxed on the remittance basis and, as such, may not be entitled to the benefits of the Convention unless the income/gain is actually remitted to the United Kingdom») 8
Article 4, paragraph 2, of the OECD Model Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then he shall be deemed to be a resident only of: a) the State in which he has a permanent home available to him; b) if he has a permanent home available to him in both States, the State with which his personal and economic relations are closer (centre of vital interests); c) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, the State in which he has an habitual abode; d) if he has an habitual abode in both States or in neither of them, the State of which he is a national; e) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement 9
Tiebreaker rules and the identification of the CVI The identification of the centre of vital interest («CVI») requires a case-by-case analysis aimed at assessing the social, family, financial, working and cultural ties of the individual with the relevant Contracting States In most cases, the assessment of the ties entails a comparison «Country A vs. Country B» and not a comparison «Country A vs. All other Countries» In principle, there is not a predominance of personal ties over business ties (or vice versa) and the whole range of ties should be taken into account and evaluated on the basis of the lifestyle of each single individual In practice, in Italy for many years personal ties had been considered as predominant by the Italian Supreme Court. According to recent judgments, it seems that such conclusion has been softened Also the check-list provided by Italian Tax Authorities to help the assessment of the tax residence for the application of the 100,000 flat tax regime shows a substantial balance between personal and economic ties 10
Step-up in basis Most of the countries do not provide for a step-up in basis of the assets held by an individual upon acquisition of the tax residence status and this could give rise to double taxation if an exit tax applies in the country of origin The OECD Model does not set forth any rule to deal with exit tax and step-up in basis issues and only few DTAs include specific provisions (see for instance the protocol to the Italy Germany tax treaty) Under Italian tax law, no exit tax is provided to individuals moving their residence out of Italy and Tax Authorities clarified that individuals moving their residence to Italy may benefit from a step-up in basis only up to the value that is subject to exit tax in the State of origin (see Resolution no. 67/2007) Step-up in basis may be achieved through pre-immigration planning techniques 11
Future scenarios Minor importance to be given to formal requirements (enrollment in the register of resident population) and presumptions of residence Instruments to reduce and solve conflicts should include: possibility to define the residence status through advance rulings (in Italy this possibility has been recently provided with respect to the application of the 100,000 flat tax regime) mandatory arbitration procedures to resolve disputes concerning the different interpretation and application of DTAs, as provided by the Council Directive 2017/1852/EU of 10 October 2017 Increasing number of information at disposal of tax authorities should be used to improve the assessment of the tax residence status of individuals automatic exchange of information under CRS/FATCA/DAC 2 advancement of technologies (mobile roaming, electronic payments, acquisition of big data, use of web, social networks, etc.) 12