Few new features in the Agency's instructions on the tax residence of companies and entities

With Circular no. 20/E of 4 November 2024, the Italian Revenue Agency issued operational instructions on the new criteria for establishing Italian tax residence. However, almost a year after the publication of the Decree on International Taxation (Decree no. 209/2023) implementing the tax reform, the practice document appears not to have resolved the complexities and uncertainties of the reference regulatory framework, with respect to companies.

Article 2 of the Decree has changed the criteria for the Italian tax residence of companies and entities for Italian income tax purposes.

According to the reformulated paragraph 3 of Articles 5 and 73 of the Italian Income Tax Code (TUIR), companies and entities are now Italian tax residents if, for the greater part of the fiscal year, they have in the territory of the State, alternatively
- the registered office;
- the effective place of management;
- the main place of the day-to-day administration;
replacing the previous criteria of ‘place of management’ and ‘principal activity'.

Concerning the place of effective management, defined as ‘continuous and coordinated taking of strategic decisions concerning the company or entity as a whole’, the Agency confirmed the irrelevance of shareholders' non-management decisions. 

Regarding the concept of the main place of the day-to-day administration as ‘(...) continuous and coordinated performance of the acts of day-to-day management concerning the company or entity as a whole’, the Circular clarified that the regulatory clarification ‘as a whole’ is used to discern the company's State of residence from the permanent establishment, deferring in any case to a case-by-case assessment.

The restyling of the tax residence criteria has not completely removed the interpretative uncertainty.

With respect to the domestic context, the main issues relate to (i) the assumed exceeding of the tax assessment against foreign holding companies (following the removal of the principal object criteria) and the issue of “esterovestizione ” against foreign companies’ subsidiaries of Italian holding companies (if they engage in ordinary management and coordination activities)

Finally, in relation to the objective of improving compatibility with international law, it should be noted that the complexity of interpreting the dual residence conflict resolution criterion  of the Place of Effective Management (PoEM, similar to the new Italian criterion) was the driver behind the amendment in 2017 of Art. 4(par. 3) of the OECD Model, adopting a ‘ case-by-case approach’, based on the specific analysis of a series of factors (formal and substantive).