Tax residency between France and Italy: the Risk of the Economic Interests Center and the New 2025 Rules

As we know, tax treaties against double taxation based on the OECD Model contain provisions to resolve cases of dual tax residency (Article 4, Paragraph 2 – Residency).

In the case of the France-Italy tax convention on income and wealth taxes, Article 4, Paragraph 2 provides a framework for resolving dual tax residency situations by applying a series of criteria alternatively and in a hierarchical order, as follows:

2. When, in accordance with the provisions of Paragraph 1 (i.e., based on the national criteria of each contracting state), an individual is considered a resident of both states, the situation is resolved as follows:

a) The individual is deemed a resident of the state where they have a permanent home; if they have a permanent home in both states, they are considered a resident of the state where their personal and economic ties are closest (center of vital interests).

b) If the state where the center of vital interests is located cannot be determined, or if the individual does not have a permanent home in either state, they are considered a resident of the state where they habitually stay.

c) If the individual habitually stays in both states, or does not habitually stay in either of them, they are considered a resident of the state of which they are a national.

d) If the individual is a national of both states, or if they are not a national of either, the competent authorities of the states shall settle the matter by mutual agreement.

In the case mentioned above, assuming the taxpayer can demonstrate that they have a permanent home only in Italy and no longer in France, this should be sufficient to establish their “treaty residency” in Italy, thus prevailing over the French national criterion of the center of economic interests.

If the taxpayer has a permanent home in both states, it will then be necessary to determine their center of vital interests, understood in the treaty sense as the center of their personal and economic interests.

However, if a person residing in Italy is in the same situation as the French taxpayer who moved to Budapest—meaning their personal interests are in Hungary while their economic interests remain in France—it would not be possible, in our view, to apply the treaty criterion of the “centre des intérêts vitaux – center of vital interests.”

Indeed, this criterion considers the center of vital interests as both economic and personal, and it does not allow for a separation between personal and economic interests.

Thus, the next treaty criterion in the hierarchical order would apply, namely the physical presence criterion (séjour habituel – habitual stay), which would allow, in our view, the Italian tax residency to prevail over French tax residency, which would otherwise be determined based on the French national criterion of the center of economic interests.

This approach is reinforced by the recent legislative amendment introduced by the French Finance Law for 2025, which modifies the fundamental rule on tax residency in France, namely Article 4 B of the CGI.

This reform adds a paragraph to the article, which states:

“Individuals who meet at least one of the criteria mentioned in points (a) to (c) of this paragraph 1 (i.e., those considered French tax residents under national legislation) cannot, however, be deemed fiscally domiciled in France if, under international conventions against double taxation, they are not considered residents of France.”

This legislative amendment thus strengthens the application of treaty-based residency criteria established by international tax conventions to resolve cases of dual tax residency arising from the application of national rules, while also clarifying certain ambiguities in French case law.