Last update of this article: march 2025
PART TWO – Companies and Entities
In the FIRST PART of our article on Circular 20/E dated November 4, 2024, we examined how the Italian Revenue Agency (i.e., the Italian tax authority Agenzia delle Entrate) provided its interpretative reading of the legislative amendment introduced by the “International Taxation” Decree (Legislative Decree 209/2023) concerning the tax residency of individuals.
In the same Circular, the Italian Revenue Agency also addressed the amendments introduced by the legislative reform regarding the tax residency of Companies and Entities.
These changes should be interpreted in light of the objective pursued by the International Taxation Decree, which aims to prevent disputes concerning the tax residency of Companies and Entities and to align Italian regulations with international practices.
Let’s now take a brief look at the new tax residency criteria for Companies and Entities in Italy, effective from 2024, and how the Agency interprets them.
1. New Tax Residency Criteria in Italy – Companies and Entities
As we did for Individuals, before analyzing the comments of the Italian tax administration, it is useful to compare the new criteria with the previous ones.
The criteria for determining the tax residency of Companies and Entities, as outlined in the previous version of Article 73, Paragraph 3 of the TUIR* (Consolidated Income Tax Act), were as follows, alternatively**:
- have in Italy, for the majority of the tax period (183 days or 184 days in leap years), at least one of the following elements:
- Registered headquarters, or
- Place of management, or
- Principal business activity
*These criteria remain valid for determining tax residency for fiscal years prior to 2024.
**In other words, the existence of just one of these criteria is sufficient to determine tax residency.
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CONTACT USThe legislative reform has eliminated the criteria of place of business administration and principal business activity*, replacing them with:
- Place of effective management
- Predominant ordinary management
Furthermore, it has provided definitions for these two new concepts (see below, new Article 73, Paragraph 3 of the TUIR).
As for the specific regulations concerning Collective Investment Schemes and Trusts, the residency rules for such entities remain unchanged, except for the burden of proof regarding the residency of a trust.
The reform clarifies that taxpayers may now, in any case, provide counter-evidence to prove the non-residency of a trust established in non-cooperative jurisdictions.
The new Paragraph 3 of Article 73 of the TUIR**, effective from the 2024 tax period, states as follows (with key points highlighted):
“For income tax purposes, companies and entities are considered resident if, for the majority of the tax period, they have their registered headquarters, place of effective management, or predominant ordinary management within the territory of the State.
Place of effective management refers to the continuous and coordinated assumption of strategic decisions concerning the company or entity as a whole.
Predominant ordinary management refers to the continuous and coordinated execution of current management activities concerning the company or entity as a whole.
*This criterion remains in force to distinguish commercial entities from non-commercial entities, as outlined in letters b) and c) of Paragraph 1, Article 73 of the TUIR.
**For consistency purposes, amendments have also been made to: Article 5, Paragraph 3, Letter d) of the TUIR on the general residency rules for companies, associations, and similar entities; Article 73, Paragraph 5-bis of the TUIR on corporate tax inversion (esterovestizione).
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CONTACT US“Collective investment schemes are considered resident if established in Italy. Trusts and similar institutions established in States or territories other than those listed in the decree issued by the Minister of Economy and Finance pursuant to Article 11, Paragraph 4, Letter c) of Legislative Decree No. 239 of April 1, 1996, are also considered resident in the State’s territory, unless proven otherwise, if at least one of the settlors and at least one of the beneficiaries of the trust are fiscally resident in the State’s territory.
Furthermore, trusts established in a State other than those listed in the decree issued by the Minister of Economy and Finance pursuant to Article 11, Paragraph 4, Letter c) of Legislative Decree No. 239 of April 1, 1996, are also considered resident in the State’s territory, unless proven otherwise, when, after their establishment, a resident individual in the State’s territory makes a contribution to the trust that entails the transfer of ownership of real estate or the creation or transfer of real property rights, including partial shares, as well as restrictions on their use.”
Summarizing:
Starting from the 2024 tax year, Companies and Entities are considered resident in Italy for tax purposes if, for the majority of the tax period*, they alternatively have in Italy:
- Registered headquarters
- Place of effective management
- Predominant ordinary management
while maintaining the previous provisions on residency for Collective Investment Schemes, which are:
- Considered resident in Italy if established in Italy
and for Trusts and similar entities, which are considered resident in Italy when:
- Unless proven otherwise, they are established in non-cooperative jurisdictions and at least one of the settlors and one of the beneficiaries is fiscally resident in Italy.
- Unless proven otherwise, after their establishment, a resident individual in Italy makes a contribution to the trust, consisting of the transfer of ownership of real estate, the creation or transfer of real property rights, or any other asset contribution listed in the regulation.
Let’s now briefly examine how the tax administration has commented on this significant legislative reform.
*That is, 183 days in a year, or 184 days in the case of a leap year.
Comments of the Italian Tax Administration on the Residency of Companies and Entities
The Italian Revenue Agency has commented on the new criteria of the place of effective management and predominant ordinary management, while also addressing the relationship between the new criteria and the previous regulations, as well as aspects related to international tax treaties.
2.1. The Criterion of the Place of Effective Management
With regard to this criterion, the Italian Revenue Agency limits its analysis to commenting on certain points contained in the Explanatory Report of the Italian Government on the International Taxation Decree.
In particular, it highlights that, in order to determine whether a Company or Entity has its place of effective management in Italy, it is first necessary to exclude all shareholder decisions that do not have a managerial nature, such as those related to the supervision of business activities.
Therefore, only decisions that set a new course for the company’s operations, i.e., strategic decisions, should be considered for the purpose of determining the place of effective management, while mere administrative decisions should not.
Additionally, emphasis is placed on the substantive nature of the place of effective management criterion, which considers only the factual aspects of business management. This contrasts with the formal criterion of the place of administration, which introduced interpretative and application ambiguities.
This substantive criterion is aligned with the evolution of information technology, which now allows for the complete dissociation between business management (which can now be conducted entirely remotely) and the physical location of business operations.
Furthermore, this criterion aligns with the approach already adopted in Double Taxation Treaties signed by Italy, where it serves as the decisive criterion in cases of dual residency of a Company or Entity (Article 4 – OECD Model Tax Convention, 2017).
In any case, the Italian Revenue Agency reminds that the existence or absence of the place of effective management in Italy must be assessed based on the specific circumstances of each case.
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CONTACT US2.2. The Criterion of Predominant Ordinary Management
This criterion, which is alternative and independent from the place of effective management previously examined, applies to cases where the ordinary administration of a company or entity establishes its connection with the Italian territory.
On this point, the Italian Revenue Agency states that:
“The connection criterion under examination must, therefore, be associated with the place where the normal functioning of the company takes place and where the obligations related to its ordinary administration are carried out.”
Residual compared to the other two criteria, this criterion, which is also substantive in nature like the place of effective management, effectively allows a company to be linked to the Italian territory based on the fact that the ongoing management of its current affairs, as a whole, is continuously carried out in Italy.
In this regard, the Italian Revenue Agency particularly emphasizes that:
“The management must concern the business as a whole, with the intent to distinguish the State of residence of the legal entity from the location of its permanent establishment.”
This final comment from the Italian Revenue Agency appears particularly relevant as it emphasizes that the predominant ordinary management of a company, as a whole and on a principal basis, must be such as to clearly distinguish the State of residence of a company from that of its permanent establishment.
Naturally, this principle also applies to the criterion of effective management.
2.3. Relationship with the Previous Regulations
We have seen that these new rules have been in force starting from the tax period following the one in progress as of December 31, 2023, meaning from the 2024 tax year.
In this regard, the Italian Revenue Agency points out that for companies with fiscal years not aligned with the calendar year, the previous tax residency rules continue to apply until the tax period following the one in progress as of December 29, 2023 (the formal effective date of the new provisions).
For example, for a company whose fiscal year runs from April 1, 2023, to March 31, 2024, the new tax residency criteria will apply starting from April 1, 2024, i.e., the beginning of the new fiscal year.
2.4. New Rules on the Tax Residency of Companies and Entities and Double Taxation Treaties
For general considerations regarding dual tax residency, please refer to PART ONE of this article.
With specific regard to the rules on resolving tax residency conflicts for Companies and Entities, the Italian Revenue Agency reminds that:
“In the treaties concluded by Italy, there is a conflict resolution rule that assigns residency to the contracting State where the place of effective management is located,” referring to the criterion of effective management (Article 4, Paragraph 3 – OECD Model Tax Convention, 2017).
Furthermore, the Italian Revenue Agency highlights that:
“In certain international treaties concluded by Italy (see treaties in force with Canada and Chile), a version aligned with the current Paragraph 3 of Article 4 of the OECD Model has been adopted. These treaties establish that when, under national laws, an entity other than an individual is considered resident in both contracting States, the competent authorities of the contracting States will endeavor to resolve the issue by mutual agreement, with particular regard to its place of effective management, the place where it was incorporated or otherwise created, and any other relevant factors. In the absence of such an agreement, the entity is not entitled to claim any tax relief or exemption provided by the treaty.”
Such a clause is more restrictive than the standard international practice, where the identification of the place of effective management of a Company or Entity is generally sufficient to determine tax residency.
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CONTACT USThe opinion expressed in this article is for informational purposes only.
This article does not constitute legal advice.
In addition, it is important to remind that each client’s tax issue is different because each client’s personal situation is different.
Should you have a similar tax issue, please contact us for an initial discussion of your case.