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The “forced stay”, caused by the closure of third Country borders, can determine tax residence in Italy

by Alberto Allegra | Sep 7, 2021 | Blog

With its response no. 458 of July 7, 2021, the Italian Tax Authority clarified that the “forced” stay in the Territory has its effects (i) on the tax residence of individuals, (ii) on the territoriality of the smart working services performed in favor of foreign companies and, therefore, on their taxability in Italy, (iii) on the applicability of the “conventional wages” regime pursuant to Article 51, par. 8-bis of the Consolidated Income Tax Act (“TUIR”). This is irrespective of the recommendations issued by the OECD Secretariat on April 3, 2020 (“Recommendations“).


The question

The applicant company had sent some workers on secondment to China, to affiliated companies. They had registered with AIRE and had acquired Chinese tax residence. When the epidemiological emergency caused by COVID-19 spread, these workers returned to Italy, also with their families. They continued to work for the seconded companies in smart working. However, the employment relationship, the object and the recipient of the work services had not changed. This situation continued beyond 183 days, the time limit for acquiring tax residence in Italy.

The company asked whether their “forced stay” in Italy could have any impact on:

  1. the territoriality of the smart working service from Italy;
  2. the tax residence of such workers (who remained in Italy for more than 183 days);
  3. the possibility to apply the regime of “conventional wages”.


The applicant’s interpretative solution

The applicant proposed not to attribute relevance, for tax purposes, to the periods of “forced stay” spent in Italy due to the COVID-19 emergency, referring to the OECD Recommendations and the Italy-France bilateral agreement of 24 July 2020 (only “Agreement“).

The first document states “given that the COVID-19 crisis constitutes an exceptional circumstance and a period characterised by major changes in the short term, tax administrations and competent authorities will have to consider a more normal period of time for the assessment of a person’s tax residence“, and therefore considers that exceptional circumstances due to the pandemic should not be given relevance for tax purposes.

Similarly, the Agreement provides that work carried out at home for a foreign employer (e.g. a French posting company) must be considered to have been carried out in the State in which the worker should have carried it out, in the absence of extraordinary circumstances.

The Applicant therefore observed that both the OECD recommendations and the Italy-France bilateral agreement led to “neutralise by law the distortions produced by the pandemic by inviting Member States to consider remote work activities irrelevant for the purposes of residence status and source of income“. Therefore, it proposed to resolve the questions submitted to the Tax Authority as follows:

  1. the work carried out in Italy had to be qualified as territorially rendered abroad, because this was what the secondment contract originally provided for (whose mode of execution had changed only because of the pandemic); therefore no withholding tax should have been applied on wages paid to personnel seconded to China, but present in Italy;
  2. the tax residence of the workers was not to be affected by the ‘forced stay’ in Italy, a period of an exceptional nature, which could not be taken into account for the calculation of the 183 days;
  3. as to the “conventional wages” regime, the applicant considered its application possible, if the workers were considered as tax residents in Italy, since the income they produced should have been considered of “foreign source”.




The Tax Authority’s response

The Tax Authority disregarded the proposals made by the applicant, although supported by the Recommendations and the Agreement. In fact, it pointed out that the Recommendations are only the point of view of the Secretariat and concern the application of the Treaties. Therefore, they have no prescriptive or interpretative relevance for the domestic legislation. Consequently, it stated that, in the absence of specific domestic rules taking into account the COVID-19 emergency, reference should be made to the ordinary rules of the TUIR, ‘the application of which is independent […] from reasons related to the pandemic‘. On the basis of this interpretation, the Authority replied that:

  1. smart working carried out in Italy must be qualified as territorially relevant therein, regardless of the fact that it is carried out in the Territory only because of the pandemic;
  2. for the purposes of identifying tax residence, the period of ‘forced stay’ must be counted for the purposes of exceeding 183 days and no force majeure applies;
  3. the ‘conventional wages’ regime is inapplicable to posted workers who acquire tax residence in Italy by virtue of their stay in the Territory, because it requires the worker residing abroad for more than 183 days.

In essence, the possibility of resorting to any fictio iuris or force majeure reason to neutralise the impact of the COVID-19 on the situations described herein has been excluded. This position expressly confirms what was anticipated by the MEF in its reply to question no. 5-04654 of 03.01.2020, by the Italian Tax Authority in its Clarification no. 34 provided to Telefisco on 28.01.2021 and in its Reply no. 345/2021.

However, the Italian Tax Authority reiterated that if such circumstances lead to the acquisition of the Italian tax residence, the conflict of dual residence with a third country must be resolved under the relevant international treaty, paying particular attention to the tie-breaker rule of the ‘habitual abode‘. Indeed, in a situation similar to this one here described, workers are likely to have a permanent home in both countries and it is difficult to identify their ‘centre of vital interests’.

The “abitual abodeis defined as the place where an individual is usually present. This assessment does not depend on the mere counting of days, which the individual has spent in one country or the other for a certain period of time, but requires the verification of (i) frequency, (ii) duration (iii) and regularity of stays that form the individual’s routine and are therefore not merely transitory or occasional. In this regard, the OECD has specified that days spent in another country (Italy in this case) due to travel restrictions imposed by public security measures should not lead to a change in the person’s habitual residence. The determination of the habitual abode must, in fact, cover a sufficient period of time to be able to ascertain the frequency, duration and regularity of stays that are part of the routine of the individual’s life (see in this regard the ‘Updated guidance on tax treaties and the impact of the COVID-19 pandemic’, para. 44 – OECD, 21 January 2021).

It is, therefore, a place with which the taxpayer demonstrates a link beyond the mere physical presence, i.e., the intention to live there permanently, revealed by living habits.


Concluding remarks: habitual residence sterilizes the effects of ‘forced stay’

Although the Italian Tax Authority relies on a formalistic and literal interpretation of the TUIR rules, which allows the identification of the tax residence in Italy also on the basis of situations of “forced stay” in the Territory, which are accidental and unintentional, the reference to the tie-breaker rule of the “habitual abode” is particularly important, because it makes it possible to enhance, at the legislative level, both the will of the taxpayers (consisting of their habits of living in one country rather than in another) and the occasional and extraordinary nature of the periods of “forced permanence”, which by their nature are opposed to the concept of place of “habitual abode”. However, this does not affect the territoriality of the work carried out in smart working, which should be qualified as being carried out in Italy.



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