Italy Guidance Clarifies Tax Aspects of Cross-Border Working

The landscape of work has evolved significantly in recent years, with the emergence of “smart working” using new technologies to increase flexibility, and remote employment. The Italian Revenue Agency aims to provide clarity on the tax implications of smart working with Circular No. 25/E of Aug. 18, 2023.

The Rise of Smart Working

The first part of the circular provides guidance on the tax aspects of smart working. It focuses on recent regulatory trends and practical instructions, including tax incentives aimed at individuals who transfer their tax residency to Italy.

The circular acknowledges that there has been a notable increase in the adoption of flexible work arrangements. This trend involves performing work virtually or remotely, eliminating the need for physical presence at an employer’s location. Despite significant organizational changes in businesses, professional settings, and the public sector, there have been no amendments to domestic legislation affecting the determination of tax residence.

The criteria for establishing tax residence for individuals remain governed by Article 2 of the Italian Income Tax Code, unaffected by the mode of work. The method of performing work doesn’t influence the criteria used to determine tax residence, which continue to rely on the fulfillment of at least one of the conditions specified in Article 2 of the Code. According to this provision, individuals are considered tax residents in Italy if for the majority of the tax year they are registered in the municipality registry of residents, or have their domicile or habitual dwelling in the territory of the Italian state. The presence of just one of these conditions is sufficient to establish a person’s tax residence in the territory of the Italian state.

Due to the complexity of different situations, the circular provides examples illustrating the implications of tax residence in Italy. One is where a foreign citizen works remotely from Italy for a foreign employer and resides in Italy with their spouse and children for the majority of the calendar year, despite not being formally registered as a resident. In this case, although the formal requirement of registration as a resident isn’t met, the foreign citizen maintains their personal and family ties within the Italian territory for most of the tax year. Therefore, in this scenario, the individual would be considered a tax resident in Italy.

Similarly, an Italian citizen who has relocated abroad but maintains their registration in the Italian municipality for the majority of the tax year while engaging in smart working would still be regarded as a resident in Italy due to the registration requirement, subject to taxation on all income in Italy unless otherwise provided by applicable tax treaty provisions.

The circular indicates that these principles have been consistently applied in recent practice.

The circular clarifies that regardless of the location of their employer, individuals engaged in smart working may still be subject to Italian taxation if the work is effectively performed within Italy, unless different provisions of tax treaties apply. For this purpose, it highlights situations in which income may be subject to concurrent taxation in both the country of tax residence and the country in which the work is conducted.

This also holds true for the application of preferential tax regimes aimed at individuals who transfer their tax residence to Italy to work within Italian territory, as regulated by Article 16 of Legislative Decree No. 147 of Sept. 14, 2015, the “Special Regime for Impatriates,” and Article 44 of Decree-Law No. 78 of May 31, 2010, the “Special Regime for Teachers and Researchers.” These regimes require the transfer of tax residence to Italy and the establishment of substantial connections with Italy.

The OECD Guidance

The Organization for Economic Cooperation and Development Secretariat, through its guidance issued on April 3, 2020 and updated on Jan. 21, 2021, analyzed the impact of the Covid-19 pandemic on the application of tax conventions. This analysis primarily focused on how the restrictive health measures implemented by countries in response to the pandemic affected international tax treaties.

The OECD’s analysis examined the tax consequences of pandemic-related measures concerning tax residency (for individuals and legal entities), income from work, and the determination of a permanent establishment.

The circular underlines that the analysis in the OECD Secretariat’s document represents its perspective on interpreting conventional provisions. Individual jurisdictions have the flexibility to provide their own guidance to offer tax certainty to taxpayers. Additionally, these guidelines primarily concern the interpretative principles of double tax avoidance conventions and don’t directly impact the interpretation of domestic tax regulations.

Several countries, including Italy, adopted administrative or legislative measures in line with the suggestions outlined by the OECD Secretariat. In Italy’s case, the competent tax authority entered into administrative interpretative agreements regarding Article 15 (employment income) of double taxation conventions with Austria, France, and Switzerland. These agreements addressed specific issues related to cross-border workers and remote work, considering the period from March 11, 2020 to June 30, 2022, or later in some cases.

However, with the declared end of the pandemic, these international agreements have ceased to be effective, and ordinary provisions within the respective double taxation conventions and international agreements apply.

Permanent Establishment Rules

Regarding the concept of a permanent establishment or fixed base for tax purposes, the circular highlights that the principles outlined in the OECD Model Tax Convention largely remain applicable. This means that even in cases of remote work or flexible working arrangements, traditional criteria for determining tax jurisdiction aren’t fundamentally changed.

Cross-Border Workers Between Italy and Switzerland

The circular acknowledges the complexities associated with cross-border employment and underscores the necessity for clear and comprehensive tax guidelines. It covers special provisions for cross-border employees between Italy and Switzerland following the new international agreement signed with Switzerland, and the legislative changes brought about by ratification law (Law No. 83 of June 13, 2023, published in Official Gazette No. 151 of June 30, 2023).

It provides an in-depth analysis of this agreement and valuable insights into how these developments apply to cross-border workers and their corresponding tax obligations.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Giuliana Polacco is a partner and Annarita De Carne is counsel with Bird & Bird.