Smart working Italy-abroad: where do you pay taxes?

In a recent response to interpellate No. 98/2023, the Internal Revenue Agency has provided clarification on a request from a taxpayer who asked whether or not emoluments paid to him by his foreign employer, in respect of smart working, were taxable in Italy.
The issue submitted to the Agency’s consideration is as widespread as ever: in recent years, more and more people are taking advantage of remote working to work from Italy for a foreign employer.

Current legislation on tax residency

According to Article 2(2) of the Tuir, individuals are considered to be tax residents in Italy who, for the more significant part of the tax period, that is, for at least 183 days (or 184 days in the case of a leap year)

• are registered in the registries of the resident population
• have their domicile or residence within the meaning of the Civil Code in the territory of the State.

These are necessary alternative conditions; even one for most of the tax period is sufficient for a person to be considered qualified for tax purposes (and resident) in Italy.
But that’s not all. Under paragraph 2bis of Article 2 of the Tuir, Italian citizens who have been removed from the registers of the resident population and transferred to states or territories with a privileged tax regime are also considered residents unless proven otherwise.
Thus, a relative legal presumption applies, which implies, to be overcome, a reversal of the burden of proof. It will be up to the taxpayer who has moved abroad to a country considered a tax haven to prove in concrete terms that they are a resident of the foreign country.
In essence, the taxpayer is required to overcome from the substantive point of view that the merely formal findings collected against them do not override the substantive aspects.
From this, it follows that even following formal registration in Aire, concerning Italian citizens transferred to a privileged tax country (in this case, Switzerland), there continues to be a (relative) presumption of tax residence in Italy.
If the taxpayer fails to prove otherwise, they will continue to be considered resident in Italy and be subject to taxation concerning all income wherever produced (as provided for in Article 3 of the Tuir).

The precedence of conventional law over domestic law

In the Italian legal system and the field of taxation, the principle of the prevalence of customary law over domestic law is enshrined.
Article 4 of the OECD Model Convention for the Avoidance of Double Taxation establishes the so-called tiebreaker rules aimed at resolving any conflicts of residence of the taxpayer between different states.
These rules, as highlighted in response to interpellation under comment, settle the issue by making prevail, in hierarchical order, in the case of a residence conflict:

• the criterion of permanent residence
• the center of vital interests
• habitual residence and nationality.

The Italy-Switzerland case

The Convention for the Avoidance of Double Taxation between Italy and Switzerland also includes a specific provision to resolve the possible conflict of taxpayers’ residence.
In this regard, it should be noted that the Italy-Switzerland treaty, following the recommendations made in paragraph 10 of the Commentary to Article 4 of the OECD Model Convention, contains a provision that explicitly provides for the solution to the problem of dual residence by splitting the tax year, in case of transfer from one State to another during the year.
More specifically, Article 4(4) of the Convention provides that ”an individual who has permanently transferred his domicile from one Contracting State to the other Contracting State shall cease to be subject in the first Contracting State to the taxes for which his domicile is decisive as soon as the day of the transfer of domicile has elapsed. Subjection to the taxes for which the domicile is decisive shall commence in the other State from the same date.”