How is the tax residence of a company established? The tax residence is very important to identify in order not to incur the phenomenon of foreign dressed companies. (For Italy read more HERE)
To understand how to pay business income tax in Italy it is necessary to start from a first big distinction between the residence of partnerships and the residence of public limited companies.
The requirements for establishing the tax residence of the company and foreign dressed companies
Pursuant to Article 5, paragraph 3 of Presidential Decree no. 917/86, TUIR, the companies of persons resident in Italy are those that for most of the fiscal period have their legal or administrative headquarters or the main object of the company, in the territory of the State.
Pursuant to Article 73, paragraph 3 of Presidential Decree no. 917/86, TUIR, the companies resident of Italy are those that for most of the tax year, have in Italy (for permanent establishment in Italy and tax representative read more HERE):
- The registered office of the company, which is identified with the registered office and address of the company indicated in the deed of incorporation or in the Articles of Association;
- The headquarters of the administration of the company. The place where the management of the company is carried out that can be identified by specific data such as the existence of administrative offices and the indications contained in documents or invoices;
- The main object of the activity of the company actually carried out in Italy as established by the law, by the deed of incorporation and by the articles of association.
The registered office of the company
The address of the registered office is not always the actual office of the company. For the determination of the company’s registered office for the purposes of tax regulations, reference should be made to the provisions of the Italian Civil Code concerning private international tax law.
The administrative headquarters of the company
The company’s registered office is the effective headquarters of the company and is located in the place where the company’s administrative body permanently exercises its powers and functions. The administrative headquarters is the place where the company’s strategic and management decisions are formed and taken. Thus, the administrative headquarters are where the company’s top management is located and where the most important decisions are made.
The main object of the company’s activity
The requirement of the main object of the company must be identified not so much in the activity envisaged by the articles of association but rather in the commercial activity actually carried out.
Tax residence- personal residence – domicile – A.I.R.E.
To determine the tax burden in Italy, it is appropriate to distinguish between 4 different concepts:
tax residence- personal residence – tax purposes – A.I.R.E.
- Tax residence is the place where taxes are paid. Usually, registered residence and tax residence are the same. But there are cases in which a person can have the registered residence in one country and a tax residence in another.
- The registered residence is the habitual residence and is registered in the municipal archives
- Domicile is the fiscal address where all communications from the Internal Revenue Service are received. It usually corresponds to permanent residence but can also be different.
- A.I.R.E. is the acronym for the The Registry of Italians Resident Abroad. In case of transfer abroad, to no longer be considered a resident in Italy it is necessary to register with the AIRE. An Italian citizen can register with the AIRE only if he lives abroad for at least 183 days a year.
Warning! To be considered as a tax resident abroad, it is necessary to live outside the Italian State for at least 183 days a year and concentrate own commercial interests in the foreign Country.
Examples of registered residence and effective tax residence abroad
- Giuseppe is a resident of Rome. He moved to France, but decided not to change his habitual residence. So he lives in Rome, but lives in France for more than 183 days a year. His registry office is Rome. His tax residence is in France. It is required to register with AI.R.E. and declare his physical residence abroad.
- Giuseppe is a resident of Rome. He moved to France but lives there for less than 183 days a year. His registry and the tax residence remain in Rome.
- Giuseppe is a resident of Rome and moves to France for work. In France he lives for more than 183 days a year. Then, he decides to transfer his registered residence in France. Giuseppe is registered in the municipal register of the French country in which he lives and in Italy he is registered with the AI.R.E .. In this case, Giuseppe in Italy is no longer a resident.
To be sure of being subject to the tax regime of a country you can ask for a certificate of tax residence. This is the document that certifies that a person is subject to the tax system of that State and can be transmitted to the Internal Revenue Service in Italy.
Foreign dressed companies
In terms of taxation, a legal person resident in the country is subject to taxation for income produced anywhere in the world, based on the well-known principle of taxation on a worldwide basis (c.d. “world wide taxation”).
This is why the issue of corporate tax residence is very important. In Italy the phenomenon of overshooting is regulated by Article 73, paragraph 5-bis, of Presidential Decree no. 917/86 TUIR.
With the phenomenon foreign dressed companies the fictitious registered office abroad of a company’s tax residence is indicated, which actually carries out its activity and pursues its social purpose in Italy. Usually, the companies are fictitiously established abroad, to subject the “foreign dressed” income to a more advantageous tax regime than the Italian one.
In order to verify the tax residence of companies, Article 73, paragraph 5-bis, of Presidential Decree no. 917/86 TUIR, provides that:
- Until proved otherwise, it is considered in the territory of the country the administrative seat of a company that hold controlling interests in Italy
- are controlled, even indirectly, pursuant to Article 2359, paragraph 1, of the Italian Civil Code, by subjects resident in the territory of the State;
- they are administered by a board of directors, or other equivalent management body, made up mainly of directors residing in the territory of the State.
Warning! In case of verification to establish the foreign dressed companies the burden of proof is not charged to the Financial Administration but to the company subject to verification.
Practical cases of foreign dressed companies. Errors not to be committed
Become a partner or director of a company abroad, being resident in Italy.
Under Italian law, a company registered and managed by Italian people is no longer a 100% foreign company, even if the headquarters and the offices are abroad.
In these cases it may be a foreign dressed companies, or “dressing” a company as if it were foreign. A foreign dressed company is a crime that can lead to serious consequences, even criminal, if the position with the tax authorities is not regularized.
In other words, being a member or a director or opening a company abroad is not in itself a forbidden thing, because there is no law that can forbid it. However, it is not possible to use the foreign company as a shield to pay less taxes in Italy.
Another case of foreign dressed company can be that of the overseas company formation, whose shareholders are fiscally resident in Italy and can not move permanently abroad. A company is considered a tax resident in Italy when it has a CDA made up mostly of people resident in Italy or when most of the shares belong to persons residing in Italy.
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