Recently, the European Tax Authorities have decided to intensify controls on expatriates abroad; this is in order to verify the reality of foreign residence. Thus, the issue is related to tax savings artificially achieved as a result of fictitious foreign residences.
For this reason, it is essential to know the tax rules regarding residency and to rely on an experienced tax advisor. Our blog will mainly discuss the position of Romania and Italy.
Some background on tax residence:
For almost all OECD countries, the obligation to contribute to public expenditures is associated with the concept of tax residence (in other countries such as the U.S., the concept of citizenship is preeminent for the purpose of assessing tax liability).
Tax residence encompasses the concepts of both physical residence (habitual abode) and tax domicile (preeminent center of interest); further, in Italian law there is an absolute legal presumption that attributes tax residence to the taxpayer registered in the registry of the municipality of residence. Consequently, as long as the Italian taxpayer has not obtained the cancellation of the municipal registry of resident population and enrolled in the AIRE registry (registry of Italian citizens residing abroad), he or she is to all intents and purposes and without possibility of proof to the contrary the recipient of the tax obligation for the Italian state. Therefore, conditio sine qua non for being able to terminate tax ties with the state of birth is to arrange for removal from the registry list of one’s municipality. This first condition is necessary but not sufficient to guarantee peaceful dreams.
International conventions and tax residence
In many cases, the taxpayer carries out his economic activity in country A (perhaps he is a director and partner in companies) but maintains part or all of his economic affections and interests in country B (family or simply children, owned apartment etc). This common situation reverberates in his status as a taxpayer potentially attracted to both the tax laws of country A and country B.
In such situations, which are to be avoided by appropriate tax planning, the reading and interpretation of the Convention for the Avoidance of Double Taxation signed between the two countries takes over. In the OECD model, which is more widely used for EU countries, there are specific articles and mechanisms for identifying correct tax residence of taxpayers. Where the elements considered in identifying tax residence are of equal value, the Convention provides for final resolution through the adjudication of arbitration between the disputing countries.
Given the complexity of the topic, it is advisable before incurring tax risks and penalties to take the time to investigate individual and specific personal cases.
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