By Massimo Pellecchia and Edoardo Alessandrini
With reference to the assessment of tax residence for income tax purposes, the Italian Supreme Court held that the criterion of the permanent home required by the Article 4 of the Tax Convention between Italy and the Russian Federation is also fulfilled when the taxpayer permanently resides in the partner’s house. However, whereas the taxpayer owns a permanent home abroad and he permanently resides in the partner’s home, as in the case at issue, then tax residence must be assessed according to the criterion of the centre of vital interest.
The case examined by the Supreme Court concerned the assessment of the tax residence of a foreigner (a Russian citizen), owning a permanent home abroad, but living in Italy, at his partner’s house.
In particular, the case started with a penalty notice notified to a taxpayer through which the Italian Tax Authority challenged the missed declaration in the RW form of the tax return of the investments held abroad, since, according to the Italian Tax Administration, the taxpayer was deemed to be effectively resident in Italy for income tax purposes, despite his formal residence in Russia.
The court of first instance and the appellate court accepted that the tax residence of the taxpayer was abroad, on the basis of the provisions of the Article 4 of the Tax Convention between Italy and the Russian Federation, according to which, in order to avoid conflicts of residence between states, when an individual is considered to be a resident of both Contracting States, that person shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him.
In light of this criterion, according to the first and second instance of the Tax Courts, the taxpayer was resident abroad since:
- he has proved of being the owner, in Russian territory, of a house used as a civil residence located in Moscow; he also proved the permanence in the aforementioned foreign territory, during the year 2002, for 183 days;
- he did not appear to be the owner of a house in Italy (during the period spent in Italy, the taxpayer dwelt in the partner’s house).
For such reasons, both Courts upheld that the taxpayer had in Russia its “permanent home” and, therefore, he had to be considered resident in Russia.
Conversely, the Italian Supreme Court upheld that in domestic law the assessment of the tax residence of the taxpayer needs to refer to the place where his personal and affective relations are or where his domicile is located.
However, if a tax convention is in force, the assessment of the taxpayer’s residence must be made taking into consideration the criteria provided by that convention as well.
In this respect, according to the Article 4 of the Tax Convention between Italy and the Russian Federation, the first criterion for the attribution of the tax residence is the permanent home. In other words, the taxpayer shall be deemed to be resident of a Contracting State if he has a permanent home in that State. However, in the case at issue the taxpayer owns a permanent home in both Contracting States, since he owns a permanent home in Russia and, at the same time, he permanently resides at his partner’s home situated in Italy.
Hence the second criterion provided by the Article 4 of the Tax Convention must be taken into account, according to which the taxpayer shall be deemed to be a resident only of the State in which his personal and economic relations are closer (centre of vital interest).
In this respect, the Italian Supreme Court upheld that, since the taxpayer owned a permanent home in both Contracting States, he has to be considered tax resident in Italy since he spent the majority of his time in Italy, living with his partner.