Split year in the Swiss-Italian on double taxation. The Italian tax authority clarifications

Split year in the Swiss-Italian on double taxation. The Italian tax authority clarifications

This practice document is very important, because it specifically deals with the rule contained in the Double Taxation Convention between Italy and Switzerland on the so-called "split year," which has so far had little application in practice.

The case

The taxpayer holds dual Swiss and Italian citizenship and informs the Italian tax authority that she maintained her residence in Italy until May 31 of year X and transferred it to Switzerland from the following day.

Within 90 days of the transfer, as required by Italian law, the taxpayer reported the change of residence to the Consulate General of Italy in Zurich and has been registered in the Registry of Italians Resident Abroad (AIRE) since August of the same year.

The taxpayer asked the Italian tax authority (by means of an interpellation petition) to know from what date she should be considered tax resident in Switzerland: that is, whether from June 1 (i.e., from when her final transfer took place) or from August (the date of AIRE registration).

The response of the Italian tax authority

The tax authority recalls Italian domestic regulations that establish the criteria upon which an individual is considered tax resident in Italy.

Article 2 paragraph 2 of the Income Tax Law (TUIR) considers as such those individuals who, for most of the tax period (i.e., for at least 183 days in the calendar year in question) alternatively meet at least one of the following requirements:

  • are registered in the registers of the Italian resident population; or
  • have in the Italian territory their domicile within the meaning of the Civil Code (i.e., the principal seat of their business and interests); or
  • have in the Italian territory their residence within the meaning of the Civil Code (i.e. habitual abode).

With specific regard to Switzerland, moreover, paragraph 2-bis of the aforementioned Article 2 TUIR presumes, unless proven otherwise, the residence in Italy of those Italian citizens who – although they have correctly cancelled themselves from the registries of the resident population – have moved to States or territories with a privileged tax regime. These states (identified by Ministerial Decree May 4, 1999) include the Swiss Confederation.

For Italian citizens who have moved to Switzerland and registered in AIRE, therefore, there continues to be a presumption of tax residence in Italy. Proof to the contrary (i.e., actual establishment of residence in Swiss territory) must be provided by the taxpayer.

In light of the aforementioned provisions of Italian domestic law, given that the AIRE registration of the taxpayer occurred in August of the year X under consideration, the taxpayer should be considered tax resident in Italy for the entire tax year, since for most of the tax period (i.e., 183 days) she met the requirement of registration in the resident population registry.

However, the case must also be analyzed considering the international provisions contained in the Convention against double taxation concluded between Italy and Switzerland (hereinafter, "Convention"), which prevail over domestic law.

In the present case, Article 4 para. 4 of the Convention states that an individual who has permanently transferred his domicile from one Contracting State (i.e., Italy) to the other Contracting State (i.e., Switzerland) ceases to be subject in the first Contracting State (i.e., Italy) to the taxes for which the domicile is decisive as soon as the day of the transfer of domicile has passed. Tax liability begins in the other state (i.e., Switzerland) as of the same date.

Since the day of transfer to Switzerland (i.e., June 1) marks the beginning of tax liability in that State, according to the Italian tax authority, the resulting double taxation must be resolved in light of the aforementioned conventional provision on the split year.

Thus, Italy can exercise its residence-based taxing power until June 1 X, whereas Switzerland can do so, under the said convention provision, as of June 2 X (i.e., the day after the transfer of residence, according to Art 4 para. 4 of the Convention).

The taxpayer's AIRE registration therefore has no effect on the application of the provisions contained in the Convention, being relevant for the purposes of Italian domestic law only.

Therefore, in the present case, income wherever produced by the taxpayer until June 1 X must be subject to taxation in Italy and, therefore, reported in the Italian income tax return for the relevant year. From June 2 of the same year, on the other hand, Italy can only tax Italian sourced income.

In conclusion, however, it is appropriate to point out that the application of the convention provision in question (Art. 4 para. 4 of the Convention) does not invalidate the applicability of the said presumption provided for by the domestic rule (Art. 2 para. 2-bis TUIR). Therefore, in case of control by the Italian authorities, they will still be able to take advantage of the said rebuttal of the burden of proof. Thus, taxpayers must pay special attention to how giving evidence of their move to Switzerland and especially they should not forget to apply for AIRE registration.

If you have questions or need assistance with tax matters, with particular regard to Italian and Swiss regulations, please do not hesitate to contact our specialists in Geneva, Lugano or Zurich. We will be happy to assist you.