Let’s find out together the new tax residence rules for foreign-based companies with Italian shareholders and management and the practical impact of the provisions in order to avoid disputes with the Revenue Agency.
The Italian Revenue Agency has introduced new guidelines for corporate tax residence, providing greater clarity on the criteria determining the tax liability of Italian-managed companies. The recent Circular No. 20/E of 4 November 2024, issued following Legislative Decree No. 209/2023, amends existing regulations and could have a significant impact on many Malta-based companies with Italian management. Effective from 1 January 2024, the provisions set out new criteria for tax residency, removing the previous‘main object ’ parameter and introducing more concrete criteria. This article examines the new criteria and, through practical examples, illustrates the possible effects for Maltese companies with Italian-managed activities.
Tax residence criteria: registered office, place of effective management and ordinary management
The new guidelines state that a company or organisation is considered to be resident for tax purposes in Italy if, for the majority of the tax period, it meets one of the following criteria: the registered office is located in Italy, the place of effective management is located in Italy or the ordinary management of operations is carried out mainly on Italian territory. The introduction of these parameters aims to bring the regulations in line with international standards, focusing on the substance of the operations carried out for the management of the legal entity.
Take for instance aconsulting company with its registered office in Malta, but which performs strategic management and makes important decisions from Italy. Even if the registered office is formally located in Malta, the company could still be considered by the Italian tax authorities to be tax resident in Italy, with tax liability in Italy. Another example could be that of an e-commerce company with an administrative base in Malta and logistics managed from Italy. The presence in Italy of the ordinary management could constitute tax residence in the country, regardless of the Maltese registered office.
Removal of the main object criterion
The regulatory reform intended to eliminate the‘main object’ criterion, which in the past considered companies with their main activity in the country to be resident in Italy. This change reduces ambiguities, favouring a more objective definition of tax residence through criteria that are based on the substance of the operations carried out to run the legal entity.
A typical example is that of an Italian company in the hospitality sector that has opened a registered office in Malta for tax benefits, but continues to operate primarily in Italy. In the past, the presence of relevant economic activities in Italy could already cause this company to be considered an Italian tax resident. With the new provisions, however, the focus shifts to the location of management and ordinary operations. The company could therefore be considered to be tax resident in Italy if, notwithstanding its Maltese registered office, its actual direction and management is located in Italy.
Impacts for Italian-governed companies based in Malta
The new provisions will undoubtedly have a significant impact on many initiatives implemented by Italian entrepreneurs and professionals, who decide to transfer their registered office to Malta or intend to start a new business in the Mediterranean island, while keeping the ordinary management and strategic decisions in Italy. In particular, business initiatives that choose Malta (but also any other foreign country) as their registered office with the aim of benefiting from local taxation may have to re-evaluate their organisational structure, if the management or ordinary administration of the business is carried out from Italy.
For example, consider the creation of a technology start-up with Italian shareholders and management that decides to have its registered office in Malta, but continues to operate, manage employees and make key decisions in Italy, it will be considered tax resident in Italy. This operational and strategic organisation will mean, for the Italian State, that tax obligations will be governed by Italian and not Maltese rules. The same applies to a company in the financial sector that decides to open an office or a branch in Malta in order to also benefit from the tax incentives made available by the Malyta government: if the actual management, including the decision-making process, remains in Italy, the company will be considered by the Italian State to be tax resident in Italy.
Effective date of the new provisions and cases of application
As already specified, the new provisions for verifying tax residence are effective as of 1 January 2024 for companies with a tax year coinciding with the calendar year, whereas for companies with a tax year not coinciding with the calendar year, the rules will apply as of the tax period following the one in progress on 29 December 2023. This deadline gives companies a transition period to adjust and assess the impact of the new criteria on their tax organisation and management.
A case already analysed and handled by the Malta Business network concerns a small Italian software development company that decided to open a registered office in Malta in order to benefit from the tax benefits offered to start-ups. However, the company was still making strategic decisions from Italy and running its day-to-day business in Italy, which could have triggered the Italian taxation requirement.
After analysing the various strengths and weaknesses, of the organisational structure, the consultants of the Malta Business network identified an organisational and management solution that complies with the new provisions, in order to avoid misinterpretations by the Italian tax agency.
Companies with similar situations will therefore have to carefully evaluate the organisational and management procedures of their activities, not taking into account at all any residence permits in Malta held by members of the Management or Management.
The common practice of applying for a residence permit for work, by company executives, without then actually complying with the regulations explained in this article, opens the door to future challenges by the Italian tax authorities.
Reflections and next steps
There is no doubt that the new Italian corporate tax residence provisions provide clear parameters for determining tax liability, but they require companies based in Malta or other foreign jurisdictions, which have shareholders and management in Italy, to carefully assess their organisation.
The elimination of the‘main object ’ criterion and the introduction of objective parameters on the location of effective management and ordinary operations require a careful analysis of the location of business activities and decisions. Turning to experienced business advisors is therefore crucial to avoid future troublesome tax disputes.
We invite interested readers to assess the impact of the new regulations on their business and to contact the Malta Business Network for preventive advice. Our team is available to verify compliance and identify the most appropriate solutions, ensuring full compliance with Italian and Maltese laws and avoiding future disputes with the Inland Revenue.
Are you a shareholder or director of a company in Malta but resident and operating from Italy? Are you interested in setting up a new company in Malta but want to do so while avoiding future challenges from the Italian tax agency? Contact us for an initial consultation.
