How tax residence is determined is one of the key tax issues that dictate in which country an individual’s worldwide income will be taxed. Primarily, tax residence is determined by domicile and center of economic and personal interests. Uncertainty arises when the decision cannot be made on the basis of residence alone and the economic and personal interests are not in the same country.
If tax residency is not clearly defined, there is a risk of double taxation, which is why most OECD countries have signed international treaties on the avoidance of income taxation. Due to many recent cases, we are analyzing the treaty between the Republic of Slovenia and the Republic of Italy, which sets out the key criteria for determining residency status. In addition, a comparison will be made between Slovenian and Italian case law, which treat the same issues differently.
The first and most important criterion is permanent residence, defined in the Commentary to the OECD Model Convention (Commentary) as the place where the individual intends to return to after a holiday, business trip, education, etc. It is not necessary that the taxpayer owns the property and, conversely, ownership of the property does not necessarily mean that the owner has a permanent residence there. This was also the decision of the Italian Supreme Court, which in its judgment 26638/2017 of October 2, 2023, held that the house of the taxpayer’s partner can also be considered as a permanent residence if it is permanently and without restriction available to them.
If the criterion of domicile is met by both or neither country, the center of vital interests will be taken into account as a further criterion. The latter is in the country with which the individual has the closest personal and economic relations. In the above-mentioned judgment, the court held that the center of vital interests is where the partner with whom the obligee shares a household resides and where the obligee also has significant business activities.
In judgment No 6501 of March 15, 2015, the Italian Supreme Court ruled that in the case of domicile in two countries, the original home takes precedence if the taxpayer has always lived there and has family and assets.
In practice, the weight given by tax authorities to personal and economic relationships varies from country to country. For example, the Italian Supreme Court, in the same judgment, states that personal ties do not take precedence over economic ties, but must be considered holistically with other evidence. However, Slovenian courts consider personal relationships to be more important than economic relationships for the determination of tax residence. In the Administrative Court’s judgment II U 299/2016-10 of August 29, 2018, the elements of co-ownership of real estate, temporary residence, and the fact that the partner and children live in Slovenia were found to be more important than the elements of employment, insurance, identity documents, and membership in various interest groups in a foreign country.
If the country of tax residence cannot be determined even on the basis of the center of vital interests, the habitual residence, which is in the country where the individual is more often present, prevails. Although the element of nationality may also be decisive, in Slovenian case law, it most often serves only as a supporting argument. Ultimately, if there is an international treaty and several countries consider an individual to be their tax resident, the countries must agree on this through a mutual agreement procedure.
In determining the country of residence, the criterion of domicile is, therefore, the primary criterion, while in any further assessment between economic and personal interests, the latter prevails according to Slovenian case law, although the commentary emphasizes that a holistic approach be applied to the determination of the center of vital interests, where economic and family ties are taken into account to the same extent.
By Janja Ovsenik, Partner, Senica & Partners