Tax spotlight: Italy — The risks of ‘Fictitious Residence’ for overseas Italian enterprises and individuals

Last month Horizons set out on an important roadshow in China. Working in cooperation with the China-Italy Chamber of Commerce, the objective of the roadshow was to address the issue of relocation abroad of the residence of an Italian legal entity and natural person – otherwise called the “fictitious residence” – and the fiscal and criminal liability those involved are at risk of incurring.

The seminar took place in three key locations: Shanghai, well regard as China’s economic centre; Suzhou, a small city in Jiangsu Province, the province where the largest Italian industrial base is located; and in the southern city Guangzhou, the place where the very first foreign investments took place during the 1980s, and, therefore, a territory with a deeply-rooted, well-established Italian presence.

We began the seminars by asking a seemingly banal question to our audience: “Where is your residence?” The question is designed to set the table for a vital understanding of the ‘fictitious residence’ scenario some overseas person and entities find themselves in, lured by its temptations while being at great risk for its pitfalls. I followed up by asking attendees directly: “You, both legal entity or natural person, do you really know which State your residence is, and whether you are in compliance with your fiscal liability?”

Know your about ‘Fictitious Residence’ before pursuing it as a tool for tax advantage

The “fictitious residence” is intended as an instrument used by Italian taxpayers to place themselves outside of Italian tax law jurisdiction. Here the objective is to free oneself from tax responsibility related to income sources that would otherwise be taxable in the Italian territory; the same objective applies to entrepreneurial activities likely to produce taxable income in Italy.

The way the so-called “fictitious residence” scheme works is that a legal entity acts to identify a location where an enterprise’s income is considered having been produced “abroad” to avoid tax liability in Italy. The fact, however, remains that the mere setting up a subsidiary in a foreign country and following the rules and regulation of said country does not automatically locate the fiscal residence of the entity in the foreign country.

To clarify, if an Italian company has constituted a subsidiary in a foreign country following all the rules and regulations of that country, but the subsidiary does not function wholly independent of its parent company in its management, the fiscal residence of the subsidiary remains in Italy, along with the tax liability.

Italian authorities will attempt to verify where the management of foreign-based subsidiary lies. Quite often, it is determined that foreign-based subsidiaries are managed by the parent company. In this instance, double taxation should incur in such cases of fictitious residence. In sum, authorities start from the point that the subsidiary shall be an independent legal entity; differently, they perceive the Italian company to be attempting to avoid Italian taxation on the income generated by the subsidiary.

Italy, like many countries around the world, is cracking down hard on tax evaders

It is common during a fiscal investigation by Italian authorities that the residence of a foreign entity — and therefore its Italy-taxable income — incurs significant fiscal and criminal penalties when found acting out of legal compliance. Many Italian legal entities neglect to fully evaluate the risks associated with overseas investment while finding it tempting to try and navigate their way around tax responsibilities. In this instance, the risks far outweigh the rewards.

More than just enterprises, individual persons also fall prey to the temptation the fictitious residence approach to taxes. For Italian citizens chasing the market and becoming overseas employees, full knowledge and awareness of one’s ‘home’ tax responsibility is essential to avoid potential tax penalties. As with enterprises, individuals must be aware as to the real location of their fiscal residence and the fiscal obligation they bear.

Are you in compliance? Yes? No? Not sure?

At Horizons, we find ourselves engaged with clients who, for whatever reasons, lack the wherewithal to fully analyse the principal conditions and situations that define the residence of both legal entities and natural persons (as they can be complex). For those with the foresight to seek professional advice on the matter, their overseas activities can be rewarding and trouble free. But for those who rely on mere instinct, informal word-of-mouth advice and are either unaware of or seeking to skirt fiscal responsibilities, the outcomes can be disastrous.

The problem of the “fictitious residence” is particularly relevant in China, where many Italian companies have set up subsidiaries, and where often managers and, in general, Italian citizens operate. By the number of attendees at the seminar, it’s clear that Italian nationals living, working and investing here have numerous questions and concern for operative in a manner that best serves their interests.

Post by Lucia Myriam Netti, Horizons Corporate Advisory regional partner for Europe, Russia and Belarus. She is the organiser and presenter of Horizons “Fictitious Residence” seminar. Comments or enquiries relating to the topic or other matters affecting enterprises and individuals operating foreign in countries can be made directly to her at For general corporate advisory enquiries, email us at, and we’ll have a Horizons professional contact you.  

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