Smart working: tax impacts and regulatory changes

The Covid-19 pandemic has revolutionized our lives and, in particular, has also had very important repercussions on the world of work as well. One of the most obvious transformations has certainly been the widespread use of smart working, a  practice that, although already existing previously, has found, with the pandemic, a widespread use, given the practical impossibility for people to go to the same place: workers have seen their traditional work routine modified, thus leading to important changes in the organization of work and in the very conception of the "workplace”.

Among the various implications of smart working, an aspect of great relevance is its fiscal dimension. On this point, the Italian Revenue Agency has recently pronounced itself with circular No. 25/E,  issued last 25 August, in which the tax implications related to remote work carried out abroad are taken into consideration; in particular, the Agency has examined the situation of those workers for whom there is no convergence between their tax residence (governed by Article 2 of the TUIR),  the place where they actually carry out their work and the place where the concrete results of this activity are manifested.

The circular focuses in particular two different phenomena:

1. The first part provides clarifications and application instructions on the tax profiles of remote work (so-called "smart working"), focusing on the most recent guidelines of practice on this point, including for the purposes of the application of the facilitative regimes aimed at individuals who transfer their tax residence to Italy to carry out a work activity mainly in Italian territory, governed by Article 16 of (1) Legislative Decree no. 147 of 14 September 2015 (so-called "special regime for impatriate workers"), as well as by Article 44 (2) of  Decree-Law No 78 of 31 May 2010, converted, with amendments, by Law No 122 of 30 July 2010 ('Special regime for teachers and researchers');
2. the second part, on the other hand, is dedicated to the special regulations concerning "frontier" workers, also considering recent developments and the new international agreement signed with Switzerland, and the novelties introduced by the related ratification law (Law No. 83 of 13 June 2023, published in the Official Gazette No. 151 of 30 June 2023

1) TAX REGIME OF SMART WORKING

The new agile working methods are mostly characterized by a partial or total severing of the constraints of the physical presence of the provider in the territory of a given State for the performance of the activity. This new organizational model requires some coordination clarifications with the conventional provisions that allocate taxing power in relation to certain incomes.

In particular, Article 15 of the OECD Model (income from employment), substantially transposed into the Conventions negotiated by Italy, provides, in paragraph 1, for the exclusive taxation of income from employment in the taxpayer's State of residence, unless such employment is carried out in the other Contracting State; in the latter case, the above-mentioned income must be subject to concurrent taxation in both countries.

It should also be noted that, pursuant to paragraph 2 of Article 15 in question, exclusive taxation is restored in the state of residence, despite the fact that the employment income resides in the source State, where three conditions are jointly met: - 1) the recipient of employment income resides in the source State for periods that do not exceed a total of 183 days in the relevant tax year; (2) the remuneration is paid by or on behalf of an employer who is not resident in the source State; and (3) the burden of remuneration is not borne by a permanent establishment or a fixed base which the employer has in the source State.

In application of the conventional provision, therefore, a non-resident person who performs his activity as an employee in Italy is subject to taxation in our country in relation to the income attributable to the activity performed in the territory of the State.

This conclusion is not affected by the manner in which the service is provided. In other words, even if the work activity is carried out remotely for a foreign employer, it is still considered to be performed in Italy, with consequent recognition of the Italian taxation powers.

Finally, another important aspect to consider, with reference to smart working, is the issue of double taxation: on this point, the circular refers to a series of agreements that have been signed between Italy and other states. The function of such conventional legislation is to regulate the division of taxing power between the States, so that, once taxing power has been conferred to the Italian State, the application of the domestic legislation remains subject to the existence of the requirements of the latter.

In conclusion, therefore, it is essential that the employee and the employer have a clear understanding of these rules, so that the former can determine whether or not they are eligible for the preferential tax regime and the latter can properly fulfill their obligations.

2) THE NEW DISCIPLINE ON CROSS-BORDER WORKERS

The discipline of cross-border workers can be summarized as follows: i) an increase, starting from 2024, of the tax-free threshold (in relation to income deriving from employment carried out abroad) applicable to frontier workers up to 10,000 euros (indeed, the increase of the exemption applies to all workers, not only, therefore, those who work in border areas) and; (ii) the non-taxability, for the purposes of personal income tax, of family support allowances, paid, in favor of frontier workers, by the social security institutions of the States in which the worker serves (3) In addition, since the new regulations will come into force in 2024, the Internal Revenue Agency has also provided for a transitional regulation applicable until 31/12/2023, these rules, applicable to persons who are tax resident in Italy, who meet the requirements to qualify as frontier workers in Switzerland, based on the 1974 (4) agreement. For such individuals, days worked in the territory of the state, in teleworking mode, up to 40 percent of the working time, are considered working days performed in Switzerland.

In conclusion, the clarifications provided by the Agency in the aforementioned circular are many, but they need, in order to be applied, careful analysis, which can mutually shelter worker and employer from possible disputes and/or duplication of tax.

Dott. Pasquale Ambrosio Cepparulo

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1) "Income from employment, income assimilated to employment, and income from self-employment produced in Italy by workers who transfer their residence to the territory of the State pursuant to Article 2 of Presidential Decree No. 917, contribute to the formation of total income limited to 30 percent of their amount upon the fulfillment of the following conditions: a) the workers have not been resident in Italy in the two tax periods preceding the aforementioned transfer and undertake to reside in Italy for at least two years; b) the work activity is carried out mainly in Italian territory." Access to this special regime, pursuant to paragraph 2 below, is 14 also allowed to citizens of the European Union or of a non-EU state with which a double taxation convention or an agreement on the exchange of information in tax matters is in force, provided that: (a) they hold a bachelor's degree and have been "continuously" employed, self-employed or engaged in business outside Italy for the past 24 months or more, or (b) they have been "continuously" engaged in study outside Italy for the past 24 months or more, obtaining a bachelor's degree or "postgraduate specialization." According to the provisions of the subsequent paragraph 3 of the aforementioned Article 16, this regime is applicable on a temporary basis, starting from the tax period in which the worker transfers his or her tax residence to Italy and for the subsequent taxable periods, with respect only to income that is considered to be "produced in Italy"

2)For income tax purposes, ninety percent of the emoluments received by teachers and researchers who, holding a university degree or equivalent and not occasionally residing abroad, have carried out documented research or teaching activities abroad at public or private research centers or universities for at least two continuous years and who come to carry out their activities in Italy, consequently acquiring tax residence in the territory of the State, is excluded from the formation of employment or self-employment income."

3)https://www.we-wealth.com/news/investimenti/leggi-e-normative/smart-working-quali-fiscal-le-latest-dell'agenzia

4) Only those employees who are resident in Italy and who travel abroad to border areas or neighboring countries on a daily basis to carry out their work must be recognized as frontier workers.