How motivated to fight for either side were Italians after 1943? I’d guess they all just wanted the war to end. They’d seen the back of Mussolini, but did they want to die for the King?
My preference is for a general rule that all liberated former factory sites can be used to build infantry only (captured factories removed remember). This works fine for France. Some places could be used by either side (Romania, Finland?)
What happens if northern Italy has a mix of German and Italian units; do the Germans “disarm” the Italians?
If Italy becomes Allied does it get bonus infantry to represent returning POWs (I use something similar in 1914 after Russian revolution).
What about Italians on leave in Tokyo?
I always work house rules around historical marks for game play so in order to answer your questions, it works like this:
1: Both sides had military forces loyal to their commanders, Axis Italy did not surrendered until 1945 when it fell right before USSR entered Berlin, while the bulk of it was German defenders, they used Italian forces more of a military auxiliary but they did fight. Allied Italian forces as far as I know, never fought independent from the other allies, I don’t think US and UK trusted them so as far as I know, they were incorporated into US and UK units but they did fight.
2: You bring up a good point about Italian conquered neutral countries so for the sake of my status quo, I say it would join the allies.
3: I never worked any kind of POW rules into the game because I am not sure how to work it but I usually have allied Italy start as a baby fresh power.
4: The only known case of this was Japan did ask any Italian citizen who their loyalty lies and those who said the king, went to jail. While it is very unlike Italy would have any forces in Japanese territory, for the sake of balance, I would treat it no different than if it was in German territory so I’d say it remains Axis.