Italy? A tax haven under the sun… Over the last decade, numerous European countries (in particular Portugal, Malta, Cyprus and Greece) have introduced advantageous tax regimes in a bid to capture a clientele of HNWIs (High Net Worth Individuals). The countries make no secret of the fact that these appealing tax regimes are designed to attract wealthy families who spend and invest massively.
Italy is no exception, and has in fact recently eased its tax legislation even further in response to the financial crisis. The Italian government aims to use these clement fiscal policies to reduce the extreme gap between the north and south of the country. For anyone looking to emigrate to a country offering a comfortable way of life, Italy is a serious contender thanks to its location at the centre of Europe, its culture and its football, its attractive cities, its excellent cuisine, the diversity of its landscapes and its pleasant Mediterranean climate. And of course, it offers freedom of movement across the EU, including Switzerland.
We will start by presenting Italy’s standard tax regime before going on to cover the various tax incentives put in place by the government. We will then look at entry and residence conditions for expats before finishing with a few remarks on how to choose the most appropriate tax regime.
1. Ordinary taxation in Italy
a. Tax residency in Italy
All tax residents of Italy are liable for tax on their full worldwide income. Consequently, taxpayers are taxed on their foreign income (for example rents from properties owned outside Italy, dividends and interest from foreign companies, remuneration and director’s fees paid by non-resident entities, etc.) as well as their Italian income. Individuals tax resident in Italy are therefore required to declare all their assets (financial and other) on their Italian tax return (boats, jewellery, properties, works of art, bank accounts, etc.) (quadro RW).
In contrast, non-residents are only taxed on income generated in Italy (in particular via gainful activity carried out in the country).
Under article 2 of the Italian Tax Code, an individual is considered tax resident in the country if, for the majority of the tax year (i.e. more than 183 days) they:
– are listed on the resident Italian population registers (known as Anagrafe della Popolazione Residente);
– are “resident” in Italy; or
– have a “domicile” in the country.
To assess the notion of domicile, we look at the person’s centre of professional, economic and social interests (work, family, etc.).
If one or other of the conditions above is fulfilled, the individual is considered to be tax resident for Italian tax purposes. This is of course subject to the provisions of double taxation agreements.
Given the above, the basic criteria for determining an individual’s tax residence is whether they are listed on the resident Italian population registers for more than 183 days in the tax year in question. If they are not registered, alternative criteria will be used. These are permanent residence (more than 183 days in the country, whether continuous or not, where each day or part of a day is counted) or the individual’s centre of personal or professional interests. In certain recent decisions, the Italian Supreme Court has judged, as regards the domicile criteria, that the presence of important economic interests in Italy can sometimes take precedence over personal and family ties in a foreign country even though traditionally personal ties are rated above economic interests.
Anyone moving to Italy must apply to be listed on the resident Italian population register in the municipality where they intend to live. When they leave, they must ask for their name to be removed from the register. Italians that leave the country must apply to be listed on the Register of Italians resident abroad (AIRE – Anagrafe degli Italiani Residenti all’Estero).
Under an anti-abuse rule, Italian citizens who transfer their residence to a country considered to be a tax haven (black listed countries) are counted as living in Italy even if they are no longer on the population register, unless they prove otherwise.
Black listed States are those listed in the Ministerial Decree dated 4 May 1999 as implemented and amended from time to time (i.e., Antigua and Barbuda, the Bahamas, Bahrain, Brunei, Djibouti, Dominica, Grenada, Liberia, Macau, the Maldives, the Marshall Islands, the Netherlands Antilles, Panama, St. Lucia, Sark, Tonga, Tuvalu and Vanuatu).
b. Income tax
Individuals are liable for income tax, which is known as Imposta sul Reddito – IRPEF or IRE.
Under the Italian tax system, there are six different categories of income:
– employment income
– business income taxed as a company (Imposta sul Reddito delle Società)
– self-employment income taxed under the rules for individuals
– investment income
– capital gains
– income from property
As a rule, income tax is progressive. However, there are some exceptions, for example for dividends, interest and capital gains. In Italy, certain income from pensions and sickness or accident insurance is tax exempt.
Gross taxable income from employment includes all income (in cash or in kind) received by the employee in connection with the employment relationship (salary, bonus, profit-sharing scheme, interest-free loans, expatriation allowance, payment of school fees, tax reimbursement, car financed by the employer, meal allowances, payment of moving or accommodation costs, etc.).
In principle, benefits received in cash are 100% taxable. Benefits in kind are either taxed at a set rate or on the basis of ordinary usage (based on the usual market price of similar goods or services). There are of course specific rules covering the private use of a company vehicle, expatriation allowances and travel expenses.
Income is summed to give the total income, which is taxed on a sliding scale. This is divided into bands as follows:
• €0 – 15,000: 23%
• €15,000 – 28,000: 27% Total of tax due for the band below = €3,450
• €28,000 – 55,000: 38% Total of tax due for the bands below = €6,960
• €55,000 – 75,000: 41% Total of tax due for the bands below = €17,220
• More than €75,000: 43% Total of tax due for the bands below = €25,420
As we indicated above, capital gains are taxed at a flat rate of 26%.
In addition to income tax, there are also regional taxes (1.23-3.3%) and municipal taxes (max. 0.9%) which vary by place of residence.
In certain circumstances, private sector employees are entitled to a 10% flat rate on bonuses earned up to a maximum of €4,000 (productivity bonus). However, employees that received gross annual remuneration in excess of €80,000 in the previous year do not qualify for this tax reduction.
In contrast, variable pay (for example bonuses, stock options and profit-sharing schemes) received by executives in the financial sector (i.e. banks, financial institutions, management companies, Società di Gestione del Risparmio [SGR] et Società di Intermediazione mobiliare [SIM] and financial intermediaries) is subject to an additional 10% tax.
For variable pay paid after 17 July 2011, the tax base for the additional 10% tax is the variable pay minus the basic salary. The comparison must be made between variable pay and basic pay corresponding to the same tax year, regardless of the year in which it was actually paid.
Lastly, in certain circumstances, self-employed workers may be taxed at a flat rate of 15% on their gross income from their business activity up to €65,000. They are then not subject to the regional or municipal supplements or the progressive tax. A reduced flat rate of 5% is applied to new business activities if all the relevant criteria are fulfilled.
c. Regional tax on productivity
Self-employed workers in Italy are subject to a tax on productivity (IRAP) of 3.9% (basic rate). Regions can increase or decrease this basic rate by up to 0.92%. For other businesses, IRAP varies by sector and by region (for example, it is 5.57% for banks and financial institutions in Lombardy). IRAP is calculated on the “net value added” of production, as defined by the applicable fiscal rules (but mainly based on the company accounts).
d. Social security in Italy
When considering social security, it is important to look at the worker’s status, and in particular whether they are an ordinary employee, an executive or self-employed.
For ordinary employees, social security contributions are paid by both the employer and the employee at 30% and 10% respectively (making a total of around 40% of gross remuneration, although the rate depends on the employee’s position in the company, the business sector, the number of staff employed by the company, etc.). Around 33% of this amount is paid to the national pension scheme, and the rest goes to other social security institutions (covering unemployment, sickness, maternity, etc.). Social security payments are capped at €103,055 for 2020.
Employers are required to register their employees with Instituto Nazionale Previdenza Sociale or INPS.
e. Dividends and interest
To calculate the tax due on dividends, we have to start by classifying the holdings.
For listed companies, a holding representing more than 2% of voting rights or more than 5% of share capital is treated as a “qualifying holding”. For other companies, a qualifying holding is more than 20% of voting rights or more than 25% of share capital. In all other cases, the holding is referred to as “non-qualifying”.
From the 2018 tax year, the tax treatment of dividends from qualifying holdings has been aligned with the rules in place for non-qualifying holdings. Dividends are now taxed at source at a rate of 26% in both cases.
A transition period has been put in place for cases where dividends are paid between 1 January 2018 and 31 December 2022 in respect of profits realised before 31 December 2017.
Consequently, dividends resulting from a “qualifying holding” are taxed at the progressive tax income tax rates for:
– 40% of the dividend paid in respect of profits generated up to 31 December 2007;
– 49.72% of the dividend paid in respect of profits generated between 1 January 2008 and 31 December 2016;
– 58.14% of the dividend paid in respect of profits generated between 1 January 2017 and 31 December 2017.
As regards foreign dividends, it is important to note that for non-qualifying holdings, dividends paid by a foreign entity are subject to a flat-rate tax of 26%, net of foreign tax deducted at source.
For qualifying holdings, a 26% tax is levied on the net dividend if it is paid by a company based in a country/territory on the tax haven white list (in contrast, dividends paid by companies in blacklisted countries are subject to progressive taxation on their full value. The tax basis is reduced to 50% of the dividend if it can be proven that the foreign company is actually operating in the blacklisted country or territory.)
Interest paid to resident individuals is taxed at a flat rate of 26% (12.5% for interest on Italian treasury bonds and similar).
f. Dividends and interest
Capital gains from non-qualifying holdings are taxed at 26%.
For qualifying holdings, as detailed above for dividends, the following rules should be used. So:
– For capital gains made before 31 December 2017: 49.72% of the capital gain is taxed, using the progressive tax scale;
– For capital gains made between 1 January 2018 and 31 December 2018: 58.14% of the capital gain is taxed, using the progressive tax scale;
– For capital gains made from January 2019: taxation at a flat rate of 26% on the full value of the gain.
g. Financial assets held outside Italy
Financial assets held outside Italy by a resident of the country are subject to Italian wealth tax (Imposta sul valore delle Attività Finanziarie detenute all’Estero or IVAFE).
The tax base is the value of the assets on 31 December of the tax year in question, or at the end of the period for which they are held. The tax rate is 0.2%. For current accounts (including savings and post office accounts), the tax is €34.20 per account, if the average annual balance is in excess of €5,000.
If wealth tax is paid on a financial investment in the foreign country, the individual can offset this against the Italian wealth tax.
h. Property taxation in Italy
Italy’s property taxation system is complex because it involves all the different levels of the state.
Four basic taxes are potentially payable on property purchases:
– Land tax (Imposta Ipotecaria)
– Registry tax (Imposta Catastale)
– Stamp duty (Imposta di Registro)
– VAT (Imposta sul Valore Aggiunto, IVA)
The value of these taxes depends on how the property is to be used (primary residence or second home) and on the seller (an individual or a professional builder or similar).
Imposta Ipotecaria and Imposta Catastale are €50 or €200 (if the purchase is liable for VAT) each.
The registration fees payable on a property purchase in Italy depend primarily on who the seller is. If the seller is registered for VAT, stamp duty will always be a set fee of €200. However, if the seller is an individual or a non-VAT registered business and the property is purchased as a primary residence, it will be 2% of the property’s cadastral value. The cadastral value is determined by the authorities. It depends on the property’s location, year of construction, type and size (dimensions of rooms, square metres and volume). It appears in the deed of sale, the rogito. A property’s cadastral value is always lower than its selling price, meaning that it is advantageous to buy a house from a private seller (see below). For a second home, stamp duty is 9% of the property’s cadastral value. In both cases, the minimum payment is €1,000. Taxes are higher for luxury properties in classes A1, A8 and A9 of the land registry.
In addition, VAT is not collected on properties purchased from non-VAT registered sellers. It is generally collected therefore only on properties purchased from developers and properties that have been renovated in the five years preceding the sale. For primary residences, the VAT is 4% of the selling price. For second homes, it is 10%, and 22% for luxury properties.
Once a property has been purchased, the owner becomes liable for various additional taxes:
Firstly, Italy’s 2020 Budget Law abolished the old “single municipal tax” (Imposta Municipale Unica, IUC) which was made up of three separate taxes:
– Municipal tax (Imposta Municipale Propria, IMP)
– Refuse tax (Imposta sui Rifiuti, TARI)
– Indivisible service tax (Tributo Servizi Indivisibili, TASI)
TASI has been merged with IMP to form a new single municipal tax (Imposta Municipale Unica, IMU). TARI is unchanged.
The new IMU remains a tax on second homes. Primary residences (the registered or habitual home of the taxpayer and/or their family) are exempt from the new IMU, with the exception of luxury properties in land registry classes A1, A8 and A9.
IMU is calculated based on the cadastral value of the property, reappraised by 5% and using certain multiplication coefficients (between 55 and 160) according to how the property is categorised in the land register. These taxes are set by the municipality. The basic tax rate is 0.86%, but the relevant municipality can increase this to a maximum of 1.06% or reduce it to 0.76%. The tax is payable in two instalments, an advance payment of 50% by 16 June calculated using the previous year’s rates and deductions and the balance between 1 and 16 December of the tax year in question based on the taxes approved by the local municipalities, which publish their rates at the end of October.
TARI has fixed and variable components: the fixed portion is calculated based on the size of the property in square metres multiplied by the fixed unit rate. The variable portion depends on the number of people in the family or the number of people living in the property. This figure is obtained from the municipal records if the property is owner-occupied, or estimated based on the size of the property if it is not.
Nationally, the rental value (income) derived from ownership is based on the cadastral value of the property plus 5%. The value is roughly equal to one hundredth of the cadastral value (for example, if a property is worth €100,000, the rental income will be around €1,000).
For a rented property located in Italy, the taxable income will generally be the higher of: (i) rental value plus 5% and (ii) 95% of the rent for the period in question.
For rented property, the law provides for a standard reduction of 5% of rent (higher flat-rate reductions exist in certain specific cases) to allow for the owner’s property-management and upkeep expenses. However, the actual expenses incurred are not considered for tax purposes.
The rental value, calculated as outlined above, is then taxed based on the usual progressive scale.
It is also important to note that a new tax system, the “cedolare secca”, has been in place since the 2011 tax year. This is an optional tax regime available on an opt-in basis to replace the standard regime. Under this regime, rental income can be taxed at a set tax rate of 21% or 10% depending on the region, subject to the following conditions:
– the owner and the tenant must be individuals
– the property must be rented for residential use and be classified in category A (with the exception of A10)
Lastly, tax credits are available for 50% of the cost of restructuring work (and up to 75% for work that will reduce energy consumption and even up to 90% for renovating building façades in the historic centres of towns and cities with high population densities).
Capital gains made on properties in Italy are generally taxable, regardless of whether the owner is an Italian tax resident or not. However, if the property has been held for more than five years, or if it was held for a shorter period but used as a primary residence for the majority of this time, the capital gain is not taxable. In other cases, the capital gain is taxed using the progressive scale, or alternatively using a flat rate of 26% under certain conditions.
i. Taxes on properties held abroad
Properties held outside Italy by a resident of the country are subject to Italian wealth tax (Imposta sul Valore degli Immobile situati all’Estero or IVIE).
The applicable tax rate is 0.76%, and in exceptional cases, 0.4%.
IVIE is levied on the value of the property (i.e. the purchase price given in the deed of sale or its local market value).
For properties in EU or EEA countries that have signed an exchange of tax information agreement with Italy, the wealth tax is based on the current cadastral value in the foreign country. If there is no cadastral value, the wealth tax is based on the purchase price or the local market value.
If the properties are subject to wealth tax in the foreign country, the individual can deduct the amount paid from the amount due in their Italian tax declaration.
It is important to note that rental income earned on properties abroad must also be declared in Italy. Standard income tax is payable on this income (on the basis used when foreign income is declared) but a tax credit is available if it has been taxed abroad. The tax credit is limited to the proportion of the Italian tax corresponding to the portion of the total income taxable abroad (and subject to double taxation). The credit for tax paid abroad cannot exceed the net Italian tax due on income earned abroad.
If the rental income is not taxed abroad, it is taxed in Italy after a deduction of 15%.
j. Inheritance and gift tax
Inheritance and gift tax was reintroduced in 2006. Rates are fairly low compared to other European countries. They are:
– Spouse and children: 4% on amounts in excess of an allowance of €1m per heir
– Brothers and sisters: 6% on amounts in excess of an allowance of €100,000 per heir
– Parents: 6% with no allowance
– Unrelated third parties: 8% with no allowance
However, a €200 payment is due for each gift.
k. Stamp duty
Financial assets held by individuals in Italy are subject to Italian wealth tax.
The tax base is the value of the financial investments on 31 December of the year in question. For the 2020 tax year, the tax rate is 0.2%.
This tax is deducted directly by the bank.
In addition, a tax is also collected on financial transactions, and in particular the transfer of shares and other financial instruments issued by Italian companies limited by shares (including derivative instruments, if one of the parties to the transaction is an Italian tax resident). The tax rate is 0.2% of the value of the transaction, reduced to 0.1% if the sale is made on a listed market (a flat-rate tax is levied on the value of derivative instruments). The tax is due wherever the sale is made and regardless of the country of residence of the parties to the transaction.
Lastly, stamp duty of €34.20 is due on bank statements of accounts held by individuals if the average annual balance is over €5,000, regardless of the balance at the end of the year.
l. The Italian tax return
The tax year is the calendar year (1 January to 31 December). A tax return must be filed electronically each year.
There are two types of tax return in Italy: the “Modello 730” income declaration form (a simplified declaration for eligible individuals only receiving certain types of income [for example, from gainful activity] who also fulfil certain other conditions such as having been tax resident the previous year) which must be filed before 30 September of the year following the year in question, and the “Modello Unico” standard income declaration form (the standard declaration for individuals who do not fulfil the conditions to qualify to file the Modello 730 form; in principle, if a taxpayer has assets or accounts abroad they are automatically required to complete the Modello Unico) which must be filed by 30 November at the latest in the year following the tax year in question.
Tax on salaries is normally deducted at source by the employer, on a monthly basis. Employers are required to issue, by 31 March of the following year at the latest, an annual employment certificate called Modello CU, certifying the employee’s taxable income and the amount of tax deducted at source during the year.
Tax is paid as follows:
Two provisional payments (on 30 June and 30 November of the current year) and then the final balance on 30 June of the following year. The first payment is equal to 40% of all the income tax paid in the previous year. The second payment is equal to 60% of all the income tax paid in the previous year. The balance is the difference between the tax actually due and the sum of the two provisional payments made.
The tax authorities can carry out inspections until 31 December of the fifth year following the year in which the tax form was filed. In the event of tax evasion, the period for inspections is extended to 31 December of the seventh year following the year in which the return should have been filed.
Each person in the household is allocated a tax identification number. In Italy, as in many other countries, there is no notion of a household for tax purposes, so a person’s tax declaration does not directly include their spouse or children.
Tax declarations are filed individually: each spouse completes their own separate declaration. Children’s incomes are divided equally between the two parents. Shared income and tax-deductible expenses are also divided equally between the two spouses.
Italy reinforced its tax regime for inbound employees in 2020, to make the country more attractive to entrepreneurs and employees.
As a consequence, eligible taxpayers (employees and equivalents, together with business owners, including of newly created businesses, and self-employed workers, and no longer just researchers and teachers) who become tax resident in Italy from 1 January 2020 are eligible for a 70% tax exemption (subject to exceptions for sportspeople) on local income from gainful activity.
The reduction is raised to 90% for taxpayers who transfer their tax residency to a region in southern Italy (Abruzzo, Apulia, Basilicata, Calabria, Campania, Molise, Sardinia and Sicily). These taxpayers will therefore then pay only 10% of the progressive income tax. At the maximum tax rate (43%), which applies from €75,000, they would pay only 4.3%. It is important to note that social contributions are deducted at the standard rates, but in return for these the taxpayer qualifies for full retirement, invalidity, sickness, incapacity and unemployment insurance. In addition, as mentioned above, social contribution payments are capped.
The aim of this status is to attract human capital and entrepreneurs to Italy, and especially the southern regions. Specific qualifications are no longer required. Similarly, nationality is immaterial (the regime is open to both Italians returning to the country and to foreign nationals).
To qualify for this favourable tax regime, taxpayers must:
– transfer their tax residency to Italy in accordance with Italian law, i.e. during the first six months of the year (in Italy, tax residency is an annual concept, and there is no provision in local law for split year tax residency covering only a fraction of the year, except under specific provisions provided by a DTT entered into between Italy and a foreign State (e.g., Switzerland and Germany));
– not have been tax resident in Italy during the two tax years preceding their arrival in the country;
– be a national of an EU country, an EEA country or a country with which Italy has a current double-taxation or exchange of information agreement;
– undertake to remain resident in the country for at least two years, failing which they will be required to repay the tax incentive;
– work mainly in Italy (regardless of whether their employer is Italian or foreign);
– earn an income by working.
This new tax regime for inbound employees applies for a period of five years, and can be renewed for a further five years in the following cases:
– the taxpayer has a dependent child aged under 18;
– the taxpayer has purchased residential property in Italy after their arrival, or within the 12 months preceding their arrival. The property may have been bought by the couple, or the taxpayer’s spouse or even children, and it may be co-owned.
If one or other of these conditions is fulfilled, an exemption of 50% applies for the following five years. If the taxpayer has three dependent children, the reduction is further extended to 90%, for all regions of the country.
Even more generous tax relief is extended to researchers and teachers (defined as those who hold a university degree or equivalent and have taught or carried out research work abroad for at least two years). In this case, the tax relief is 90%, valid for six years. With a dependent child or a property purchase, the tax deduction is valid for eight years, with two children for 11 years, and with three or more children for up to 13 years.
It is important to note however that this regime cannot be combined with another special tax regime (for example, the neo-domiciled regime).
3. Flat-rate tax on certain foreign income in Italy (neo-domiciled tax regime)
In contrast to the tax regime for inbound employees, which offers tax advantages for income from gainful activity carried out in Italy, the fixed tax payment regime covers income from foreign sources received by new residents.
Consequently, since 2017 (introduced by the 2017 Budget Law, No. 232/2017), individuals who have not been Italian tax residents in nine of the previous ten tax years, and who transfer their tax residency to Italy in accordance with Italian law, can opt for a fixed tax payment of €100,000 per year (plus €25,000 for each additional family member, which is understood to refer to spouses, children including adopted sons/daughters and step-children, sons and daughters-in-law, parents and parents-in-law, and siblings) on certain foreign income and wealth, regardless of its total value.
The only exception to this is the sale of qualifying holdings in a foreign company within five years of taking up residence in Italy. In this specific case, capital gains may be taxed locally.
For Italian income tax purposes, a shareholding is considered “qualified” when the shares represent, in total (i) a percentage of voting rights in the company’s ordinary shareholders’ meeting higher than 2% (for listed shares) or 20% (for unlisted shares), or (ii) a participation in the share capital higher than 5% (for listed shares) or 25% (for unlisted shares).
During the first 5 years period, capital gain on qualified shareholdings are subject to the ordinary tax regime (see above). In this regard, it has been clarified by the authorities that qualified shareholdings (only) are subject to IVAFE and to reporting obligation in the Italian tax return only during the first five fiscal years of validity of the regime.
The tax authorities have issued a circular (no. 17/E dated 23 May 2017) on the neo-domiciled tax regime (Agenzia delle Entrate), in addition to the article 24-bis Income Tax Consolidated Act (ITCA) and the implementation rules No. 47060 of 8 March 2017.
In practice, this substitute tax covers the following:
– income tax (IRE)
– regional and municipal taxes
– dividends and capital gains tax
– wealth tax on foreign property (IVIE)
– wealth tax on foreign investments (IVAFE)
Foreign-source income is determined using the income sourcing rules of the Italian Revenue Code (article 23 of the Italian Unified Code on Income Taxes (Testo Unico delle Imposte sui Redditi)) and includes the following:
• employment income from foreign employment;
• income from personal services performed outside Italy;
• business income from business activities conducted through a permanent establishment located outside Italy;
• royalties paid by a foreign-based licensor;
• rents from the lease of foreign property;
• dividends paid by foreign companies;
• interest on bonds or similar obligations issued by foreign borrowers; and
• gains from the sale of stock or other ownership interests in companies organized outside Italy.
As a general rule, income is deemed to be foreign-sourced when:
• the asset from which the income is derived is located abroad, or
• the activities through which the income is produced is performed abroad, or
• the payer is resident abroad.
Notably, sourcing rules under Italian tax law offer great opportunities to maximize the benefits of the special tax regime with careful planning.
Under Italian tax law, the source of capital gains is the place where the property is located rather than the seller’s place of residence. For gains from the sale of stock or ownership interests in corporate or noncorporate entities, the gain is sourced with reference to the place of incorporation or organization of the entity.
Dividends and interest are sourced to the residence of the payer. However, dividends and interest earned through mutual funds, which are not treated as fiscally transparent entities, are specifically characterized as income from mutual funds and sourced to the place where the fund is organized. Therefore, even investments in Italian stock and bonds can generate non-taxable foreign-source financial income if the stock is held and managed by a foreign-organized mutual fund.
Likewise, income earned through trusts and similar arrangements is classified as income from a trust and sourced to the place of administration of the trust — not by reference to the source of the underlying items of income — which is presumed to be the place where the trustee is domiciled unless the taxpayer proves that the actual administration of the trust is carried out elsewhere. A revocable trust is disregarded: the settlor is treated as the owner of the trust’s assets and income, which is sourced by reference to the source of the underlying items of income. Non-revocable trusts are generally treated as opaque unless the settlor retains sufficient control over the trust to result in the trust being treated as fiscally transparent. As a result, a taxpayer can lump her investments — whether Italian or foreign — into a foreign-administered trust and earn foreign-source income that is not subject to the regular Italian income tax.
Income from services is sourced with reference to the place of performance. Italian law does not include any clear rule setting forth a method for the allocation of the income. In the case of wages paid for general services, allocation is made on the basis of the time spent performing those services in Italy compared with time spent performing them abroad. However, remuneration for work on specific projects or tasks should be allocated with reference to the place where the project or task is carried out.
In contrast with the situation in the UK, there is no obligation to leave the funds abroad. As the remittance basis of taxation does not apply, the foreign income can be transferred to Italy and spent or invested in the country without any restrictions. This provision covers all categories of foreign income. On the other hand, local income (salary, Italian capital gains, etc.) is taxed under the ordinary system at the standard rates.
As a result of these rules, taxpayers are not required to declare property held offshore (jewellery, bank accounts, properties, etc.). So, during the tax period in question, gift and inheritance tax is due only on assets held in Italy and in excluded States (see below), and not on those held abroad. Such exemption applies regardless of the residence of the heir(s)/donee(s).
The circular clarified that transfer of assets to trusts can also benefit from the exemption at stake. Inheritance and gift taxes are due only in case of transfer of assets within the Italian territory. In case of extension of regime to family members, exemption applies also to transfers made by such family members.
Similarly, this tax regime does not limit taxpayers to certain activities while they are living in Italy. They are free to work, invest or run a business in the country.
The regime is optional and it is applicable for a period of up to 15 years from the first year that the taxpayer opts for it. So, a taxpayer who transferred their tax residence to Italy in 2020 will be eligible for the option until the 2034 tax year. Taxpayers can opt out of the regime at any time (even after one year; however, a second application for the regime is not permitted) and it terminates automatically once the 15 years are up. Expiry, revocation and forfeiture of the regime in the hand of the main applicant trigger the loss of the effects even for his family members. In such a case, family members are entitled to exercise an autonomous option as main applicant by paying the €100,000 substitute tax. In this case, the ordinary application period of the Regime (15 fiscal years) is reduced by the number of fiscal years during which the applicant has benefited from the regime as family member. In the scenario of exercising an independent option, the regime may be extended to the new applicant’s family.
In addition, there are no restrictions regarding nationality (Italian citizens returning to the country after a long absence are also eligible). That said, the authorities will obviously be more attentive to the ten-year non-residency criteria in the case of Italian nationals. It is therefore important to exercise caution if the person in question already has links with Italy (properties, a business, investments, etc.). In the event of a tax residency conflict, the arbitration rules in the double-taxation agreements apply. However, the provisions in the agreements cannot be used to counter an Italian tax residency determined under Italian law in order to benefit from this special tax regime.
As this is a voluntary regime, to be safe the taxpayer should make a request to the Italian tax authorities in advance and ensure they obtain a fiscal ruling. The tax authorities have 120 days to respond to the request, and the absence of a response is taken as consent. If the authority requests further information, a new period of 60 days begins from the date of the request.
The Italian tax authorities have published a checklist of 20 pieces of information which taxpayers must divulge and document appropriately, and submit either in the request submitted in advance or with their tax declaration. Taxpayers should check their individual circumstances against this checklist to decide whether they are eligible.
Also, it is always important to look at double-taxation agreements and CFC (Controlled Foreign Companies) rules, for example with regard to substance (office, employees and administration) if offshore companies are held.
In this regard, if non-Italian resident companies held by the new Italian residents are considered as interposed and then disregarded for Italian tax purposes, the Italian source income arising from the underlying assets of the company would not be covered by the substitute tax. On the other hand, if the non-Italian resident disregarded foreign companies receive foreign source income, this would in any case be covered by the substitute tax. The same rules would apply to foreign trusts that are deemed to be interposed pursuant to the guidance set forth by the Italian tax authority (see above).
Pursuant to the Italian tax law, a foreign company is considered to be Italian resident if its central management and control is carried out in Italy for the majority of the tax year. The circular clarified that such rule does not apply with respect to foreign companies managed by new resident individuals benefitting from the regime, provided that the majority of the board of directors is not composed by Italian resident individuals not benefitting from the regime.
Furthermore, the Italian tax authority stated that the Italian Controlled Foreign Companies rules do not apply to shareholdings in non-Italian resident companies held by the new Italian resident individuals, provided that the foreign company is resident for tax purpose in a State covered by the substitute tax (see below).
Italian CFC rules shall however continue to apply to cases where the foreign entity is held through an Italian company; in such latter case the Italian CFC rules apply at the level of the Italian entity.
Of course, where foreign income is taxed under the special regime rather than the ordinary Italian tax system, no foreign tax credit may be used in Italy. However, a taxpayer can choose to exclude certain countries from the scope of application of the special regime. This will mean that income taxed at source and generated in these excluded countries will be subject to ordinary taxation in Italy and the tax credit will apply. Taxpayers can add further “excluded States” in each yearly tax return. Such exclusion cannot however be modified by the taxpayer in the following fiscal year (i.e., once a State has been excluded, it cannot be covered by the substitute tax in the following fiscal years).
An important question which arose when the regime was created is whether it is possible to benefit from tax agreements (DTT) signed by Italy. In fact, article 4 of the OECD Model Tax Convention states that the term “resident” of a Contracting State “does not include any person who is liable to tax in that State in respect only of income derived from sources in that State or capital situated therein”. Therefore, some DTTs should not accept a forfeit taxpayer as tax resident (e.g., DTT between Italy and Switzerland).
However, in their circular no. 17/E, the Italian tax authorities judge that a taxpayer should be eligible for the advantages of such an agreement, because they are resident in Italy for tax purposes and are taxed on their worldwide income, even though this is via the ordinary Italian tax system for their Italian income and via a tax replacing ordinary income tax for their foreign income.
Based on this conclusion, the Italian tax authorities have also announced that they would issue tax residence certificates to taxpayers opting for this special tax regime. The question remains as to whether foreign countries, and in particular those that tax foreign income at source, will recognise the application of these tax agreements. It is important to remember here that a taxpayer can always opt to exclude certain countries from the scope of application of this special tax regime.
The tax must be paid before 30 June of the following tax year (so by 30 June 2021 for the 2020 tax year).
According to the authorities, visas (whichever kind of; see below) requested by applicants shall have maximum priority and permits of stay requests are considered as “urgent”. In this regard, an ad-hoc department of the Italian Foreign Ministry is at the disposal of the applicants.
In total, 95 people opted for this regime in 2017 and 226 in 2018. Those concerned were nationals of at least 16 different countries, with the list topped by the UK (28), Brazil (12), France (10) and Switzerland (10). This tax regime does however cause issues regarding the exchange of information for tax purposes because the Italian tax authorities do not have full details of the taxpayer’s income and assets.
4. Tax regime for retired people in southern Italy
As an alternative to the fixed tax payment detailed above, Italy also introduced a favourable regime for retired people in its 2019 Budget Law (no. 145/2018). Since then, the authorities have issued directives on this subject.
On the condition (article 24-c of the Italian Tax Code) that they become tax residents of a town with a population of fewer than 20,000 people in a region in southern Italy (Abruzzo, Apulia, Basilicata, Calabria, Campania, Molise, Sardinia and Sicily), retired people qualify for a fixed-rate tax of 7% on all their foreign income, in lieu of the usual taxes (and in particular the 26% capital gains tax). The aim of this is to bring people back to small Italian towns that have been deserted. This regime also applies to certain municipalities with populations of fewer than 3,000 people in Lazio, Umbria or the Marches.
All retired people (the law does not precisely define this term or set a minimum age) in receipt of a lifetime pension (or similar payment) underwritten by a foreign public or private entity are eligible for this programme. There is no minimum value set (it does not matter whether the pension is the taxpayer’s main source of income or not), the institution just needs to have committed to making a guaranteed monthly payment for the rest of the person’s life. However, this regime is not generally beneficial for retired civil servants as, in principle, double-taxation agreements dictate that their pensions are taxed in the source country only (see for example article 19 of CDI CH-IT).
In addition, the retired person must not have been tax resident in Italy during the previous five years, and the country of which they are a national must have a current double-taxation agreement or exchange of information agreement with Italy (or a FATCA agreement).
The reduced rate of 7% applies not only to the foreign pension but also to all other foreign income (dividends, interest, capital gains, property income, etc.) as well as the wealth tax on foreign property (IVIE) and the wealth tax on foreign investments (IVAFE). On the other hand, income generated in Italy remains fully taxable (Italian financial income, income from property situated in Italy, Italian pensions, gainful activity in Italy, etc.).
It is also important to note that taxpayers are not eligible for a tax credit in Italy on tax deducted at source in the foreign country (it appears that the 7% is levied on the gross foreign amount). Under the Italian tax regime, it is however possible to exclude certain countries and to be taxed for these under the ordinary system in order to take full advantage of the double-taxation agreements and tax credits in Italy.
In addition, as with the neo-dom regime, the retired taxpayer is not required to disclose their foreign assets to the Italian tax authorities (Quadro RW). Also, all foreign income can be brought into the country without any restrictions. The regime is valid for nine years (plus the year in question) and the tax must be paid by 30 June in the year following the tax year in question (the request must be made in the first tax declaration filed after arrival). Naturally, there are no restrictions on moving house, and the person can renounce this tax regime at any time. In addition, it is terminated automatically if the population of the municipality rises above 20,000 people during the ten-year period. The ordinary tax regime will then apply.
Another important point is that, unlike the Italian neo-dom tax regime, the exemption does not apply to inheritance and gift tax, which continues to be applied at the standard rates. On the other hand, the five-year limit on selling qualifying holdings does not apply. Lastly, this regime does not cover other members of the family, unless they are retired themselves.
5. Immigration and residence permits in Italy
Free movement of people applies to EU/EFTA nationals (including Swiss nationals). This means they can take up residence in Italy without any restrictions. They are also free to work anywhere in the country.
a. Work permits for non-Europeans
For third country nationals, residence permits with gainful activity are subject to annual quotas set by the Italian labour authorities. Of course, additional quotas are available for executives, highly qualified workers and also posted workers in Italy, a system particularly applicable to multi-national companies.
In these cases, the Italian sponsor will apply online for a work permit (Nulla Osta) to the Italian immigration office (Sportello Unico/Prefettura) of the province in which the Italian company has its legal headquarters, or in which the employee will be physically working.
Once the work permit has been issued, the non-European national will be able to apply for a work visa at the relevant Italian embassy or consulate in their country of citizenship or residence.
Lastly, it is also possible to use the “blue card” procedure which facilitates the immigration process for highly qualified workers who are not EU/EFTA nationals. If all the conditions are fulfilled, the person can be employed in Italy outside the quota system.
b. Permits for retired people
To be able to register with a municipality, retired European nationals must have a property rental contract lasting at least one year (or own a property), have at least €5,000 in a bank account and hold medical insurance.
Retired nationals of non-European countries must hold a visa (elective residence visa) and be able to prove that they are in receipt of annual income not from gainful activity of at least €31,000. In other words, they must be able to prove that they have sufficient passive income (investment income, pensions, income from property, etc.) to live in Italy, given that they are not permitted to work in the country. For a married couple, the sum is €38,000. This amount is increased by 20% for each dependent. In total, 1’274 elective visas have been issued in 2016, 1’155 in 2017 and 905 in 2018.
To begin the procedure, the interested party should contact the Italian embassy in their country of residence or nationality to find out which documents will be required to make the transfer. Unfortunately, each embassy/consulate has its own procedure. The person will be interviewed by the diplomatic staff. The authorities then have 90 days to consider the application.
In general, the required documents are as follows:
– current passport (valid for at least three months)
– the visa request form signed in front of the official at the embassy/consulate
– two passport photos for each member of the family
– proof of address in the country of origin
– proof of financial resources (bank statements, pension certificate of entitlement, etc.)
– birth and marriage certificates and divorce decrees for members of the family
– a criminal record certificate or a certificate of good conduct
– proof of accommodation in Italy (rental contract, property title deeds, etc.)
– an international medical insurance certificate (minimum cover of €30,000 per year in all EU countries)
Once the person arrives in the country, they must attend the police station within eight days to declare their arrival and present the originals of the required documents. They will already have submitted the permit application forms to the authorities by post (the forms can also be obtained from the local post office). It is important to understand that a visa is not a residence permit (permesso di soggiorno). This permit is issued by the local police. Of course, the procedure is theoretically simple because most aspects of the application have already been covered at the embassy. In principle, the permit is valid for one or two years, and is renewable. After five years, the candidate is eligible for permanent residence, and after ten years for nationality.
c. Permits for investors
Italy’s 2017 Budget Law (no. 232) introduced a new type of visa enabling non-European nationals to settle in Italy outside the quota system in return for making a significant investment in the country (golden visa).
The thresholds (for 2020) for non EU/EFTA investors wishing to secure visas are as follows:
– an investment of at least €2m in Italian government bonds;
– an investment of at least €500,000 in an Italian company;
– an investment of at least €250,000 in an innovative Italian start-up; or
– a donation of at least €1m to support a project or initiative in the public interest in the fields of culture, education, scientific research, immigration management or heritage or countryside renovation.
The investments above must be guaranteed for at least two years. Members of the applicant’s family (children, spouse and dependent parents) can also accompany them without any further investment being required.
Currently, Italy does not issue residence permits in exchange for a property investment.
Foreign nationals wishing to obtain this type of visa are required to:
– show that they have the funds required to make the investment or donation in question;
– commit to making the investment; and
– prove that they have sufficient financial resources to live in Italy.
Of course, they must be able to demonstrate that the funds were obtained via legitimate means. The request will be examined by an ad hoc inter-ministerial committee and a decision will be made within 30 days. The decision will be communicated to the embassy or consulate which will issue the investor visa. The candidate will then have three months (from the date they enter the country) to make the investments.
On arrival in Italy, the investor will be issued with an “investor residence permit” valid for two years and renewable for additional periods of three years. No physical presence is required on the territory (i.e. no minimum number of days spent in Italy is mandatory for this type of permit). After five years living in the country, the investor will be granted permanent residence in Italy if they also meet the other conditions (language test, sufficient income, etc.).
6. Choosing a tax regime
Geographically, Italy is a large country and there are a wide range of different places to set up home. You could live in the north, in the Italian Alps, or in the south, on the sunny coasts of the Mediterranean, Sicily or the Adriatic. Or you could choose a lively city, like Rome or Milan, or somewhere close to the French border and Monaco.
From a fiscal point of view, it is clear that the burden of standard taxation on individuals resident in Italy is high. Beyond its tax rates, the country also has high social contributions and excessive information reporting requirements.
Over the last few years however, thanks to the special tax regimes set up by the government, Italy has become an attractive country in tax terms, and is now comparable with destinations such as Switzerland, Portugal, the UK and Greece.
Today, Italy offers three attractive tax programmes: the regime for inbound employees, neo-dom status and the programme for retired people. Each of the programmes has its own advantages and disadvantages, and they are mutually exclusive. It is important to choose carefully. The regime for inbound employees is mainly appropriate to people working or running a business in Italy, whereas the other two options will suit people with significant foreign income. Under the latter two regimes, when working out whether it is more advantageous to opt for the fixed tax payment of €100,000 per year or the 7% tax, it is important to take into account the source, the nature and especially the value of the income in question. In our opinion, the neo-dom programme is advantageous for an annual income of €500,000 or more (including capital gains), so that the fixed tax payment is equivalent to income tax at 20%.
It is also important to examine double-taxation agreements in detail to avoid any nasty surprises, for example if the state where dividends are paid was to refuse to refund a portion of the tax deducted because it does not apply the agreement with Italy when the neo-dom tax regime is used. Last but not least, under the social security agreements signed with Italy and its partners (and in particular EU countries), it is possible under certain conditions to avoid paying social security contributions. It is again important to read the texts very carefully.
We are at your disposal for any question you may have.