The 2017 Budget Law 2017 introduced a substitute tax optional regime (equal to € 100,000 per each tax year) for non-resident individuals wishing to transfer their tax residence to Italy.
This measure is inspired by the so-called "resident non domiciled" regime which is in force in the UK and is aimed at favoring investments, consumption and settlement in Italy of high-net-worth individuals and families.
1. The Conditions for the Application of the New Regime
Article 1, paragraph 152, of the 2017 Budget Law introduced Article 24-bis in the Italian Income Consolidation Code ("TUIR"). Pursuant to this Article, the individuals not resident in Italy for at least nine of the ten tax years prior to the first year of effect of the option can transfer their residence to our Country by exercising the option for a substitute tax on all foreign-source income and gains (the "Flat Tax").
The option for the Flat Tax is communicated in the income tax return for the fiscal year in which the individuals transfer their residence to Italy or in the following year.
On March 8, 2017, the Italian Tax Authority provided the operating instructions for exercising this option and clarified that the taxpayer can also file a ruling request to access the regime.
The new regime can be extended to family members of the new-resident (spouse, children – including adopted ones, parents, in-laws and sisters/brothers-in-law, etc.), provided that they transfer their residence to Italy and pay the Flat Tax at a reduced rate.
2. The Benefits and the Effects of the New Regime
If the Flat Tax option is exercised:
- foreign-source income and gains earned by the new-resident are not taxed at progressive rates according to the ordinary rules of the TUIR, but are subject to a Flat Tax of € 100,000 per year. The only exceptions to the Flat Tax are: (i) income and gains produced in Italy; (ii) capital gains from disposal of qualifying shares realized in the first five years of effect of the option. Only these income and gains are, therefore, taxed according to the ordinary rules of the TUIR;
- foreign-source income and gains earned by family members of the new-resident are subject, in the case of a specific option, to a reduced Flat Tax of € 25,000 per year per person;
- the new-resident can opt for income and gains sourced in one or more foreign States to be subject to income tax under general rules (this is the so-called "cherry picking" principle). The "cherry picking" needs to be planned carefully because it allows the taxpayer to benefit from: (i) any reduced taxation or treaty relief in the foreign State where the income is sourced; (ii) foreign tax credit in Italy;
- the new-resident is exempt from reporting requirements with respect to any assets held abroad and is not required to fill in the so-called "section RW" of the tax return in which the Italian residents disclose their assets owned abroad;
- the new-resident is exempt from any wealth taxes on foreign financial and real estate assets;
- a full exemption from inheritance and gift taxes applies on all assets held abroad by the new-resident. The inheritance and gift taxes will be limited to goods and rights existing in Italy at the time of the succession or donation.
3. Termination of the Regime
The regime is automatically renewed each year and shall apply up to a maximum of fifteen years.
The taxpayer who has exercised the option or the family member to whom it has been extended may revoke the option at any time starting from the year after the first application.
The regime ceases in the event of any failing or partial payment of the Flat Tax and in case the tax residence is transferred to another State.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.