Italy: Wealth Taxes In South America And Opportunities For HNWI Thanks To The Double Tax Treaty With Italy: A Perspective On A Convenient Fiscal Planning

Countries that account for the 22% of the South America continent have a wealth tax, they are Argentina, Bolivia, Uruguay, Venezuela and Colombia.

The Chilean tax reform project that included the Wealth tax has been rejected by the Parliament, but it may be reproposed by the Government. Meanwhile, in Brazil, the newly elected President Lula has consistently highlighted the introduction of taxation on large fortunes as a top priority.

The increased taxation for wealthy and high-income taxpayers, resulting from various new taxes, is currently leading to a surge in inquiries from Latin America individuals exploring the possibility of changing their tax residence, particularly to the United States or Europe. They are seeking greater stability and asset protection.

A popular solution for high-net-worth individuals (HNWI) from Latin America is to transfer their tax residency to a more favourable jurisdiction (especially one without wealth taxes). One of the favourite gateways to move residency was Spain, because of the lack of language barriers. However, with the introduction of a wealth tax (tax rate between 0.20% and 3,50%), this solution is no longer so convenient.

Italy, on the other hand, represents a highly attractive jurisdiction for a multitude of reasons.

1. First and foremost, there is no presence of any type of wealth tax, and the political outlook leads us to consider it highly unlikely that one will be instituted in the coming years.
2. Secondarily, the "Res non Dom" regime can be particularly attractive and competitive for Latin America private clients.

This regime was created by the Italian government with the specific purpose of attracting High Net Worth Individuals who, by choosing to transfer their tax residence to Italy, have not been residents in Italy for at least 9 out of the last 10 years.

Those who opt for this regime are not required to necessarily reside in Italy to be considered fiscally resident.

The main benefit of the "Res Non Dom" regime is the flat tax of 100,000 euros (plus 25,000 euros for each additional family member that one wants to add to the main taxpayer), which applies to all foreign-source income, regardless of the amount of the income. The only exclusion is (for the first five years of the regime's validity) on capital gains related to qualified shareholdings; however, recently the Italian tax authority allows obtaining an exemption through a specific ruling if the taxpayer commits himself to be tax resident in Italy for at least 5 years.

However, there are also other benefits:

• Reporting requirements: Exemption regarding foreign assets and investments;
• IVIE: This tax is due on the value of real estate located abroad and held as property or other real right by individuals residing in the territory of the Italian State, regardless of their use. Individuals benefitting the Res Non-Dom Regime are exempted from the payment of the IVIE.
• IVAFE: This tax is due by Italian residents on financial assets, current accounts and savings accounts held abroad as property or other real right; Individuals benefitting the Res Non-Dom Regime are exempted from the payment of the IVAFE.
• INHERITANCE AND GIFT TAXES: Those who have exercised the option are granted exemption from inheritance and gift taxes for assets and rights held abroad. In case of transfer by inheritance or gift during the period of the substitute tax regime, the inheritance and gift tax will have to be paid only for assets and rights held in Italy. The exemption also applies to the family members who have joined the scheme.

These benefits last for a maximum period of 15 years (however, it is possible to leave Italy before the expiration without the application of any exit tax). Another crucial point is that the regime also extends to offshore structures (trusts, foundations, holdings, etc.) and the assets held by them.

Compared to other jurisdictions, also foreigners who choose the Res Non-Dom Regime are also entitled to obtain the certificate of Italian tax residence. To obtain it, the taxpayer has only to paid the lump sum for at least one tax period (i.e.: if a person joins the Res Non-Dom Regime from 2024, he will be able to request the certificate of tax residence from October 2025, as soon as he has paid the lump sum tax of Euro 100.000)

This certificate has strong evidentiary value against the non-Italian Tax Authorities for the purpose of proving the Italian tax residence of the Res Non Dom individual, as well as for the application of the rules contained in the treaties against double taxation concluded by Italy and avoid problems regarding the double tax residence. This because Italian Res Non-Dom individuals are fully covered by all double taxation treaties entered into by Italy. However, in order to avoid all the possible challenges from foreign tax authorities, it is strongly recommended to have strong ties with Italy.

Italy has bilateral agreements against double taxation in effect with all the nations in the previous scheme, except Bolivia.

These treaties are aligned with the OECD Model, that provide for the transfer of taxing power from the "source state" to the "state of residence". As stated, the payment of the 100k Euros lump sum tax allows the treaty to be applied. This because the newly Italian tax resident will pay: i) taxes on the foreign source income through the substitute tax of 100k euros; and ii) taxes on the Italian source income through normal Italian taxes.

In conclusion, moving tax residency to Italy will allow the Latin America HNWI to avoid the application of wealth tax in his home country, transferring to a country where not only is such a tax absent, but it will also be possible to pay a fixed tax of 100,000 euros for all income generated abroad, regardless the amount of the income. This comes with the added benefit of having a fully applicable and enforceable double taxation treaty even in relation to Latin America tax authorities.

Some numbers

The attractiveness of this regime has been widely demonstrated by the Italian Court of Auditors.

In 2021, approximately 1,000 individuals transferred their tax residence to Italy (with 300 family members), resulting in revenues of 108 million euros for the Italian state. These numbers are more than twice as high as in 2020 and three times as high as in 2019, once again demonstrating that Italy is the ideal place for those who wish to relocate and optimize their tax exposure.

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.