To support the economic, scientific and cultural development of Italy, the Italian Tax system provides numerous benefits for people who move their residence to Italy.

The 2017 Italian Stability Law (Law no. 232/2016) has introduced the so called "Res Non Dom Regime" (Art. 24-bis of the TUIR), a special tax regime for foreign income generated by individuals who wish to move their tax residence to Italy. The most important requirement (among others) is that the individual have not been resident in Italy for at least nine out of ten tax periods before electing to apply the new tax regime.

People benefitting from the Res Non Dom Regime are subject to a a substitute tax equal to Euro 100,000 for each year in which the option is valid on income generated abroad. It is possible to opt for this benefit, which has a maximum duration of 15 years.

Res Non Dom individuals have also exemptions from:

  • wealth Tax (such a tax is not present in Italy);
  • the fiscal monitoring of foreign businesses and investments;
  • paying property value tax on the value of properties held abroad and from paying value tax on financial products, current accounts, and bank books;
  • Inheritance and donation taxes regarding property and rights held outside Italy at the time of succession or donation.

Among all the benefits mentioned before, the Italian Res Non-Dom individuals are fully covered by all double taxation treaties entered into by Italy.

The issue of compatibility between favourable tax regimes and double taxation treaties is a much-discussed topic. Some jurisdictions (e.g., Portugal, the UK, Switzerland, Monaco and Spain) have very strong limitations on the applicability of double taxation treaties in the case of newly resident individuals benefiting from these special tax regimes.

Specifically on this matter, a recent ruling (not yet published) of the Italian Tax Authority stated that individuals who transfer their residence to Italy in order to take advantage of the optional regime for new residents, must exclude Swiss source income from the facilitated regime if they wish to access the benefits of the Italy-Switzerland double taxation treaty ("CDI").

In fact, Article 4, paragraph 5, letter b) of the Italy-Switzerland treaty states that "the treaty shall not apply, in respect of natural persons, to income from the other Contracting State which, in the State of residence, is not subject to taxes generally levied on all income generally chargeable to tax under the taxation laws of that State"

Therefore, it is not sufficient that the foreign source income is generally subject to tax in the State of residence, but is required to be taxed under the same rules applicable to any resident (i.e.: no substitutive tax).

That means that the Italian Res Non Dom Regime - which subjects foreign source income to a flat-rate substitute tax of EUR 100,000 per year - entails the inapplicability of the treaty.

In order to be able to apply the treaty, it is therefore necessary to exercise the option set forth in paragraph 5 of Article 24-bis of the TUIR in order to exclude Switzerland from the list of States whose income is absorbed by the flat-rate tax (so called "CHERRY PICKING"). In this case, the Swiss source income is subject to ordinary Italian taxation and, therefore, Article 4(5)(b) of the CDI does not preclude access to the other treaty provisions.

The interpretation provided by the Italian tax authorities is in line with that of the Swiss authorities.

In Switzerland, a person who avails him/herself of taxation based on expenditure must also tax all income generated in Italy if (s)he wants to qualify for the convention with Italy.

Therefore, newly resident individuals with Swiss source income will have to assess on a case-by-case basis whether they should exercise the Swiss opt-out.

The Italian Tax Authority's Ruling puts into practice the principle already expressed in Circular No. 17 of 23 May 2017 (§ 7) according to which neo-residents are, in general, considered to be resident in Italy for the purposes of double taxation treaties, since all their income is subject to taxation, "if of Italian source in the ordinary way, if of foreign source through the substitute tax". However, the rule does not apply when the agreements provide otherwise, as is the case with the Italy-Switzerland treaty.

Therefore, this Ruling demonstrates that, under certain conditions, it will also be possible for Res Non Dom individuals to benefit from the Italy-Switzerland Treaty.

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.