Italy: Wealth Tax In Colombia And The Italian Res Non Dom Regime: A Convenient Fiscal Planning Solution For HNWI

Taxes on wealth represent a crucial aspect of an individual's or a company's finances in any nation. In this article, we will examine the new wealth tax in Colombia and the opportunity offered by the Italian "Res Non Dom" regime, highlighting the importance of the double taxation treaty between the two countries.

The Colombian Executive Branch enacted the 'Tax Reform Law' (Law 2277) on 13 December 2022, developing a tax system that encompasses various categories of taxation, including wealth taxes for taxpayers with net wealth that exceeds approximately USD635,000 (converted at current foreign exchange rates) measured on January 1. Taxpayers will include individuals as well as non resident entities that own assets in Colombia other than shares, leased assets, and receivables, and provided they are not income tax filers. The tax rates are marginal and progressive as follows:

• The 1,5% tax rate will apply only for fiscal years 2023, 2024, 2025, 2026

Colombia has also followed the trend among Latin American countries of introducing taxes on wealth.

A popular solution for high-net-worth individuals (HNWI) from Colombia and Latin America is to transfer their tax residency to a more favourable jurisdiction (especially one without wealth taxes). One of the favourite gateway to move residency was Spain, because of the lack of language barriers. However, with the introduction of a wealth tax (tax range 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.

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.

Secondarily, the "Res non Dom" regime can be particularly attractive and competitive for Colombian private clients.

Res Non Dom Regime

Individuals who transfer their tax residency to Italy can benefit from a substitute tax on income produced abroad, by paying a fixed tax of 100,000 euro for each tax period in which the option is valid, regardless of the amount of income received (income produced in Italy by new residents are subject to the ordinary Italian Tax rates)

The regulation is applicable with a specific option for individuals who acquire tax residence in Italy, on condition that they have not been tax residents in Italy for at least nine tax periods during the ten preceding the start of the option's period of validity and can be extended to family members of the individual with an addition of 25,000 euro for each tax period. Of course, also the family members have to transfer their residence to Italy.

The Res Non Dom Regime is of a temporary nature and ceases after 15 years from the first tax period of effectiveness, without the possibility of renewing.

Further benefits are granted to the main applicant and to the family members to whom the regime is extended:

• 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.

Moreover, 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.

Since January 1st, 2021, a bilateral double taxation treaty between Italy and Colombia has been in effect.

This treaty is 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 Colombian HNWI to avoid the application of wealth tax in Colombia, 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. This comes with the added benefit of having a fully applicable and enforceable double taxation treaty even in relation to Colombian authorities.

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.