In 2016 the Italian government issued a new tax package to attract the high net worth individuals that want to relocate to Italy. 2017 is the first tax period affected by the new system and during 2018 the first applications had been sent.
The new law includes a € 100,000 substitutive flat tax on all foreign incomes for individuals who become Italian residents. The most important requirement is to become an Italian resident after at least a 9-year period of residence outside of Italy.
The maximum duration of this taxation option is 15 years and it is revocable at any time by the taxpayer. On the other hand, not paying the yearly flat tax in time drives to the forfeiture of this substitutive regime, without any possibility to opt again for it.
The yearly flat tax
Pursuant to the Italian ordinary rules, Italian tax residents (individuals) are subject to a progressive income tax on their worldwide incomes (“worldwide taxation principle”). The main income tax “Irpef” includes rates from 23% to 43%, but, with some additional local taxes, the highest rate can achieve even 47-48%. Anyway, a complex system of deductions of life expenses reduces the final average tax impact.
In addition, there are:
- a 0.20% rate tax on the value of some financial assets wherever located;
- a 0.76% rate tax on the value of real estate properties owned in Italy and abroad.
According to the flat tax system, the new resident taxpayer can opt for the yearly payment of a € 100.000 in lieu of the ordinary taxation explained above.
The “Cherry Picking” principle
According to this new package the new resident not domiciled taxpayers can choose which country or countries income to tax with this substitutive flat tax. All the incomes coming from non-chosen countries (if any) are excluded from the flat tax regime and, therefore, they are subject to ordinary Italian taxation and will benefit from a tax credit on taxes paid abroad (under ordinary Italian and international treaties regulation and limits).
So new resident that opts for the flat tax regime may apply the ordinary tax regime with respect to incomes arising from one or more specified countries. All the incomes from one excluded country are taxed with ordinary rules, in fact, the taxpayer cannot pick each income, but only all the incomes from a specific Country. This system may allow a new resident to benefit from international tax treaties with respect to the related incomes.
A Country excluded from the Flat Tax system can not be included again in the new system taxation, and all the related incomes will be ordinarily taxed till the end of the flat taxation option.
All the Italian source incomes (if any) are subject to the ordinary Italian progressive taxation and to all the other Italian tax fulfilments.
Favourable?
In general, a right calculation is absolutely not a simple exercise:
Foreign sources incomes can be remitted into Italy with no additional taxation (or burden withholding taxation).
Other advantages and exemptions
According to Italian tax rules, resident taxpayers must fulfil a tax reporting procedure with respect to any financial asset, real estate property, car, plane, helicopter, ship, yacht, fine art items, fine and high-value jewellery etc. (financial and not financial assets) directly held abroad, even through a third party, or under trust mandate etc. This means not only small taxation (resumed above) but also a very important leakage of confidentiality about those assets.
The option for the new substitutive flat tax grants a total exemption about this kind of assets reporting procedure, with guaranteed full confidentiality. Italian tax authorities keep obviously the power to investigate the taxpayer position from a worldwide point of view.
This complex and not confidential reporting procedure remains for the assets located in not “cherry-picked” (excluded) Countries.
The flat tax for family members
The option for the flat tax is absolutely personal and does not cover taxes otherwise due by other family members. However, the same flat tax regime may be extended to some or all of the family members yearly paying a reduced to € 25,000 flat tax for each additional family member. Family is very broadly defined and is not limited to wife and children.
Eligible foreign new residents
The option for the new flat tax system can be done only by a person who has not been resident of Italy for at least 9 out of the last 10 calendar years before.
This is a very strong anti-abuse measure for Italian citizens moved abroad because of our high ordinary taxation, that now could be attracted back.
Ruling procedure
The first option for the substitutive regime could require a ruling procedure with the Italian tax authority. The eligible new resident must declare (and proof) that he meets all the requirements of this new regime, and above all being not Italian tax resident last 9 out of 10 years, the last tax residency, the excluded Countries (if any) etc.
There will be the exchange of information with the tax authorities of the jurisdictions where the applicants had been resident in the relevant years.
The ruling application does not include any detailed description of the wealth or incomes of the applicant, if not relevant for understanding whether he was resident in Italy during the previous 10 years.
The exception to the rule
The flat tax system does not cover capital gains on qualified shareholdings realized by the taxpayer in the first five-year period. Qualified shareholdings are those representing more than 20% of the voting rights or 25% of the capital of a company. The thresholds are reduced to 2% and 5% per cent for listed on stocks markets companies. Ordinary Italian taxation is applicable for these capital gains.
After this five-year holding period, the flat tax covers also these capital gains, becoming even more interesting in a long period tax planning.
Dividends from such shareholdings fall instead within the flat tax regime.
Exemption from gift and inheritance tax
The option for the flat tax system allows a full exemption from inheritance and gift taxes on all foreign situs assets held by persons who have elected for the special regime (in the years when this regime is applicable).
For any further clarification or to start the application procedure do not hesitate to contact us, we can assist You and Your family.